Legal Aspects of Business

INTRODUCTION

LAW:
Law is that portion of
established habit
and
thought of mankind
which has gained
distinct and formal recognition
in the shape of uniform rules
backed by the authority and
power of Government.
 INTRODUCTION

Separate rules and principles are known as laws. Such laws

may be

Mandatory Laws- Calls for affirmative act

Prohibitive Laws – Requires negative conduct

Permissive Law – which neither requires nor forbids action,

but allows certain conduct on the part of individual if he
desires to act.
Sources of Law
PRIMARY SOURCES OF INDIAN LAW

Customs or Customary Law

Judicial Decisions or Precedents

Statutes or Legislations

Personal Law e.g Hindu and Mohammedan

Law etc.
SECONDARY SOURCES OF INDIAN LAW

Secondary
Sources of
Indian Law

Justice, Equity
Sources of
and Good
English Law
Conscience
 BUSINESS LAW

Meaning:
It is that branch of law comprising
laws concerning trade, industry
and commerce.
Scope of Business Law:

• Contracts
• Sale of Goods
• Partnership
• Companies
• Negotiable Instruments
• Insurance
• Insolvency
• Carriage of Goods
• Arbitration
 Presumption of Law

Every person is presumed to know the law.

“Ignorantia juris non-excusat”

Ignorance of law is no excuse.

 English Mercantile Law

Indian Mercantile Law is built

on the foundation of
English Mercantile Law.
In case of ambiguity,
our courts take recourse to English Law.
 The Statute Laws:
• The Indian Contact Act, 1872.
• The Negotiable Instruments Act, 1881.
• The Sale of Goods Act, 1930.
• The Indian Partnership Act, 1932.
• The Companies Act, 1956.
• The Arbitration and Conciliation Act, 1996.
 JUDICIAL DECISIONS
(CASE LAW)
Binding on all courts having jurisdiction lower to that of
the court which gave the judgment.

Courts with equal jurisdiction – generally take

cognizance of the judgment, though not bound by it.
In case of ambiguity, when act is silent,
principles of justice, equity and good conscience
are applied.
 Meaning of a Company
• There are many definitions of a Company by
various legal experts. However, Section 2(20)
of the Companies Act, 2013, defines the term
‘Company’ as follows: “Company means
a company incorporated under this Act or
under any previous company law.”
 Types of Company
Types of
Companie
s

One
Section 8 Sole
Public Limited
Company or Private
Person
Company LLP Proprietorsh
Company
Limited Company ip/
Partnership

Companies Unlimited
Companies Liability
limited by Limited by
Shares Guarantee
 Difference between Public and Private company
PUBLIC COMPANY PRIVATE COMPANY
A Private company has "Pvt.Ltd" at the A Public company has "Ltd" at the end of its
end of its name. name.
The minimum number of members
The minimum number of members needed to
Minimum number of needed to form a private company is at
form a Public Company is at least 7 members.
members least 2 members.

Maximum number of The Maximum number of members in a The Public Company have no restriction on a
members Private Company is restricted to 200. maximum number of members.

Private Company should have a minimum Public Company should have a minimum paid up
Minimum Paid-up paid up capital of 1 lakh rupees. capital of 5 lakh rupees.
Capital

Commencement of business of a Private A Public Company can only Commence its

Company takes place immediately after business after receiving a certificate of
Commencement of getting the certificate of incorporation. incorporation and Certificate to commencement.
Business
A Private Company must have at least 2
A Public Company must have at least 3 directors
directors to head and supervise the
to manage and lead the affairs of the company.
Number of Directors affairs of the company.

A Private Company cannot issue a

Public Company can issue a Prospectus. Public
Prospectus. Private Company is not
Company is free to invite public for subscription
allowed for inviting the public for
of its shares.
subscription of its shares.
Issue of Prospectus
 Difference between Public and Private company

PUBLIC COMPANY PRIVATE COMPANY

A Private Company can allot shares A Public Company cannot be able to allot shares
Minimum without waiting for the completion of before the minimum subscription of shares is
Subscription minimum subscription limit. completed.
The Articles of Association of a Private
The Public Company is free to transfer the
Company lays restriction on transfer of
shares of its company from one person to
Transferability of the shares from one person to another
another.
shares person.

A Private Company is obligated to have A Public Company is obligated to have at least 5

at least 2 members personally present for members personally present to constitute the
holding the company meeting. meeting.
Quorum
A Private Company is not required to
A Public Company is required to conduct a
conduct a Statutory Meeting of the
statutory Meeting and file the Report to the
members or filing of Report to the
Register of Companies.
Statutory meeting Register of Companies.
There are no restrictions on payments There are some restrictions on payments and
and remunerations offered to the remunerations offered to the directors or
Managerial directors or managers of a Private managers and the remuneration should not
remuneration Company. exceed 11% of the net profits.
 Difference between Company and Partnership

PARTNERSHIP COMPANY
The members of the Partnership firm The members of the company are called as
are called as Partners. shareholders of a company.
Partnership Form of business is
Company Form of business is governed by "The
Enacted by governed by "The Indian Partnership
Indian Companies Act, 2013”.
Act, 1932."

A Company must have Minimum of 2 and

Number of Minimum of 2 partners and maximum maximum of 200 in the case of private company.
Members of 20 partners. Minimum 7 and maximum is unlimited number of
members in case of public company

Partnership Firm is Created by Contract Company Firm is Created by Law i.e created by
Created by
between two or more people. incorporation of a company under company law.

Regulation It is regulated by the Registrar of Firms It is regulated by the Registrar of Companies which
Authority which comes under State Government. comes under Central Government.

Registration The registration of a Partnership firm is The registration of Company with Registrar of
procedure Not Mandatory. Companies is Mandatory.
Partnership Deed(Agreement
Memorandum of Association(MoA) and Articles of
Documents Document) is the mandatory
Association(AoA) are the main documents to the
Required document for creation of a Partnership
incorporation of the company.
Firm.
 Difference between Public and Private company

PARTNERSHIP COMPANY

Partnership firm is not a separate legal

entity from partners. The Partners of A company is a separate legal entity, It is a separate
Separate Legal Entity
the firm are collectively referred as a entity from its members, directors, promoters, etc.
Partnership firm.

The partners have Unlimited Liability in

The Shareholders and promoters have Limited
Liability of Members all the matters relating to Partnership
liability to Capital of the company.
Firm.

Partnership Firm has to maintain A Company should maintain accounts and auditing
Accounts and Audit accounts as per the conditions stated in of accounts by certified Chartered Accountant are
partnership deed. Compulsory.

A Common Seal is not required for A Common Seal in the form of a stamp is required
Common Seal
Partnership Firm. for the company for legal and functional purposes.

Management of the activities of a

Management of the activities of a Company is done
Management Partnership Firm is usually done by the
by Board of Directors.
working partners.

The name of the Partnership Firm can The name of the company cannot be changed
Change of Name be changed easily by having a easily and a prior approval of Central Government
discussion between partners. is required to change the name.
 Difference between the LLP and Private
Limited Co.

Factors of comparison Private limited company Limited liability partnership

Maximum number of members 200 None

Requirements for compliance Annual return filling borad Annual return filling and
meetings and general meetings Statement of Account & Solvency.

Audit compulsory Only if contribution more than Rs.

25 lakhs or turnover exceeds Rs.
40 Lakhs

Lower cost of Formation Legal charges – Rs. 12,000 Legal Charges- Rs. 7000

Conversion Can be converted to LLP Cannot be converted into a

company
Time for registration 15-20 days 10-15 days
Dividend distribution tax Apply Not apply
 Minimum requirements
for incorporating a One Person
Company
• A minimum of one director
• Atleast one member
• Minimum share capital Rs. 1,00,000
• Director identification number
• Digital signature certificate
Requirements for an OPC:
1. Only a natural person who was a resident of India in the previous year
(i.e. he has stayed in India for more than 182 days in that year) shall be
eligible to form an OPC. This means that any association of persons or
body of individuals or company or any other entity cannot form OPC. A
minor is also not eligible to be a member or nominee in an OPC.
2. You cannot incorporate more than one OPC at a time.
3. An OPC can either be a company limited by share or limited by guarantee
or an unlimited company.
4. Once an OPC is formed, you will still have to follow the minimum
requirement i.e. the company must have an average annual turnover of
Rs. 2 crore in the immediately preceding three financial years, failing
which the company will lose its status.
5. An OPC cannot carry out Non- Banking Financial Investment activities
including investment in securities of any body corporate.
 Features of a Company

• A Company is a Separate Legal Entity

• Perpetual Succession
• Limited Liability
• Artificial Legal Person
• Common Seal
– According to Companies (Amendment) Act, 2015, if a
company does not have a common seal, then the
authorization shall be done by:
– Two Directors or
– One Director and the Company Secretary (if the
company has appointed a Company Secretary).
 Question
• Q1. Peter holds 99.99% of the shares of a
timber company. Also, he is a major creditor
of the company. He ensures the company’s
timber in his name. A few months later, the
company loses all the timber in an accidental
fire. Peter claims the insurance amount from
the insurer. Is his claim valid?
 Corporate Veil Theory

• The Corporate Veil Theory is a legal concept

which separates the identity of the company
from its members. Hence, the members are
shielded from the liabilitiesarising out of the
company’s actions
 Piercing the Corporate Veil

• 1] To Determine the Character of the

Company - the Courts usually avoid piercing
the corporate veil, unless the public interest is
in jeopardy.
• 2] To Protect Revenue or Tax
• 3] If trying to avoid a Legal Obligation
• 4] Forming Subsidiaries to act as Agents
• 5] A company formed for fraud or improper
conduct or to defeat the law
 Question
• Q: ABC Limited purchases shares of XYX Limited by
investing Rs. 20 lakh. The dividend received on these
shares reflects in the profit and loss account of the
company. Further, the workers of the company receive
an annual bonus and the dividend amount is taken into
account in calculating the overall bonus figure.
• A few years later, ABC Limited transfers the shares of
XYZ Limited to LMN Limited, which is a wholly owned
subsidiary of ABC Limited. Post transferring of the
shares, the dividends do not reflect in the accounts of
ABC Limited. This leads to a reduction in the overall
bonus amount figure. Is ABC Limited legally allowed to
do so?
 ANSWER
• In this case, the Court will observe that LMN Limited
has no assets of its own, except those transferred to it
by ABC Limited. Also, LMN Limited has no business or
income of its own except receiving dividends from the
said shares.
• Hence, ABC Limited has created a subsidiary and
transferred the shares to it with the intention of
reducing the amount paid to its workers as a bonus.
The Court will opt for piercing of corporate veil and
conclude that ABC Limited has created LMN Limited
with the intention of avoiding its legal obligation.
Hence, the Court voids the separate existence of the
subsidiary company (LMN Limited).