Vignana Jyothi Institute of Management

Business Law NOTES

P Varun Raju 12/29/2010

Contents Business Law Question Paper Pattern .................................................................................................... 5

Indian Contract Act (ICA) 1872................................................................................................................ 5

Essential Elements of a Valid Contract ............................................................................................... 6

Types of Contract ................................................................................................................................ 7

Offer .................................................................................................................................................... 8

Legal Rules for Offer ........................................................................................................................ 8

Acceptance Section 2(b) ..................................................................................................................... 8

Rules of Acceptance ........................................................................................................................ 8

Consideration Section 2(d) (QUID-PRO-QUO) .................................................................................... 9

Essentials of Consideration ............................................................................................................. 9

Capacity of Parties (Section 11) .......................................................................................................... 9

Minor (Sec 3) of Indian Majorities Act 1875 ................................................................................... 9

Unsound Mind (Sec 2) ................................................................................................................... 10

Free Consent (Sec 14) ....................................................................................................................... 10

Coercion (Sec 15) .......................................................................................................................... 10

Undue Influence (Sec 16) .............................................................................................................. 10

Silence & Fraud ............................................................................................................................. 10

Mistake .......................................................................................................................................... 11

Lawful Object & Consideration ......................................................................................................... 11

Discharge of Contract ....................................................................................................................... 13

Remedies for Breach of Contract .................................................................................................. 13

Damages ........................................................................................................................................ 13

Special Contracts ............................................................................................................................... 13

Contract of indemnity (Sec - 124) ................................................................................................. 13

Contract of Guarantee (Sec - 126) ................................................................................................ 14

Contract of Bailment (Sec – 148) .................................................................................................. 14

Contract of Pledge (Sec – 172) ...................................................................................................... 15

Contract of Agency (Sec – 182 to 288) .......................................................................................... 15

Partnership Act (1932) .......................................................................................................................... 17

Types of Partnership ......................................................................................................................... 17

Partnership at Will (Sec 7) ............................................................................................................. 17

Particular Partnership (Sec 8) ....................................................................................................... 17

Types of Partnership ......................................................................................................................... 17

Partner .......................................................................................................................................... 17

Dissolution of Partnership & Firm ..................................................................................................... 18

Modes of Dissolution of Partnership ............................................................................................ 18

True Test of Partnership ............................................................................................................... 18

Co-Ownership ....................................................................................................................................... 19

Negotiable Instruments Act 1881 ..................................................................................................... 19

Negotiable Instruments .................................................................................................................... 19

Bills of Exchange (Section 5) ............................................................................................................. 19

Distinguish between Bill & Promisary Note ...................................................................................... 19

Cheque (Section 6) ............................................................................................................................ 20

Distinguish between Bill & Cheque ................................................................................................... 20

Holder in Due Course (Section 8, 9) .................................................................................................. 20

Noting (Section 99) & Protesting (Section 100) ................................................................................ 20

Companies Act ...................................................................................................................................... 21

Types of Company ............................................................................................................................. 21

Incorporation of Company ................................................................................................................ 22

Documents to be filled with Registrar of Company (ROC)................................................................ 22

Conversion of PRIVATE Company to PUBLIC Company .................................................................... 23

Conversion of PUBLIC Company to PRIVATE Company .................................................................... 23

Memorandum of Association (MOA) ................................................................................................ 23

Contents of MOA .......................................................................................................................... 23

Alteration of MOA ......................................................................................................................... 24

Alteration of Registered Office Clause .......................................................................................... 25

Articles of Association (AOA) ............................................................................................................ 26

Contents of AOA ........................................................................................................................... 26

Doctrine of ULTRAVIRES.................................................................................................................... 26

Share Capital ..................................................................................................................................... 26

Share & Stock ........................................................................................................................................ 27

Share ................................................................................................................................................. 27

Stock .................................................................................................................................................. 27

Types of Share ................................................................................................................................... 27

Equity Share .................................................................................................................................. 27

Preference Share ........................................................................................................................... 27

Issue of Share at Par (ISP) ................................................................................................................. 27

Issue of Share at Premium (Section 78) ............................................................................................ 27

Issue of Share at Discount (Section 79) ............................................................................................ 28

Sweat Equity Share (Section 79A) ..................................................................................................... 28

Buy Back of Shares (Section 77A, 77AA, 77B) ................................................................................... 28

Rights Issue / Further Issue of Shares ............................................................................................... 28

Capitalization of Profit .................................................................................................................. 28

Meetings of Company ........................................................................................................................... 28

Statutory Meeting (Section 165) ....................................................................................................... 28

Annual General Meeting (AGM) ....................................................................................................... 29

Extraordinary General Meeting (Section 169) .................................................................................. 29

Requisites of Form ............................................................................................................................ 29

Management of Company .................................................................................................................... 31

Board of Directors (BOD) .................................................................................................................. 31

Appointment of Directors ................................................................................................................. 31

Role of Directors ............................................................................................................................... 32

Managing Director ............................................................................................................................ 32

Share Holder & Member ................................................................................................................... 32

How to become Member of Company ......................................................................................... 32

Prospectus ............................................................................................................................................. 33

Agreement ICLR

Business Law Question Paper Pattern 1. Essay question (10 +10, a & b)

Contract act intro , meeting, directors, memorandum articles, sale of goods intro, share capital

2. Case let (Q 2, 3, 4) (4 or 5 Marks) 3. Short answers (Q 5) (choice 4 out of 5)

True test of partnership, etc. Rules:

1. Quality of answer 2. Case study: yes/no, reasoning

Indian Contract Act (ICA) 1872

Section 266

ICA 1872 – Sections: 1-75, 124-238

Sale of Goods Act 1930 76-123

Indian Partnership Act 1932 239-266

- The act came into force in India on 21st Sept 1872 except in Jammu & Kashmir. - Article 370 gives a separate entity, due to geographical conditions.

Contract = an Agreement + Enforcement by Law Agreement = Offer + Acceptance Enforcement = Valuability Law = Rules & regulations which are a must and should be followed. Major source of developing law is our customs & English law, from time to time various legislative court judgments. Offerer – Offeree When a person makes a propose to other – accepted promise Consensus – AD – IDEM (Latin): Section 13 Meeting of minds or identity of minds or receiving the same thing in the same sense Example: X says to Y, “will you buy my car”; which is no clarity and no consensus Obligation: Section 13

1. Social (Void) 2. Legal (Valid)

“All contracts are agreements but all agreements are not necessarily contracts”

Contract

1. If parties intend to create legal relationship it is a contract

a. Example: Inviting a friend for lunch 2. If parties intend to create a social relationship it is not a contract

a. Example: Domestic relationships do not have legal contracts b. X & Y are doing real estate deal

Essential Elements of a Valid Contract 1. Offer & acceptance

a. Definite to do or refrain from doing unconditional 2. Intention to create legal relationship 3. Consideration

a. Consideration need not be adequate, but real b. Same thing in return, some benefit, which has some value I the eyes of the law

4. Capacity to contract 5. Free consent 6. Lawful object 7. Certainty to offer and possibility of performance

a. Example: will you sell 100lts of oil 8. Writing & registration

a. Negotiable Act 1881: every document should be written b. According to Section 10

i. He must be major ii. He must have a sound mind: rational thinking, conscious

iii. He must not be disqualified by any other law c. According to Section 11

i. The persons are disqualified to enter into valid contract 1. Minor 2. Unsound person 3. Other

a. Alien enemy b. Insolvent c. Convict: sentenced for imprisonment d. Company or corporation against Memorandum of

Association (MOA) & Article of Association (AOA) d. According to Section 14

i. Free consent in case consent is not obtained by using the following forces such as:

Type Section

Coercion 15

Under Influence 16

Fraud 17

Miss Representation (MR) 18

Mistake 20, 21, 22

ii. Said to be free consent or acceptance Example: X enters Y room with AK47 & asks for ransom (A = Offer + Acceptance)

Types of Contract 1. Valid Contracts: Section 10 – All Conditions are Satisfied

a. Express contract in writing or word of mouth b. Contingent contract: Section 31-36

i. According to Section 31: A contract to do (or) not to do something if an event is collateral (incidental), does or does not happen

ii. Incidental: it is one type of a conditional contract

Type Section

Uncertain 29

Impossible 56

c. Quasi Contract: Section 68 – 72 i. Quasi Contract is not a contract, contractual obligations, resembling

between two persons are created by law 2. Invalid Contract

a. Void i. Is Void: An agreement not enforceable from the beginning, it is said to be

void, it is also called Void-AD-INITIO 1. Example:

a. Agreement with mines b. Agreement without consideration c. Wager agreement Is not enforceable in court

ii. Becomes Void: An agreement valid at the beginning but due to supervening impossibility, contract becomes void

1. VIS Major (Acts of God) 2. War

b. Voidable i. It is one which is valid at the option of one (or) more parties but not at the

option of other or others: Section - 15, 16, 17, 18 c. Illegal

i. An agreement forbidden by law; all illegal agreements are void but all void agreements are not necessarily illegal

1. Void – not against the law 2. Illegal – against the law (punishment)

d. Unenforceable Contract (UEC) i. It is a contract which is valid but due to technical requirement or technical

defect contract becomes void. ii. In case the technical defects are removed agreements are enforceable

e. Executed Contract i. When both the parties have performed their obligations there is remaining

nothing to perform ii. Example: Any sale, go to shop and pay money, then take the goods

iii. Executory: where both parties are still to perform their obligations f. Unilateral Contract

i. In a contract, one party has performed his obligation and other person is still to perform, yet to perform the obligation

ii. Example: credit sales g. Bilateral Contract

i. Both parties are still performing, it is an executed contract ii. Section 2(a)

1. Express 2. Implied

a. Neither in writing nor oral b. Example: Auto, public telephone, weighing machine

3. Specific a. When offer is given to specific person, group of persons,

specified b. Example: Legal notice, prestige can exchange

4. General

Offer General Offer: When offer is given to whole world, Example: Discount Sale

Legal Rules for Offer

1. Offer must be given with an intention to crate legal relationship

2. Offer must be defined

3. There is a clear cut difference between offer, invitation to offer, invitation to sale

4. Offer must be communicated

5. Statement of a price is not an offer

Acceptance Section 2(b) Express acceptance (either in writing or face to face)

Implied / Tacit = neither in writing or in oral (unspoken)

Rules of Acceptance

1. Acceptance must be given only by the person to whom the offer is made

Offer

Communicated

Accepted

Both are bound to perform

Invitation to Offer

Communicated AcceptedNo contract subject to conditins

If conditions satified, then

contract

Invitation to Saler

Subject to conversation between the two persons

2. Must be absolute & unqualified; everything was available 3. Must be in prescribed mode or reasonable manner 4. Must be communicated 5. Within reasonable time 6. Acceptance must succeed an offer 7. Rejected offers can be accepted 8. Implied acceptance is also called Tacit

a. When acceptance is inferred from the conduct of the person is called Tacit 9. Mere silence is not acceptance

Consideration Section 2(d) (QUID-PRO-QUO)

Essentials of Consideration

1. Consideration must move at the desire of offerer 2. May move from offeree or any other person 3. Stranger to a contract cannot sue; exception in case of trust created, an addressee of an

insure article, family settlement 4. May be past, present or future 5. Must be of some value 6. Must be real 7. 3 types of consideration

a. Positive consideration b. Negative consideration (PATTERSON) c. Return consideration

8. Doctrine of Privities = contractual obligation / relationship 9. No consideration, no contract

a. Exception: i. Natural love & affection

ii. Agreement to compensate for part voluntary service iii. Payment of time – barred debt – lapse of time iv. Completed gift v. Contract of agency

vi. Contribution to charity

Writing – registered – nearness relationship is not necessary

Limitation Act: o Any Debt that comes under these limitations are called time – barred debt

Capacity of Parties (Section 11)

Minor (Sec 3) of Indian Majorities Act 1875

Minor is defined as any person who has not attained the age of 18 years of age. In the following cases a person is said to be minor if he does not complete the age of 21 years.

1. Any person comes under the Guardian & Wards Act 1890 or any person who comes under the legal representative

2. Void & inoperative 3. No restitution 4. Beneficial agents are valid 5. No ratification on attaining the age of majority 6. Minor agent 7. Minor & insolvency

8. Rule of Stopped does not apply 9. Minor’s liability for necessaries 10. Specific performance 11. Minor partner

Unsound Mind (Sec 2)

A person generally sound mind but occasionally, unsound mind cannot enter into contract when he is of unsound mind. A generally unsound mind but occasionally sound mind can enter into contract when he is of sound mind. The following persons are disqualified to enter into valid contract:

1. Lunatic: born with sound mind, by tension he becomes mad (mental Shock) 2. Idiot: abnormal case 3. Intoxicated: Drunk 4. Alien enemy 5. Convicts: sentence for imprisonment 6. Married women 7. Insolvents: who’s liabilities are more than assets

a. Presidential law b. Provential Law

Free Consent (Sec 14) Coercion

Undue Influence

Misrepresentation

Fraud

Mistake

Coercion (Sec 15)

Committing or threatening to commit any act forbidden by the IPC with an intention to cause any person to enter into an agreement. The unlawful detaining or threatening to detain any property with an intention to cause any person to enter into an agreement is coercion. Example: Mobile taking & asking money

Constitution Act 21 (Right to Live)

The act constituting coercion may be directed at any person & not necessarily at the other party to the agreement. It does not matter whether the IPC is or is not in force where the coercion is employed. If suit is filed in India the said provision will apply. Law coercion is called Duress

Undue Influence (Sec 16)

A contract is said to be induced by undue influence when the relation subsisting between the parties is such that one of the parties is in a position to dominate the will of the other & he uses this position to obtain an unfair advantage over the other. Example: Superior – Subordinate Doctor – Patient = Money spent Teacher – Student = Marks

Silence & Fraud

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud unless:

Such person is under a duty to speak

Silence is in itself equivalent to speech

Mistake

An error ridden argument belief on something 1. Mistake of law:

a. Mistake of law of the country b. Mistake of foreign law

2. Mistake of Fact: a. Void – Bilateral Mistake – 2 parties under mistake b. Valid – Unilateral Mistake – 1 party under mistake

Ignorance of Law is not excused

Ignorance of Fact is excused

Lawful Object & Consideration Object means the design or propose of the contract

Consideration is said to be unlawful if it involves an act or price which is unlawful

Illegal or Unlawful means a transaction not enforceable by course. It does not necessarily refer to a punishable offence, unless it is expressly punishable by a criminal court or special legislation

Mistake

Law

Indian Law Foreign Law

Fact

Subject Matter ex: Car

Purchase

Existance of Subject Matter

Identity of Subject Matter

Quantity Price

Identity ex: Maruti 800

According to Section 30 in a contract one person promise to another to pay money or

money’s worth by the happening of uncertain future event in consideration of other person promise to pay if the event does not happen

o There are 2 person o There must be uncertain future event o No control over the event o No reciprocal promises between the persons o Others may not be interested in the contract

In India wagering agreement are deliberately declared as Void – AB – NITIO, whereas in the state of Gujarat & Maharashtra these agreements are declared as illegal

Life insurance is a Contingent Contract

General Insurance – Indemnity – Save from loss

Unlawful Agreement

Illegal Immoral Agreement Opposed to Public Policy (AOP)

Agreement which interferes with administration of Govt.

Agreement which interferes with administration of Justice. Article

19(1)(g)

Agreement which interferes with personal liberty

Agreement in restraint of parental

rights

Agreement restraint of profession

Agreement restraing of

marraige (Sec 26)

Agreement restraint of Trade (Sec 27)

Marital duties

Wager Agreement (Sec 30)

Discharge of Contract

Breach: non fulfillment condition by either of the parties

Remedies for Breach of Contract

1. Suit for damages 2. Suit for specific performance 3. Suit for injunction 4. Suit for recession 5. Suit for quantum merit

Damages

1. Ordinary Damage: a. Difference between market price & contract price, these are estimated or calculated

after breach of contract. Both are not aware of damage. 2. Liquidated Damage:

a. Pre-estimated, at the time of agreement, both are having knowledge about damage. b. Example: they are writing in the agreement that they have to pay Rs. 100000 in case

of non-fulfillment of conventions 3. Vindictive Damage:

a. Punitive Damage b. Business person or breach of marriage can succeed c. Negotiable Instrumentation Act 1881

i. Suit for specific performance ii. Injunction

1. Restraining a person, not to do a particular thing 2. Example: Ghajini case

iii. Recession iv. Suit for quantum merit:

1. As much as merited 2. Example: Maharashtra – if goods are divisible they can be suit for

quantum if not they cannot v. Quasi Contract is not a Contract (Sec 68)

Special Contracts

Contract of indemnity (Sec - 124)

1. In a contract one person to another to save him from the loss caused to him by the conduct of promissory himself or by the conduct of any other person.

2. Contract of Essential: a. There are 2 persons indemnified and indemnity holders b. There must be loss

Assignment of Contract

By Conduct of Parties

(Novation)

By operation of Law

(Succession)

Impossibility

Breach Subsequently

c. The loss may arise by the default of the promise or by any other person d. It is a contingent contract e. The indemnifiers liability is primary f. Example: X says to Y, “I will sue you”. Z has a contract with Y saying, “if any bad is

done to Y then Z will save Y from the Law”

Contract of Guarantee (Sec - 126)

1. In a contract 1 person promise to another to discharge his liability if it arises to him by the default of promiser himself.

2. Essentials: a. There are 3 persons namely principle debtor, principle creditor and surety. b. There are 3 agreements namely,

i. Principle creditor & principle Debtor ii. Principle creditor & surety

c. There must be liability. The liability must arise by the default of promiser himself. d. The solitary liability is secondary, however principle debtor being a minor the

sureties liability becomes liability 3. According to Section 128, the surety’s liability is co-existent with that of the principle debtor.

The surety’s liability is nothing more than, nothing less than debtor’s liability. In other words the surety is stepping into the debtor’s shoe.

4. Guarantee need not be in writing, it may be oral 5. Guarantee classified into 2 types

a. Specific guarantee: i. When guarantee was given to specified one single transaction it is called

specific guarantee b. Continuing guarantee (Sec 129):

i. When guarantee extends for series of transactions, then it is specific continuing guarantee

6. More than one surety is called co-surety

Indemnity – Sec 124 Guarantee – Sec 126

1. There are 2 persons namely indemnifier and indemnity

1. There are 3 persons namely principle debtor, principle creditor, surety

2. 1 agreement between the person 2. 3 agreements

3. There must be loss 3. There must be liability

4. Indemnifiers liability is primary 4. The surety persons liability is secondary however principle debtor being a minor the sureties liability becomes primary

5. It is a contingent contract 5. It is an existing contract

Contract of Bailment (Sec – 148)

1. Delivery of the goods from one person to other person for a specific purpose up on a contract, goods shall be returned or disposed of when the purpose is accomplished.

2. Essentials: a. There are 2 persons bail or bailee b. There must be delivery of goods c. The delivery of the good may be actual or constructive d. Goods means every kind of movable property other than money and actionable

claims 3. There must be purpose 4. Bailee can use the goods 5. The goods must be returned as disposed when the purpose is accomplished

6. Only goods are delivered but not owner shipping the goods 7. Example:

a. X delivered some goods to goldsmith for making of jewelry. When the purpose is accomplished goods should be returned

b. Money – fixed deposit = not bailment c. Money – Locker = not bailment d. Jewelry – Locker = bailment

Contract of Pledge (Sec – 172)

1. Bailment of goods from one person to another person to perform the promise or to discharge the debt.

2. Essentials: a. There are 2 persons pledger and pledge (or) pawner and pawnee b. There must be delivery of the goods c. Goods are delivered as a security d. Pledge cannot use the goods e. In case of default by pledger, pledgee or sell the goods after giving a reasonable

notice f. Example:

i. X contacted bank, “give me some loan”. X delivered some gold and got loan = this is one kind of mortgage. It accepts only movable property

Contract of Agency (Sec – 182 to 288)

1. Agent is one who is connecting the link between principle & customer, who is competent to enter into contract sound mind

2. Creation of Agency (Sec 185) a. By express agreement b. By employee agreement

i. Estople agent ii. Holding out agency

iii. Agency in case of necessity c. Creation of agency by ratification

i. Pretending as agent ii. Holding out: he was an agent, later removed by he is represented as an

agent in society 3. Requisites of valid ratification

a. There must be principle and agent relationship b. Agent must act as agent c. The agent must act beyond his authority

Lien

Particular Lien (Sec 170)

Delivered watch for repair, you are bailee after paying only. taken goods only for payment not for other

purpose

General Lien (Sec 171)

General Balance Account

d. The agent must act on behalf of disclosed principle e. The principle should be competent person at the time of contracting as well as at

the time of ratification f. The entire transaction is to be ratified but not in part g. It must be communicated

4. Types of Agent a. Mercantile Agent:

Daily involved in day-to-day activities of business. The work purely for profit. i. Factor (only to sell the goods, appointed by principal who buys and sells) –

Broker (buyer gives brokerage) – Debt creating Agent (no element of profit only service)

ii. Auctioneer – commission agent – bankers. b. Non-Mercantile Agent:

Indirectly promoting the business activity. i. Clearing and forwarding agents

ii. Insurance agents iii. Solicitor iv. Under written agent v. Wife

Termination of Agency

By Conduct of Parties

By Mutual agreement

Rennnciation by Agency

Revocation by Principle

By Operation

of Law

Desolution of Partnership

Principal becomes aien enemy

By lapse of time

When purose is accomplished

Death of either of person

Insanity of either person

Insolvent of either party

Partnership Act (1932) 1. According to Sec 4, 2 or more persons come to an agreement to share the profits of a

business; the business may be carried on by all or any of them acting for all. 2. Essentials:

a. At least 2 persons b. Max no. of members are restricted to 10 in case of banking & 20 persons in any

other form of business (Sec 11 of the Companies Act 1956) c. It is the result of agreement between the persons d. Registration of the partnership is not compulsory, it is optional e. The agreement must be to share profits and losses f. The profit and loss must be derived from the business g. Business must be lawful h. Business may be carried on by all or any of them acting for all i. No consideration is necessary to create a partnership j. Partnership is a special kind of agency k. Each partner must be competent person to enter into contract

Types of Partnership

Partnership at Will (Sec 7)

1. A business is commenced for indefinite period of time 2. Mode of resolution is not specified 3. Work In Progress

Particular Partnership (Sec 8)

1. Business is commenced for definite period of time 2. Notice is not necessary

Types of Partnership 1. Active Partner – Liability Unlimited 2. Sleeping Partner – dormant, Liability Unlimited 3. Nominal Partner - just for name sake, no capital, no share, liability unlimited 4. Estopal Partner – through the works spoken 5. Holding out Partner – he was a partner 6. Sub Partner – XYZ & Co. 7. Partner in Profits 8. Minor Partner – no minor, cannot be stated, we can share profits with minor, minor can

admit into business when it already exists

Partner

1. Registration of Partnership (Sec 58) 2. Issue of certificate of Registration (Sec 59) 3. Communication of alteration to registers of forms within 30 days (Sec 60) 4. Effect of Non-Registration:

a. No partner can sue the form for his undistributed share of profits b. Partnership firm cannot sue others however others can sue the firm c. No provision for set-off d. If the set of amount is Rs. 100/- or less irrespective of the registration amount it can

be set –off

Dissolution of Partnership & Firm Dissolution of Partnership Dissolution of Firm

1. The relations among the partners are redefined or re-constituted

1. The relation among the partners are suspended or has come to an end

2. There must be existence & continuance of the business in future

2. No business existed and continued in future

3. It may not lead to dissolution of the firm 3. It will automatically result in dissolution of partnership

4. Example: Admission & retirement of partner

4. Example: Closer of business

Modes of Dissolution of Partnership

1. Mutual Agreement, (Section 40) 2. Notice of Dissolution, (Section 42) 3. Operation of Law, (Section 41) 4. Happening of Certain Contingency, (Section 43) 5. Decree of Court, (Section 44) 6. When a partner has become of unsound mind 7. Permanent incapacity of a partner 8. Misconduct of a partner – fraud 9. Transfer of share by a partner 10. The will full & persistent disregard of partnership agreement by a partner 11. Where the business cannot be carried on except at losses 12. Just and equitable – deadlock in management

True Test of Partnership

1. Mutual Agency, (Section 6) a. Cox vs. Hickman: Case b. A money lender to a partner sharing the profits of business or on behalf of deceased

partner his wife/son/daughter/legal representative may share profits of business c. Minor can be admitted to share the profit of business d. A retired partner may share the profits of business as per the terms of retirement e. A managerial person is appointed with salary as well as share in profits f. Above all persons are not partners because profit sharing is not true test or end test

of a partnership 2. True test of partner is mutual agency i.e., each partner is an agent to rest of partners

XYZ Company

X - AgentY,Z - Principle

Y - AgentX, Z -

Principle

Z - AgentX, Y -

Principle

Partnership HUF

1. It is a result of agreement 1. It is result of status

2. No person can be admitted into business without consent from all other partners

2. Mere by birth a person can become member

3. A female person can be a partner 3. A female person cannot be a member

4. Partners liability is unlimited 4. Kartha’s liability is unlimited where as members liability is limited to the extent of their share

5. No partner can transfer his share in business to another without consent from all other partners

5. A member can surrender his share to another member without consent from other member

Co-Ownership

Negotiable Instruments Act 1881 According to Section 13(1), the Negotiable Instruments are defined as a promissory note, bills of exchange, check, either to order or to the bearer of the instrument. Share warrant, dividend warrant are negotiable instruments. Share certificate is not Negotiable Instrument; it is called Merchant Negotiable Instrument

Negotiable Instruments According to Section 4, promissory note is defined as an instrument in writing, containing an unconditional undertaking, signed by the maker to pay certain sum of money only (or) to the order of (or) to the bearer of the Instrument. Essential:

1. It is an instrument 2. It must be in writing 3. Writing includes printing & typing 4. There are 2 persons namely promiser and promise 5. There must be an unconditional undertaking 6. Money and only money can be the consideration

Other Rules: 1. It must be properly placed and dated 2. It must be signed by the maker 3. The amount must be stated in terms of words & figures 4. It must be properly stamped as per the Indian Stamps Act 1899

Bills of Exchange (Section 5) It is an instrument in writing containing an unconditional order signed by the maker, directing to certain person to pay certain sum of money only to (or) to pay certain sum of money only to (or) to the order of (or) to bearer of the instrument. Essential:

1. It is an instrument, it must be in writing 2. There are 3 persons namely drawer, drawee and payee 3. There must be an unconditional order

Distinguish between Bill & Promisary Note Promisary Note (Section 4) Bill (Section 5)

1. There must be an unconditional 1. There must be an unconditional order

undertaking

2. 2 persons – promisor & promise 2. 3 persons – drawer, drawee & payee

3. Notice of acceptance is not necessary 3. It is necessary

4. Notice of dishonor is not necessary 4. It is necessary

5. The promisors liability is primary 5. Drawers liability is secondary

Cheque (Section 6) Cheques are bills of exchange, drawn on a specified banker, and not expressed to be payable otherwise than on demand. It includes electronic image of truncated cheque and cheque in electronic form. Essentials:

1. It must be drawn on a bank 2. It is payable only on demand 3. All cheques are bills, but all bills are not necessarily cheques 4. It does not require any stamp

Distinguish between Bill & Cheque Bill (Section 5) Cheque (Section 6)

It can be drawn on any person including a banker It must be drawn only on a banker

Notice of acceptance is necessary It is not necessary

Notice of dishonor is necessary It is not necessary

Grace days of 3 days are available No grace days available

It must be properly stamped It does not require any stamping

It cannot be crossed It can be crossed

All bills are not cheques All cheques are bills

Holder in Due Course (Section 8, 9) Who is not a holder in due course:

1. Any person obtains the negotiable instrument after its maturity 2. Any person obtains the instrument by using unfair methods such as coercion, undue

influence, etc. 3. Any person obtains the instrument as a gift

Noting (Section 99) & Protesting (Section 100)

Dishonor NI

BE

Non-acceptance

Non-payment

PNC

Non-payment

Companies Act 1. Derived from Latin word (com + panis = come together + bread), come together to share

bread/profit 2. According to Section 3(1) company means a voluntary association registered under the

Companies Act 1956 (or) an existing company 3. First joint stock Companies Act 1860 4. Characteristics of Company:

a. Voluntary association b. Separate legal entity c. Soloman vs. soloman company ltd. d. Limited liability e. Perpectual succession – continuous existence day by day existence/Companies life is

neither dependent on shares nor any managerial persons f. Common Security – official signature of a company g. Transferability of shares: company can sue, it can be sued by others h. Capaictative: company can have nationality filing case (suing), company cant be

having citizenship

Types of Company 1. On basis of Incorporation

a. Chartered company i. As far as the will & desire of queen of England if any company came into

force ii. Example: Bangkok Company, East India Company

b. Statutory company i. Any company which came into law

ii. Example: RBI

Comapany

Ownership (share holder)

Share holders liability is limited, company's liability is unlimited

Management (Board of Directors)

Representative Management

Share Holders Liability

Limited by shareShare holders liability is

limited to the extent of the unpaid value

Limited by Guarantee

Anay company registered under Sec 25, an associated

not for profit, objective is promotion of sports

Example: NGO = Amount of guarantee given, NTC

c. Registered company i. A company which is registered under the Companies Act 1956

2. On basis of liability a. Company limited by share b. Company limited by guarantee c. Company unlimited liability

3. On basis of no. of members a. Private company

i. Under Section 3(1)(iii), any company registered under the Companies Act 1956 by articles of association which restrict max no. of members to 50 excluding present and past employees

ii. Which restrict the transferability of share iii. Which prohibits issue of prospects of public iv. The min paid up capital is Rs. 100000/-

b. Public company i. Under Section 3(1)(iv), any company other than private company is public

company. In other words any company registered under the Companies Act 1956 by its AOA which does not restrict max no. of members, which does not prohibit issue of prospectors to public, which does not restrict transferability of share, the min paid up capital is Rs. 500000/-.

ii. Min 7 members to start 4. On basis of authority

a. Holding company i. Having hold (or) control over other companies managerial, technical

activities with majority of shares b. Subsidiary company

i. Being controlled by other company c. Government company

i. Section 617 ii. In any company 51% of the paid up capital is held by central government

(or) state government (or) partly central government & partly state government

5. On basis of nationality a. Indian company

i. Any company incorporated in India having some branches outside India for business purpose

b. Foreign company i. Section 591

ii. Any company incorporated outside India having branches in India (place of business) for business purpose.

iii. Example: HSBC

Incorporation of Company 1. Promoter (Section 62, 65) 2. Registration 3. Flotation 4. Important documents

Documents to be filled with Registrar of Company (ROC) 1. Memorandum of Association (MOA), Articles of Association (AOA) 2. Form No. 1(a)

a. Availability of proposing companies name 1(a) b. Once name allotted reserve your name for 6 months, once not used again extended

to 6 months 3. Form No. 18 4. Form No. 29, 32

a. Appointment of director 5. Whole time director 6. Power of attorney

a. Prescribed fee (section 33) b. Corporate Identity Number (CIN) c. Director Identification Number (DIN)

7. Prescribed fee

Conversion of PRIVATE Company to PUBLIC Company 1. By Default (section 43) 2. By Choice (section 44) 3. Private

a. Min 2 people b. Max 50 people c. Transferability of share is there d. Prospectors to public

Conversion of PUBLIC Company to PRIVATE Company 1. Meeting with Board of Directors 2. Meeting with share holders 3. Give correct explanation 4. Central government approval 5. Inform to ROC 6. Announce to public

Memorandum of Association (MOA) 1. It is a fundamental document, 2. It is a charter of company, 3. It regulates external affairs of company 4. It must be in writing 5. Table B, C, D, E can be adapted in order to prepare MOA 6. It must be signed by min subscribers (2 persons in case of private company, 7 persons in

case of public company) 7. 2 directors out of whom one shall be MD 8. Whole time practicing Chartered Accounting by company secretary

Contents of MOA

1. Name Clause (NC): a. Before I decide the company name precautions are taken b. At the end of company’s name, ltd. Should be there c. In case of private company the word ‘private’ should be there d. Some existing company name should not be taken e. Some words should not be used in company’s name

i. Example: Idiots Company, 3 Lions, Flag, Gandhi pictures should not be used, 54 words declared by government should not be used

2. Registered Office Clause (ROC) / Situation Clause

a. All meetings of a company should be held within the premises of the registrar office b. All accounts books should be preserved in registrar office (for 8 years books) c. Communication should be there between Board of Directors & Share Holders

3. Object Clause (OC) a. Main objective – main purpose b. Auxiliary objective – other works c. Other objective of a company – other business d. Example: sale of petrol – Main Objective; “I will get Korean Diesel” – Auxiliary

Objective 4. Capital Clause (CC) 5. Liability Clause (LC)

a. Shareholders share can be limited by liability 6. Association Clause (AC)

a. Serial number, index number, name of share holder, share applied areas, transfer etc, should be listed

Alteration of MOA

1. NC a. Special resolution b. 3/4th majority attending & participated in voting

2. ROC a. Special resolution

3. CC a. Ordinary resolution

4. LC a. Special resolution

5. OC a. Special resolution

6. AC a. Ordinary resolution b. 51% or members attending & participated in voting

Alteration of Registered Office Clause

Alteration of Registered Office

Clause

Withing Local Limits

Ordinary Resolution

Form no. 80 submitted to registrer office company form 30 days of alteration

Beyond the Local Limits within same

State

Same ROC

Special Resolution

Form no: 23, 18. Submit in 30 days to

ROC

Explanatory statements are

cumpulsory for special resolution

From 1 ROC to another ROC

Regional director's permission

Rest are same or same ROC process

From 1 state to another

Example: Business from Gujarat AP

Special resolution

regional director's permission

central government approval

Notice to interested group of persons -

Share Holders, Creditors

Form no. 18, 23. Submit to ROC in 30

days

Articles of Association (AOA) 1. It is a secondary document 2. It regulates internal management of a company 3. It must be in writing, inclusive of printing & typing 4. Table A can be adopted in order to prepare AOA

Contents of AOA

1. Issue of shares 2. Conversion of share into stock 3. Issue of share certificate & share warrant 4. Buy back of shares 5. Issue of shares with premium & at discount 6. Appointment of director 7. Appointment of Managing Director 8. Appointment of auditor & company secretary 9. Meetings of company 10. Proxy 11. Minutes & reports 12. Resolution 13. Accounts & declaration of dividend 14. Unclaimed dividend 15. Winding up of a company

Doctrine of ULTRAVIRES 1. Theory beyond power 2. Example:

a. Authorized capital – Rs. 100/- Issued Capital – Rs. 120/- = unltravires (is void, nullified)

3. Borrowing power of board of directors for AOA is Rs. 10000000, intravires, Ultravires becomes Intravires when approved by Share Holders

4. Public Company 11% = Intravires, 12% = Ultravires 5. Constructive Notice of MOA/AOA

a. Every outsider before he deals with company it is his first and foremost thing to read the memorandum of company

b. Let outsider be careful c. Example: Kotta Venkata Swamy Vs. Ram Murthy

i. Any contract of the company should be signed by working director, MD & Company Secretary

ii. It is a negative weapon in the hands of the company 6. Indoor of Management 7. Lifting of Corporate Veil

Share Capital 1. Authorized Capital (AC) – BOD are authorized to Issue 2. Issued Capital – a part of AC is issued to public 3. Alteration of Capital under Sec 94 4. Subscribed Capital – capital agreed to take up by public 5. Called up Capital – how much the company asked to pay 6. Paid up Capital – paid by Share Holders 7. Capital yet to be paid by Share Holders 8. Reserved Capital (Section 99) - a part of the unpaid capital is reserved, paid to creditors

9. Capital Reserve – out of capital profits if you have one reserve

Share & Stock

Share 1. It is a part of paid up capital 2. Always issued to public 3. Maybe fully or partly paid up 4. Issued to both private/public company 5. SEBI guide lines have to be followed 6. Share Holder will get share certificate 7. Your name is there under Section 150, Register of Members

Stock 1. A fully paid up share is converted into stock 2. Part of paid up capital 3. Not issued to public 4. Always fully paid up not partly 5. It can be central government permission compulsory then stock holder will get share

warrant, once warrant is issued your name under Section 150 will be removed 6. No longer member of company

Types of Share

Equity Share

1. Whose dividend will be paid after refunding to preference share capital 2. They have voting rights 3. They are invited to annual general meeting

Preference Share

1. Preference in dividend & refunding the capital 2. They don’t have voting rights

Issue of Share at Par (ISP) 1. When the share holder is required to pay at face value

2. Nominal value & share value = 10

3. Called up paid capital = 10

Issue of Share at Premium (Section 78) 1. Share premium and Security premium are one and the same

2. Utilization of Security Premium {Section 78(2)}:

a. To right of preliminary expenses

b. To right of the commission or brokerage paid

c. To redeem the redeemable preference share

d. To issue the fully paid up bonus shares

e. Buy back of shares

Issue of Share at Discount (Section 79) 1. When the share is required to pay less than the nominal value of share 2. Rate of discount is 10%, we can give a discount if more National Company Law Terminal

(NCLT) permission should be there, within 2 months from date of agreement

Sweat Equity Share (Section 79A) 1. When shares are allotted to the directors or employees at discount 2. When shares are allocated for exchange of technical know-how 3. When shares are allotted for utilization for intellectual property rights (IPR) 4. When shares are allotted for value addition

Buy Back of Shares (Section 77A, 77AA, 77B) 1. No company can buy its own shares (Section 77, diluted) 2. Guidelines:

a. Your AOA there should be provision of buy back b. Annual general meeting you have to pass special resolution for explanatory

statement c. Declaration of Solvency (Assets are more than Liabilities) is Compulsory d. Debt equity ratio is 2:1 after buyback e. No company can buy more than 20% of the paid up capital and free reserve (reserve

for workman’s fund) in the particular financial year i. Example:

ii. You buy the shares in a bulk f. If you wanted buy you wanted to pay face value / market value / more. Buy back is

always more than market value g. Resources going to use are operating profit, proceeds from fresh issue of shares

from the date of buy back is completed within 7 days & share certificate should be destroyed

Rights Issue / Further Issue of Shares 1. When a company asks more capital rather going outside, they can ask the inside existing

people (Share Holders). 2. If inside people are reluctant to take up then offer to public is called Pre-emption 3. Clause: Right to Renunciation (in agreement), from friends and relatives.

a. Example: b. 100 Shares – 70 existing Share Holders, 20 renunciation, 10 public

Capitalization of Profit

Meetings of Company

Statutory Meeting (Section 165) 1. Certificate of Commencement of Business (CCB)

Converting Profits into

CapitalBonus Issue

Free of Cost (Need not Pay)

Money is translated from free reserves to capital account

2. Every public Ltd. company having a capital, the share holder liability may be limited by share or limited by guarantee after commencement of business not less than 1 month, not more than 6 months. There should be a meeting called statutory meeting.

3. This is a the only 1 meeting which would be held once during the life time of the company 4. For private this meeting is not compulsory 5. In case of default the fine is Rs. 5000/- after giving a reasonable time ROC can proceed for

compulsory winding up of a company {Section 433(b)} 6. Contents:

a. Issue of Share; equity share or preference share b. Amount received on allotment of shares c. Abstract/statement of receipts & payments d. Director e. Share qualifications of a director f. Demand for pay g. Managing director h. Auditor & company secretary i. Under written & broker j. Adoption of the preliminary contracts k. Any other information required by ROC

Annual General Meeting (AGM) 1. The first AGM should be held within 18 months of its incorporation 2. No extension of time by ROC if first AGM was not conducted 3. The gap between two annual general meeting should not be more than 15 months, if not

possible then there will be extension of the time by 3 months by ROC 4. If there is a default fine is Rs. 50000/- & Rs. 2500/day for every day of further delay 5. Officer who is in default should pay these amounts

Extraordinary General Meeting (Section 169) 1. When the decision cannot be postponed to next meeting then we can call for (EGM) 2. Who may call for EGM:

a. Board of directors according to accord b. Board of Directors according to requisition give by requisitionist (share holder) c. Requisitionist by themselves d. NCLT / Company Law Board (CLB)

Requisites of Form 1. Proper authority 2. Notice

a. Intimation to share holders to attend the meeting (we need to have 21 days from day of the notice posted after 48 hours excluded as it reach the share holders)

b. Notice is given to i. Share holder

ii. Auditor iii. Legal representatives of disabled share holders iv. Official received of insolvent share holders

c. Meeting should be on a working day at registrar office during working hours (10am to 8pm)

d. For adjourned meeting no need of announcement/notice 3. Quorum

a. Min no. of members to be present in order to validate the meeting is called Quorum

b. Private company – 2 members in persons excluding proxy c. Public company – 5 members in person excluding proxy d. When no. of people are not there the meeting is adjourned to next week same date,

same place, same time. e. When it was cancelled on that day then the meeting is scheduled in preceding day

4. Proxy a. A proxy is a representative of original Share Holder of a company b. Proxies authorization should be in writing c. Before 48hrs of the meeting, proxy has to be lodged with company d. A private company share holder can appoint one person as a proxy where as a public

company share holder can appoint more than 1 person as proxy e. A proxy need not be share holder of company f. A proxy cannot speak at meeting g. A proxy cannot participate in voting however he can participate in polling

5. Minutes & Reports a. 1925 if they did not maintain the minutes they don’t know when first board meeting

held, what is agenda etc. b. It helps the next generation c. Minutes are accepted as prima facie d. Minutes should be signed by 30 days by chairman e. Minutes are accepted as evidence f. Report are not accepted as evidence g. Reports need not be signed by chairman

6. Resolution a. The wish of the share holder of a company is resolution b. Proposal/question from share holder of company is in writing this proposal is called

motion c. When 2 persons are second it is considered d. When 2 persons are not seconded it is rejected/fall on ground e. The mover of the motion start debate discussion f. Members are allowed to participate in meeting g. Any proposal need not be accepted as it is any deduction or addition can be done is

called amendment h. Today law permits notice through 14 days notice postal ballet i. It can be accepted by voting/polling it becomes resolution

Reslolution

Ordinary

Appointment of Director

Special

51%

Resolution which requires special notice

3/4th people acceptance or

51%

7. Agenda a. Any item outside the agenda should not be discussed b. What is to be transacted should be listed out there c. Day should end with verification of agenda

Management of Company

Board of Directors (BOD) 1. Any person who occupies office of director & discharge the function of director 2. Private company has a min of 2 directors – max unlimited 3. Public company has a min of 3 directors – max 12, if more than 12 then permission of central

government is required 4. All the directors of private company can be appointed into 1 resolution 5. Each directors appointment require ordinary resolutions in public company 6. No person can be director for more than 15 years in public company 7. Qualification:

a. He must be individual, competent person, major of Indian Contract Act 1872 (Section 11)

b. He must acquire qualification of shares within 2 months (Rs. 5000/- shares applicable only for public company)

c. For private company no need to qualification shares 8. Disqualification:

a. Minor convicted on account of moral terms b. Unsound mind

Appointment of Directors 1. Appointment of first director – by AOA or first subscribers will automatically become

directors a. Out of total directors in public company:

i. 12 * 1/3 = 1/3 are called non retiring directors ii. 12 * 2/3 = 2/3 are called as rotational directors

iii. (1/3 of 2/3) has to retire every year = 8 * 1/3 = 3:3:2 iv. Those who retire they can be reappointed but not compulsory v. Senior directors will go first or lottery system

2. Appointment of director by company 3. Appointment of director by BOD

a. Additional director i. Expansion of organization either horizontal or vertical, we can take a person

who is appointed essentially to reduce the work burden of BOD ii. Qualification shares are compulsory

b. Casual director i. To fill the vacancy due to insolvency, death of director, his appointment is

valid up to next meeting c. Alternative director

i. It is one who is appointed in original director’s place as the original director is out of station etc.

4. Appointment of director by central government a. When public are substantially interested, government is also interested b. Closely held company and widely held company c. Private company and public company respectively as above

d. 1 director appointed to se that every activity is fairly carried out 5. Appointment of director by others

a. Nominate directors b. Creditors are nominating to safe guard their money

6. Appointment or director proportionate representation a. 3 share holder – 80% paid up share capital, 15% representation of shareholder

should be there, 5% minority share holder can there in the board and he can also be a director

Role of Directors 1. Director as trustee

a. He is a trustee for company’s property b. Act on behalf of company c. They act like an agent on behalf of the company the direct signs

2. Director as employer 3. Director as employee

a. No director is not an employee because he is not working daily b. Section 314, MD – whole time directors are employees c. In case of public company

i. 11% of Net profit of that financial year ii. It can be paid monthly, quarterly, half yearly

d. In case of company in loss i. Rs. 75000 to Rs. 200000/month

e. In case of inadequate profits i. Rs. 150000 to Rs. 400000/month

ii. Average salary Rs. 200000 * 15 * 12 = Rs. 3.6 crore

Managing Director 1. Only director can be appointed as MD 2. Qty & director Qty are same as Director 3. Age limit not less than 25 and not more than 70 4. Term of office is 5 years 5. Can be re-appointed as MD

Share Holder & Member 1. No difference between them, both can be used interchangeably

2. Every registered member is a share holder of a company but all share holder is not member

of the company

How to become Member of Company

1. By subscribing MOA & AOA 2. By application, allotment and registration 3. By transfer of share 4. By succession – death of original share holder 5. By acquiring the qualification shares

a. Each director will become member of company b. Minor can be share holder; on condition of fully paid up capital according to Section

109(A)(4) c. A partnership firm can’t be share holder but partners can be share holders d. Can a company become partner in partnership firm? Yes e. Can alien be share holder? Yes

f. Can company/corporation become a member of other company? Yes g. Can a company expel a member? No, however if the member’s behavior is pre-

judicial then Yes.

Prospectus 1. It is a notice/circular issues to public inviting them to participate in shares, debentures

a. General introduction b. Present issue c. Risk factors

2. It must be drafted and signed by underwritten secretary or MD 3. Under writer (Section 76)

a. All public financial institutions are acting as under writer. b. He is giving assurance under taking for minimum subscription on behalf of the

company c. According to SEBI under writers are optional d. Abridged form of Prospectus

i. The salient form of prospectors along with application should be given according to SEBI guidelines