Business Law- II (English Version)-munotes

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1 MODULE I
THE INDIAN COMPANIES ACT, 2013.
1
NATURE, FEATURES OF COMPANIES
Unit Structure
1.0 Objectives
1.1 Introduction
1.2 Characteristics of Company
1.3 Disadvantage of Incorporation.
1.4 Formation of Companies
1.5 Lifting of Corporate Veil
1.6 Effects of Non - Registration.
1.7 Questions
1.0 OBJECTIVES After studying the unit, the students will be able to:
• Understand the characteristics of the Company
• Understand the Advantage and Disadvantage of Companies
• Explain how to form the company.
• Understa nd the meaning and effects Lifting of Corporate Veil
• Understand the Effects of Non - Registration.
1.1 INTRODUCTION HIGHLIGHTS OF THE COMPANIES BILL, 2012 (as passed by the Lok
Sabha on 18.12.12 and by the Rajya Sabha on 08.08.13) The Bill has 470
clauses as against 658 Sections in the existing Companies Act, 1956. The
entire bill has been divided into 29 chapters. Many new chapters have
been introduced,
Section 2 (20) of Companies Act, 2013" “Company” means a company
incorporated under this Act or under any previous company law.
The word “company” has no strictly technical or legal meaning. A body
corporate or corporation includes a company incorporated outside India,
but does not include a co -operative society registered under the law
relating to co -operative societies, and anybody corporate which the
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2 Business Law - II
2 Company” is derived from two words: “com” - group and “panies” - bread.
Therefore, it means group that eat their bread together.
A company is: - an association or collection of individuals, whether
natural persons, legal persons, or a mixture of both.
• Company members share a common purpose and unite
• in order to focus their various talents and organize their collectively
available skills or resources to achieve specific, declared goals
• not merely a legal institution
• a legal device for attainment of social (Section 25/8) or economic end
and to a large extent publicly and socially responsible
A company as an entity has many distinct feature s which together make it
a unique organization. The essential characteristics of a company are
following:
1.2 CHARACTERISTICS OF THE COMPANY 1. Voluntary association:
A company is a voluntary association formed by an individual or group of
individuals. Mos t companies are formed with the motive of profit -making
except the Section 8 companies that is Non -Governmental Organization .
Profit earned is divided among the shareholders or saved for the future
expansion of the company .
2. Separate Legal Entity:
A com pany becomes a separate legal entity as compared to its members
when it registered with an appropriate authority that is ROC (Registrar of
Company). The company is distinct and different from its members in law.
It has its own seal and its own name; its as sets and liabilities are separate
and distinct from those of its members. It is capable of owning property,
incurring debt, and borrowing money, employing people, having a bank
account, entering into contracts and suing and being sued separately.
Case Law: Salomon v/s Salomon: Salomon had a business in leather and
shoe manufacturing. Due to some circumstances, he created his own
company and sells his previous business of shoe manufacturing to this
company. Salomon gave one share each to his wife, daughter, sons, and
the rest of the company‟s shares were held by him. After few years, the
company was wound up and had some existing liabilities but did not have
enough assets to pay off the liabilities. Unsecured creditors sued Salomon
for repayment of their mone y, but the court held that the company was not
an agent or a trustee for Salomon. The company is entirely different from
the individual, and hence the contentions of the creditors could not be
upheld.
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3 Nature, Features of Companies 3. Limited Liability:
The liability of the members of the company is limited to contribution to
the assets of the company up to the face value of shares held by him. A
member is liable to pay only the uncalled money due on shares held by
him. If the assets of the firm are not sufficient to pay the liabilities of the
firm, the creditors can force the partners to make good the deficit from
their personal assets. This cannot be done in the case of a company once
the members have paid all their dues towards the shares held by them in
the company.
The liability of a company may be limited either by Shares or Guarantee.
Company limited by Guarantee: Liability of shareholders is limited to a
certain amount of guarantee mentioned in the memorandum payable only
at the time of wind up and losses occurred by the company .
Company limited by Shares: Liability of the members shall be limited
to the extent of unpaid money or shares held by them.
4. Perpetual Succession:
“Perpetual Succession” in a company is best defined by this line -
Members may come and go but the company goes on forever. It means
company never dies If any member dies or leaves the company it does not
make any difference to the corporate existence of the company. It is one
of the fundamentals of a company‟s existence. Perpetual succession means
that a co mpany‟s life is not determined by the longevity of its members,
shareholders, promoters, directors, employees or anyone else. If a
shareholder dies, or hypothetically, all the shareholders die, only their
shares in the company will be transferred to new pe ople. If even a key
director resigns, he/she will be replaced but the company will continue on.
5. Separate Property:
A company is a distinct legal entity. The company‟s property is its own. A
member cannot claim to be owner of the company‟s property duri ng the
existence of the company.
6. Transferability of Shares:
Shares in a company are freely transferable, subject to certain conditions,
such that no share -holder is permanently or necessarily wedded to a
company. When a member transfers his shares to an other person, the
transferee steps into the shoes of the transferor and acquires all the rights
of the transferor in respect of those shares.
7. Common Seal:
A company is an artificial person and does not have a physical presence.
Thus, it acts through its Board of Directors for carrying out its activities
and entering into various agreements. Such contracts must be under the
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4 company. The name of the company must be engraved on the common
seal. Any document not bearing the seal of the company may not be
accepted as authentic and may not have any legal force.
8. Capacity to sue and being sued:
A company can sue and be sued in its name and may even sue its
members. It also has a right to see k damages where a defamatory matter is
published about the company, which affects its business.
9. Separate Management:
A company is administered and managed by its managerial personnel i.e.
the Board of Directors. The shareholders are simply the holders o f the
shares in the company and need not be necessarily the managers of the
company.
1.3 DISADVANTAGE OF INCORPORATION OF COMPANY 1. Cumbersome Formalities and Cost
2. Separation of control from ownership
3. Greater Social Responsibility
4. Greater Tax Bu rden in Certain Cases
5. Winding Up Procedure is lengthy
Cumbersome Formalities and Cost:
Incorporation of a company is a very complex legal process and it
involves a considerable amount of time and money. These elaborate
procedures have been established so as to discourage people from doing
business who not serious and passionate about it.
Even after the incorporation of the company, it has to be run and managed
very strictly. In accordance with the legal provisions provided by the
Companies Act. The retu rns and other documents have to be registered at
the Registrar of Companies.
Certain particular events or activities such as accounts, corporate audits,
meetings, borrowing, lending, investment and issue of capital, dividends
etc, are necessarily required to be conducted and carried out by the
provisions of the Companies Act.
Separation of control from ownership:
Members of small shareholders of a company do not have any effective
control over the functions and decisions of the company because, the
number o f people in the company is large in number that an individual or
even a small group of people cannot have a big effect on the functioning
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5 Nature, Features of Companies Greater Social Responsibility:
Companies incorporated under Companies Act have to pay a higher ta x.
An incorporated company does not get any discounts and any minimum
taxable limits. An incorporated company also has to pay income tax on the
whole of its income at a fixed rate whereas other companies are charged at
a gradual or slab rate.
Winding up Procedure is lengthy:
The Companies Act provides for a very much lengthy and complicated
process to explain the winding up of a company. This process takes more
time to complete the formalities, time consuming and expensive.
1.4 FORMATION OF COMPANIES Introduction:
The formation and incorporation of a company are very much similar to
the birth of a human like it also goes through various stages of formation
of its body parts during the womb stage. Number of preliminary works are
to be carried out to brin g a company into existence. The process of an idea
converting into a company includes various stages, these crucial stages of
the pre -incorporation and formation stages are discussed in detail as under.
This lesson explains the functions, duties and liabil ities of a promoter
along with providing in depth knowledge into cases regarding pre -
incorporation contract.
Role of Promoters For Incorporation of Company:
“Promoter is the person who originates the idea for formation of a
company and gives the practical shape to that idea with the help of his
own resources and with that of others.”
A person cannot be held as promoter merely because he has signed at the
foot of the Memorandum or that he has provided money for the payment
of formation expenses.
The promote rs, in fact, render a very useful service in the formation of the
company. A promoter has been described as “a creator of wealth and an
economic prophet.” The promoters carry a considerable risk because if the
idea sometimes goes wrong then the time and mo ney spent by them will
be a waste.
A promoter may be an individual, a firm, an association of persons or even
a company.
S. 2 (69) of Companies Act 2013 defines Promoter as:
(a) “who has been named as such in a prospectus or is identified by the
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6 (b) who has control over the affairs of the company, directly or indirectly
whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board
of Directors of the company is accustomed to act:
Provided that nothing in sub -clause (c) shall apply to a person who is
acting merely in a professional capacity”
Preliminary Contracts/Pre -Incorporation Contracts Made by the
Promoters:
Preliminary contracts are those contracts which are made by the promoters
with different parties on behalf of the company yet to be incorporated.
Such contracts are generally entered into by promoters to acquire some
property or right for and on behalf of the company to be for med.
The promoters enter into preliminary contracts, generally as agents or
trustees of the company. Such contracts are not legally binding on the
company because two consenting parties are necessary to a contract
whereas the company is non-entity before i ncorporation.
Functions of a Promoter:
The Promoter Performs the following main functions:
1. To conceive an idea of forming a company and explore its
possibilities.
2. To conduct the necessary negotiation for the purchase of business in
case it is inten ded to purchase as existing business. In this context, the
help of experts may be taken, if considered necessary.
3. To collect the requisite number of persons (i.e. seven in case of a
public company and two in case of a private company) who can sign
the „Memorandum of Association‟ and „Articles of Association‟ of
the company and also agree to act as the first directors of the
company.
4. To decide about the following:
(i) The name of the Company,
(ii) The location of its registered office,
(iii) The amo unt and form of its share capital,
(iv) The brokers or underwriters for capital issue, if necessary,
(v) The select the bankers,
(vi) The selection of auditors of company,
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7 Nature, Features of Companies 5. To get the Memorandum of Association (M/A) and Art icles of
Association (A/A) drafted and printed.
6. To make preliminary contracts with vendors, underwriters, etc.
7. To make arrangement for the preparation of prospectus, its filing,
advertisement and issue of capital.
8. To arrange for the registratio n of company and obtain the certificate
of incorporation.
9. To defray preliminary expenses.
10. To arrange the minimum subscription.
Promoter of Company and his legal position towards Company:
The promoter is neither a trustee nor an agent of the compan y because
there is no company yet in existence. The correct way to describe his legal
position is that he stands in a fiduciary position towards the company
about to be formed.
The promoters of a company stand undoubtedly in a fiduciary position.
They have in their hands the creation and molding of the company.
They have the power of defining how and when and in what shape and
under what supervision, it shall start into existence and begin to act as a
trading corporation.”
From the fiduciary position of pro moters, the two important results
follow:
(1) A promoter cannot be allowed to make any secret profits. If it is found
that in any particular transaction of the company, he has obtained a
secret profit for himself, he will be bound to refund the same to th e
company.
(2) The promoter is not allowed to derive a profit from the sale of his own
property to the company unless all material facts are disclosed. If he
contracts to sell his own property to the company without making a
full disclosure, the company m ay either repudiate/rescind the sale or
affirm the contract and recover the profit made out of it by the
promoter.
A promoter who wishes to sell his own property to the company must
make a full disclosure of his interest.
The disclosure may be made:
(i) To an independent Board of Directors, or
(ii) In the articles of association of the company, or
(iii) In the prospectus, or
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8 If the promoter fails to discharge the obligation demanded of his fiduciary
position the company may rescind the contract or may in the alternative
choose to take advantage of the contract and sue the promoter for damages
for breach of his duty to the company.
Secret profits on the sale of property can be recovered from a promoter
only when the property was bought and sold to the company while he was
acting as a promoter.
Rights of Promoter:
The rights of promoters are enumerated as follows:
1. Right of indemnity:
Where more than one person act as the promoters of the company, one
promoter can claim against another promoter for the compensation and
damages paid by him. Promoters are severally and jointly liable for any
untrue statement given in the prospectus and for the secret profits.
2. Right to receive the legitimate preliminary expenses:
A promoter is entitled to receive the legitimate preliminary expenses
which he has incurred in the process of formation of the company such as
cost of advertisement, fee of solicitor and surveyors. The right to receive
the preliminary expenses i s not a contractual right. It depends upon the
discretion of the directors of the company. The claim for expenses should
be supported by vouchers.
3. Right to receive the remuneration:
A promoter has no right against the company for his remuneration unless
there is a contract to that effect. In some cases, articles of the company
provide for the directors paying a specified amount to promoters for their
services but this does not give the promoters any contractual right to sue
the company. This is simply an authority vested in the directors of the
company.
However, the promoters are usually the directors, so that in practice the
promoters will receive their remuneration.
The remuneration may be paid in any of the following ways:
(i) A commission may be paid to the promoter on the purchase price of
the business or property taken over by the company through him.
(ii) The promoters may be granted by the company a lumpsum amount.
(iii) The promoters may be given fully or partly paid shares in
consideration of t heir services rendered.
(iv) The promoter may be given a commission at a fixed rate on the shares
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9 Nature, Features of Companies (v) The promoter may purchase the business or other property and sell the
same to the company at an inflated price. He must disclose this fact.
(vi) The promoters may take an option to subscribe within a fixed period
for a certain portion of the company‟s unissued shares at par.
Whatever be the nature of remuneration, it must be disclosed in the
prospectus if paid within the preceding two years from th e date of
prospectus.
Duties of Promoter:
The duties of promoters are as follows:
1. To disclose the secret profit:
The promoter should not make any secret profit. If he has made any secret
profit, it is his duty to disclose all the money secretly obtained by way of
profit. He is empowered to deduct the reasonable expenses incurred by
him.
2. To disclose all the material facts:
The promoter should disclose all the material facts. If a promoter contracts
to sell the company a property without making a full d isclosure, and the
property was acquired by him at a time when he stood in a fiduciary
position towards the company, the company may either repudiate the sale
or affirm the contract and recover the profit made out of it by the
promoters.
3. The promoter mu st make good to the company what he has
obtained as a trustee:
A promoter stands in fiduciary position towards the company. It is the
duty of the promoter to make good to the company what he has obtained
as trustee and not what he may get at any time.
4. Duty to disclose private arrangements:
It is the duty of the promoter to disclose all the private arrangement
resulting him profit by the promotion of the company.
5. Duty of promoter against the future allottees:
When it is said the promoters stand in a fi duciary position towards the
company then it does not mean that they stand in such relation only to the
company or to the signatories of memorandums of company and they will
also stand in this relation to the future allottees of the shares.


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10 Liabilities of Promoter:
The liabilities of promoters are given below:
1. Liability to account in profit:
As we have already discussed that promoter stands in a fiduciary position
to the company. The promoter is liable to account to the company for all
secret profits made by him without full disclosure to the company. The
company may adopt any one of the following two courses if the promoter
fails to disclose the profit.
(i) The company can sue the promoter for an amount of profit and
recover the same with interest.
(ii) The company can rescind the contract and can recover the money
paid.
2. Liability for mis -statement in the prospectus:
The promoter liable to pay compensation to every person who subscribes
for any share or debentures on the faith of the prospectus for any loss or
damage sustained by reason of any untrue statement included in it. Sec. on
62 also provides certain grounds on which a promoter can avoid his
liability. Similarly Sec. 63 provides for criminal liability for mis -statement
in the prospectus and a promoter may also become liable under this
section.
The promoter may also be imprisoned for a term which may extend to two
years or may be punished with the fine up to Rs. 5,000 for untrue
statement in the prospectus.
3. Personal liability:
The promoter is personally liable for all contracts made by him on behalf
of the company until the contracts have been discharged or the company
takes over the liability of the promoter. The death of promoter does not
relieve him from liabilities.
4. Liability at the t ime of winding up of the company:
In the course of winding up of the company, on an application made by
the official liquidator, the court may make a promoter liable for
misfeasance or breach of trust. Further where fraud has been alleged by
the liquida tor against a promoter, the court may order for his public
examination. (Sec. 478).
Registration Process:
The Companies Act, 2013 provides for the kinds of companies that can be
promoted and registered under the Act.
Section 3(1) of the Companies Act 20 13 states that a company may be
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11 Nature, Features of Companies 1. Minimum Members Required :
(a) seven or more persons, where the company to be formed is to be a
public company;
(b) two or more persons, where the company to be formed is to be a
priva te company; or
(c) one person , where the company to be formed is to be One Person
Company that is to say, a private company, by subscribing their
names or his name to a memorandum and complying with the
requirements of this Act in respect of registration
A company formed under Section 3(1) may be either:
(a) a company limited by shares; or
(b) a company limited by guarantee; or
(c) an unlimited company.
2. Approval of the Proposed Name of the Company:
Before the company is registered, it is essentia l to obtain the approval of
the Registrar to its proposed name. There is a specific application form for
this purpose that is FORM INC -1. The promoter generally selects a few
suitable names in order of preference and apply to the National Company
Law Trib unal through the Registrar of the State in which the company is
to be registered in with a fee of Rs.1000. On hearing about the available
name, the promoter has to decide the name for the company. As per
Section 4 (5) the name reserved shall be valid for a period of 60 days
from the date on which the application has made.
3. Documents to be Filed with the Registrar during registration
The promoter should then prepare and file the following documents with
the Registrar of Companies. He should also pay the necessary filing and
registration fees.
A. Memorandum of Association:
The Memorandum is the heart of any company. It is the Constitution of
the company and Primary document which is rigid in form. A
Memorandum of Association (MoA) represents the charter o f the
company. It is a legal document prepared during the formation and
registration process of a company to define its relationship with
shareholders and it specifies the objectives for which the company has
been formed. The company can undertake only tho se activities that are
mentioned in the Memorandum of Association. As such, the MOA lays
down the boundary beyond which the actions of the company cannot go. It
should be printed and signed by the subscriber whose names are there in
the Memorandum.
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12 B. The Articles of Association:
Articles of association form a document that specifies the internal rules
and regulations for a company‟s operations and defines the company‟s
purpose. The document lays out how tasks are to be accomplished within
the organizat ion, including the process for appointing directors and the
handling of financial records.
4. First Directors:
Minimum 02 directors in case of Private company and 3 in case of public
company are required to be appoint. The names of first director have to be
mentioned. Once the company name has been approved by MCA and
registered, the next step is procuring a Digital Signature Certificate for
private limited company. Digital Signature Certificate is a form of a digital
key, which holds all the vital info rmation about the registered signatory
like name, address, email, phone number, and the authority which has
provided the certificate. Further an intending directors must have an DIN
(Directors Identification Number by filling up the Form No DIR -3. This
DIN must be obtained by the director before commencing the procedure
for incorporation of the company.
5. Consent of the Directors:
When Directors of a Company are appointed by the or named in the
prospectus, a written consent to act as directors and also a written
undertaking to take up and pay for the qualification shares if any are
mandatory in Incorporation of a Company.
6. Statutory Declaration from the professionals:
A statutory declaration by any one of the following persons stating that all
the req uirements of the Act regarding Registration have been duly
complied with:
a) An Advocate of the Supreme Court or High Court.
b) An Attorney or Pleader who is entitled to appear before a High Court.
c) A Chartered Accountant who is engaged in formation of t he company
and also practicing in India.
d) Any individual who is named in the Articles of Association as the
Company‟s Director, Manager or Secretary.
7. An Affidavit:
Subscriber of Memorandum of Association required to file an affidavit
stating that he/s he is not convicted in any offence in relation with the
formation or management of an affairs of any company.

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13 Nature, Features of Companies 8. Notices of the Address of the Registered Office:
The notice for the address of the registered office of the company should
be given within 3 0 days after its incorporation or on the date from which
the company commences its business whichever is earlier.
9. Payment of Fees and Stamp Duty:
After submitting the document to the Registrar of Company, Fees and
Stamp duty has to be paid by the prop osed company the said fees are
depends upon the authorized capital of the company.
Final Procedure:
1. Certificate of Incorporation of the Company:
After the above documents are filed with the Registrar and the prescribed
fees are paid and the Registrar i s satisfied that all the requirements of the
Act regarding the registration have been complied with, he will register
the documents and retain them.
The Registrar will then issue a certificate known as Certificate of
Incorporation and enter the name of the company in the Register kept in
his office. This Certificate of Incorporation entitles the company as a legal
person. In other words, the company is born upon the issue of Certificate
of Incorporation. (Form No INC 11) and Rule 18 of Companies
(Incorporat ion) Rules 2014.
Conclusiveness of the Certificate of Incorporation:
According to Companies Act, the certificate is conclusive evidence that all
the requirements of the Act in regard to the formation and registration of
the company have been complied with. The effects of the certificate of
incorporation can be summed up as follows:
1. Neither the Court nor the Registrar can cancel the Certificate of
Incorporation even if the company is formed for an illegal purpose.
2. The validity of the Certificate of Inc orporation cannot be debated or
argued upon on any grounds whatsoever.
3. When a certificate is issued, the new company is born. In other words,
a legal person has come into existence through a legal process.
4. The date mentioned in the certificate is the date of incorporation of
the company.
Effect of Certificate of Incorporation:
1) The company is born on the day on which it receives its certificate of
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14 2) It is conclusive evidence that all the requirements of the Act in
relation to registr ation have been complied with. The validity of the
certificate cannot be challenged on any ground.
Effect of Pre -incorporation contracts:
Often contracts are entered into on behalf of the company even before it is
duly incorporated. Such pre -incorporation contracts are not binding on the
company after it comes into existence. This is because at the time of
making of the contract, the company is a non -entity. A company cannot
even ratify these contracts, after it comes into existence for the simple
reason that ratification relates back to the date on which the contract was
made. So, the person entering into the contract incurs personal liability on
such contracts.
Advantages of Incorporation:
The advantages of incorporation are
i) The company acquires an in dependent corporate personality.
ii) It becomes the owner of its capital, assets and other property.
iii) It is capable of perpetual succession.
iv) It can use a common seal.
v) It can sue in its own name.
vi) The liability of the members is limited.
vii) Shares of the company are easily transferable.
Disadvantages of Incorporation:
i) Social Responsibility:
Many companies have billions of dollars in assets and employ hundreds of
thousands of people. They have a significant impact on society, and these
companies often participate in social activities that are part of their
corporate social responsibility (CSR) campaigns. These incorporation
companies are so influential that they must adhere to certain social norms
and contribute to the development of societ y.
ii) Formality and expenses:
Incorporation of a company is not only expensive but it also involves a
number of formalities. Several requirements hare to be complied with -
both as to the formation of a company as well as the administration of its
affairs . Whereas, constituting a firm is a relatively easy and inexpensive
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15 Nature, Features of Companies iii) Lifting the veil of Corporation:
Personality of a company is a legal myth. It ignores reality. And the reality
is that a company is an association of persons who are in fact the
beneficial owners of corporate property. So in some cases, the courts
ignore the legal personality of the company, pierce the veil of corporation
and look at persons behind it. Thus, some of the advantages of
incorporation may become illusory.
Followin g are the circumstances in which the courts may lift the veil
of corporation:
a) When the company assumes an enemy character:
In Daimler Co. Ltd. v. Continental Tyre and Rubber co. (1916)2A C 307,
the House of Lords, while determining the character of a co mpany
registered in England, held that though the company was registered in
England it would assume enemy character if the persons in de facto
control of its affairs are residents in an enemy country (Germany).
b) When the company is formed for evasion of taxes:
Where the company is formed only for the purpose of evasion of taxes, the
court has the power to disregard the corporate personality of the company
(Re Sir Dinshaw Maneckjee Petit).
c) Where the company is formed for fraudulent purposes:
The courts can pierce the corporate personality if the company is formed
for a fraudulent purpose, or for an unlawful object (Gilford Motor Co. v.
Horne)
d) Where the company is an agent or trustee:
Courts will refuse to uphold the separate and independent existence of a
company where it is an agent of its, members or of another company.
e) Under Statutory Provisions:
The courts will crack the shell of corporate personality where, because of
the fall in the number of members below the prescribed legal minimum
(seven in case of a public company and two in case of private company)
the liability has become unlimited.
f) Any other just case:
The courts may, in the interest of truth and justice, set aside the cloak of
corporate personality so as to determine liability.
1.5 LIFTING OF CORPORATE VEIL / PIERCING OF CORPORATE VEIL Lifting the corporate veil, in simple words means disregarding the
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16 control of the company and where a fraudulent and dishonest use is made
of the legal entity, the individuals concerned will not be allowed to take
shelter behind the corporate personality. In this regards the court will
break through the corporate veil.
Corporate personality of a company should ordinarily be respe cted. The
whole law of corporations is still based on this basic principle of corporate
entity. There are umpteen instances in which the courts have upheld this
principle and resisted the temptation to break through the veil. But when
the benefit is misuse d, the court is not powerless and it can lift the veil of
corporate personality to see the realities behind the veil. In doing so, the
court sub serves the important public interest, namely, to arrest misuse or
abuse of benefit conferred by law. 27 Thus, i t is quite evident that
„Piercing the veil‟ law exists as a check on the principle that, in general,
investor shareholders should not be held liable for the debts of their
corporation beyond the value of their investment.
Statutory Provisions for Lifting t he Corporate Veil:
1. Reduction of Number of Members :
If an organization carries on business for over a half year after the number
of its members has been diminished to seven if there should arise an
occurrence of a public company and two in the event of a privately owned
business, each individual who knows this fact and is a member during the
time that the organization so carries on business after the half year,
becomes liable severally and jointly with the organization for the payment
of debts contracted following a half year. It is just that part who stays after
a half year who can be sued.
2. Fraudulent Trading:
If any business of an organization is gone ahead with the aim to defraud
creditors of the organization or creditors of some other individual or for
any deceitful reason, who was intentionally a party to the carrying on of
the business in that way is subject to imprisonment or fine or both
3. Misdescription of the Company:
If any officer of the organization or other individual acting on its benefit
signs or approves/authorized to be signed by the organization any
promissory note, bill of exchange, order or cheque for money or goods,
endorsement in which the organization‟s name is not specified in readable
letters, he is obligated to fine and he is p ersonally liable to the holder of
the instrument unless the organization has effectively paid the sum.
4. Failure to Refund Application Money:
If the executives of an organization are mutually and severally at risk to
reimburse the application cash with pr emium if the organization neglects
to refund the cash within 130 days of the date of issue of the prospectus.
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17 Nature, Features of Companies 5. Failure to deliver Share Certificate etc. within stipulated time:
If the Company fails to deliver the share or debentures stipulated within
the period of 3 months of allotment or within 2 months of application for
transfer, then the company as well as every officer of the company who is
at fault shall be punishable with fine up to Rs.5000/ - per day till such
default continues.
6. Investigation of ownership of Company:
Central Government if deems fit may order to evaluate or check who are
the persons who are financially interested and also control its decision
making, appoint one or more investigators for investigation and reporting
in respect of membership of the company.
7. Liability for Ultra Vires acts:
The Directors and other officers of the company may be held personally
liable under the provisions of other statues for example, for the recovery
of tax arrears of a Private Company while b eing wound up, every
director jointly and severally liable for the tax during the tenure for which
the arrears is due.
1.6 EFFECTS OF NON -REGISTRATION Company gets the status of body corporate on immediate effects of its
registration with ROC which mand atory under Companies Act 2013 and
any other previous Act. On registration company gets a status of Separate
Legal Entity and carries Perpetual Succession. Company can enjoy all
the rights as the common man enjoys the rights conferred by the
constitution . Likewise when the company is registered with the ROC can
enter into number of contracts, can acquire and disposed off the movable
or immovable property with its own. Company can sue and can be sued in
its corporate name.
When company is not registered with appropriate authority that is
Registrar of Company will not enjoy the benefits of companies which are
registered . For Example : Unregistered Company can not enjoy the
Perpetual Succession status, Such companies will be treated as illegal
association and Director or the Members are personally Liable for tortious
acts. Such association can not enter into any contract with any other
companies lawfully.
1.7 SUMMARY Characteristics of the Company:
Voluntary association. Separate Legal Entity :.Limited Li ability: Perpetual
Succession Separate Property: Transferability of Shares: Common Seal:.
Capacity to sue and being sued: Separate Management:
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18 Business Law - II
18 Functions of Promoter:
1. To conceive an idea of forming a company and explore its
possibilities.
2. To conduc t the necessary negotiation for the company.
3. To collect the requisite number of persons to form the company.
Rights of Promoter:
Right of indemnity: Right to receive the legitimate preliminary expenses:
Right to receive the remuneration:
Duties of P romoter:
The duties of promoters: To disclose the secret profit: To disclose all the
material facts: The promoter must make good to the company what he has
obtained as a trustee: Duty to disclose private arrangements:
Duty of promoter against the future al lottees:
Liabilities of Promoter: Liability to account in profit: Liability for mis -
statement in the prospectus: Personal liability: Liability at the time of
winding up of the company:
1.8 QUESTIONS 1. Define Company and Explain the features of company
2. What do you understand by lifting up of corporate veil ?
3. What do you understand by pre incorporation or preliminary
contracts?
4. Explain the role of Promoter in formation of Company.
Write Short Notes
1. Body corporate
2. Government company
3. Subsid iary company
4. Promoter
5. Pre incorporation contract


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19 2
TYPES OF COMPANIES
MEMORANDOM OF ASSOCIATION AND
ARTICLES OF ASSOCIATION - I
Unit Structure
2.0 Objectives
2.1 Introduction
2.2 Types of Company
2.3 Advantage and Disadvantages of Public and Private Company
2.4 Difference between Private and Public Company.
2.5 Conversion of Private Company into Public Company
2.6 Summary
2.7 Questions
2.0 OBJECTIVES After studying the unit, the students will be able to:
• Understand the different types of Companies
• Understand the difference between Public and Private of Companies
• Understand the procedure for conversion of Public company into
Private and Private Company in to Public Companies.
• Understand the advantages and disadvantages of Public and Private
Companies.
2.1 INTRODUCTION Classification of companies are essential for smooth understanding the
functions and procedures. Companies are classified according to the
Nature, For mation, Place of registration, Managerial Control, Liability
Number of Shares held, Number of Directors etc.
2.2 TYPES OF COMPANY
Kinds of Companies:
For better understanding the body corporate of the companies are broadly
divided in to number of classes on the following grounds:
A. Modes of formation.
B. On the basis of liability of members
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20 Business Law - II
20 D. Man agement Control.
E. Miscellaneous Category
A. On The Basis of Mode of Formation/ Incorporation:
There are two modes under which a corporate body may be formed; one,
through a special Act of parliament, and two, through registration under
the Companies Ac t.
Based on Incorporation:
• Statutory Company
• Chartered Company
• Registered Company
Statutory Companies: Corporations created under the special legislations
of parliament or state legislatures may be called statutory companies ;
A statutory company ar e companies created to provide public service and
has limited liability; they are not always required to utilize limited title.
Such companies can be approved can by either the Central or State
Legislature Statutory Company. A statutory company is usually created
with the intention of serving people rather than the traditional business
goal of creating profits. Further The provisions of the Companies Act
applies to statutory companies except where the said provisions are
inconsistent with the provisions of the Act creating them.
They are required, however, to provide annual reporting to the
Legislature -Parliament. A few well -known statutory companies include
the following:
• Reserve Bank of India (RBI)
• Life Insurance Corporation of India (LIC)
• Industria l Finance Corporation ( IFC)
• State Bank of India (SBI)
• Food Corporation of India (FCI)
• Unit Trust of India (UTI)
2. Chartered Companies:
Companies which are established under a special charter or by order of
monarch or kings or a queen. Such compani es are come into in an
existence under Royal Chartered Act. The nature and powers of a ventures
are specified by the charter. Following are the examples of Chartered
Companies.
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21 Memorandom of Association and Articles of Association - I • British Broadcasting Corporation,
• Bank of England
• East India Company
3. Registered Companies:
Such companies incorporated or registered under the Companies Act
passed by the government of the country are termed as a registered
company. These companies can come into existence after they have
registered themselves by observin g the necessary procedures laid down
under Indian Companies Act from the time to time. Companies Act and
the registrar of companies (ROC) has granted a certificate of
incorporation/Certificate of Commencement of Business which are known
to be conclusive evidence that the company has observed all the necessary
formalities of incorporation and later on such certificates cannot be
challenged on the ground whatsoever.
Example: Google India Pvt Ltd is a registered or an incorporated
company.
(B) On the Basis of Liability:
On the basis of liability, the company can be classified into:
i. Companies limited by shares
ii. Companies limited by guarantee
iii. Unlimited companies.
i. Companies limited by shares:
When there is the liability of the members of a compan y is limited up to
the amount unpaid on the shares if any, such a company is termed as a
company limited by shares. In a company limited by shares the liability of
the members is restricted to the unpaid amount on the shares held by them.
The liability c an be enforced during existence or life time of the company
as well as during the winding up. Where the shares are fully paid up, no
further liability leviable on them.
ii. Companies limited by guarantee:
These are the companies whereby the liabilities of members are limited up
to the amount that they have agreed by the memorandum to contribute in
the companies’ assets at the time of liquidation. Therefore, it is a
companies registered under Companies Act. In the case of such companies
the liability of its members is limited to the amount of guarantee
undertaken by them. Trade Associations, Research Associations, Clubs are
examples of such companies. They promote various objects are various
examples of guarantee companies.
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22 Business Law - II
22 iii. Unlimited Companies:
A compa ny not having a limit on the liability of its members is known as
unlimited company. In case of such a company every member is liable for
the debts of the company as in an ordinary partnership in proportion to his
interest in the company. As far as popular ity is concerned, such companies
are not so popular in India.
(C) On the basis of number of members.
(Allowed number of members)
i. Private Company
ii. Public Company
iii. One Person Company
(i) Private company:
A private company means a company which b y its articles of
association:
(i) It Restricts the right to transfer shares.
(ii) There is Limits the number of its members to fifty (excluding
members who are or were in the employment of the company) and
(iii) Prohibits any invitation to the public to subscribe for any shares or
debentures of the company.
(iv) Where two or more persons hold one or more shares in a company
jointly, they are treated as a single member. There should be at least
two persons to form a private company and the maximum num ber of
members in a private company cannot exceed 50. A private limited
company is required to add the words “Private Ltd” at the end of its
name.
ii. Public company:
A public company means a company which is not a private company. A
company the ownership of which is open to the public is a public
company. In other words, anyone can purchase the shares of this company.
There is no restrictions to the number of members or to the transferring
right of its shares. There must be at least seven members to form a public
company. It is of the basics fundamental of a public company that its
articles do not contain provisions restricting the number of its members or
excluding generally the transfer of its shares to the public or prohibiting
any invitation to the pub lic to subscribe for its shares or debentures. Only
the shares of a public company are capable of being assigned in on a stock
exchange.
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23 Memorandom of Association and Articles of Association - I iii. One Person Companies (OPC):
The Companies Act, 2013 completely transformed corporate laws in India
by introducin g many new concepts that did not there previously. One
person company is also one of new concept introduced by companies act
2013. One person company (OPC) means a company formed with only
sole or single person as a member, unlike the traditional manner of having
at least two members. In one person company there is no mandatory
requirement of minimum share capital. It is recognition of single person
economic entity lightens a path for small traders, service providers to
venture into business by expanding th eir opportunities through corporate
existence.
D. Companies on the basis of Control or Holding. (On the basis of
Management Control):
i. Holding and Subsidiary Companies:
Some companies’, shares shall be held fully or partly by another company.
In this ca se, the company controlling these shares becomes the holding
company. Likewise, the company whose shares the parent company
controls known as its subsidiary company. Holding companies exercise
control over their subsidiaries by governing the composition of their board
of directors. Further, parent companies also exercise control by controlling
more than 50% of their subsidiary companies’ shares .
ii. Associate Companies:
In such companies other companies have significant or important
influence. This “signif icant influence” amounts to ownership of at least
20% shares of the associate company. The other company’s control can
exist in terms of the associate company’s business decisions under an
agreement. Associate companies can also exist under joint venture
agreements.
iii. Government Company:
It means any company in which not less than 51 percent of the paid -up
share capital is held by the Central Govt, and/or by any State Government
or Governments or partly by the Central Government and partly by one or
more State Governments. The subsidiary of a government company is also
a government company.
E. Miscellaneous Category:
I. Foreign Companies:
Definition of Company under Companies Act, 2013 Section 2(20):
“Company means a company incorporated under this Act or under any
previous company law.”
In General, a foreign company is a company which is incorporated outside
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24 Business Law - II
24 • has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
• conducts any business activity in India in any other manner.
II. Dormant Company:
In common parlance, the word “Dormant” means inactive or inoperative.
When a Company is formed and registered for future project or to hold
any intellectual property or an asset and n ot having any significant
accounting transaction, such company apply for obtaining the status of
Dormant Company. The provisions regarding Dormant Company has been
given in Section 455 of Companies Act, 2013 read with Rule 3 to 8 of
Companies (Miscellaneo us) Rules, 2014 under Chapter XXIX. The Act
prescribed lesser compliances for dormant companies in these provisions
and rules.
iii. Small Company [S. 2(85)]:
A New concept has introduced by the Companies Act, 2013 that is ‘small
company’. Its just a type o f Private Company but with less capital and
turnover size. It was proposed initially that the minimum paid -up capital
requirement in such companies will be Rs 50 lakh and the minimum
turnover of Rs 2 crores. Therefore, as per the latest amendment in
Compan ies Act, 2013 the definition of Small Company is as follows: paid
up share capital of not more than 50 lakhs or such higher amount as may
be prescribed which shall not be more than 10 crores; AND annual
turnover of not more than 2 crores or such higher amo unt as may be
prescribed which shall not be more than 100 crores. here to become a
small company both the conditions are required to be fulfilled.
2.3 ADVANTAGE AND DISADVANTAGES OF PUBLIC AND PRIVATE COMPANY Advantages and Disadvantages of Private Company :
A Private Limited Company is a company which held privately by small
businesses enterprises. The liability of the members of a Private Limited
Company is limited to the number of shares respectively held by them.
Shares of such companies are not public ly traded Shares of Private
Limited Company cannot be publicly traded.
1. Separate Legal Entity:
A Private Limited Company is a separate legal identity in the court of the
law, meaning assets and liabilities of the business are not the same as the
assets a nd liabilities of the Directors. Both are different form each other.

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25 Memorandom of Association and Articles of Association - I 2. Limited Liability :
If the company undergoes financial crises because of any reasons, the
personal assets of members will not be liable for payment of the debts of
the company as t he liability of members of the companies are limited.
3. Easy formation:
A Private Limited Company can be formed and registered easily, It does
not requires cumbersome procedures of formation. Secondly no need to
wait for certificate of commencement o f business.
4. Transferability of shares:
Shares of a company limited by shares are transferable by a shareholder to
any other person if articles permit, without taking any permission or
authorization from any of the higher authority.
5. Existence is uni nterrupted:
As companies are featured with Perpetual Succession, means company
never dies, which is continued existence until it is dissolved legally . A
company, being a separate legal person, is unaffected by the death or other
departure of any member but continues to be in existence irrespective of
the changes in membership. ‘Perpetual Succession’ is one of the most
important characteristics of a company.
Disadvantages of a Private Limited Company :
1. There is a restricts to transferability of shares by its Articles:
Articles of Association is the internal rules and regulations of the company
which restricts the transferability of the shares if no provisions are in this
regard.
2. Restriction on maximum number of memberships:
Companies Act 2013 prov ides that in any case number of members should
not increase exceed 200. This leads to less financial liquidity.
3. It cannot issue prospectus to the public:
Private companies cannot issue prospectus to the public and hence it
cannot use public money. Priv ate companies are raising the capital by their
internal sources.
Advantages and Disadvantages of Public Company:
Advantages:
Public Company Registration is done under the Companies Act, 2013. The
registration of Public Company is subject to strict compl iances. Further,
such companies are required to have huge capital investment, Companies
intend to have huge capital investment it can go for Public Company
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26 Business Law - II
26 1. Limited Liability of the members:
In Public Company the liability of the shareholde r and Directors is limited
to the extent of the shares they hold in the company or they can be called
for any unpaid shares. For example , if the company suffers from any
financial irregularities because of primary business activity, then in such
case perso nal properties of shareholders and Directors will not be liable by
the Banks, creditors, and government .
2. Separate Legal Entity:
Members of the company, Directors may come and go, but the existence
of the company continues to exist. i.e., the absence o r movement of any
shareholder in the company will not affect the existence of the company.
3. Unlimited source of raising fund:
Public Company has a great advantage of an unlimited source of raising
fund through Public which results in carrying out new p rojects and for
getting the new market.
1. Easy Transferability
There is an easy transferability of share in Public Company. Shares of the
company are listed on a stock exchange; the shareholders find it is easy to
transfer the share in the company.
Disadv antages:
1. Difficult Legal Requirements and High cost of formation:
Setting up and maintaining a public company is much more difficult than
setting up and maintaining a private company. Public Companies are
subject to many legal requirements that do not a pply to private
corporations. Further the registering the company as a Public Company
requires a huge cost. To come up with the formation of a public company
huge investment, time and procedural things are required to be complied
with. The returns of the c ompany relied upon the investment you have
done.
2. Increased Governmental Interference:
Public Companies are subject to a high level of government interference
that does not apply to private companies held. Such interference has
increased over the last 1 5 years in the wake of the many public
corporations mismanagements that caused harm to people at large. The
government intervention, though often required, slow down and decrease
the flexibility of the operations of public companies.
3. Lack of secrecy:
To maintain the transparency and trust of the shareholders, the company
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27 Memorandom of Association and Articles of Association - I maintained. The Public is involved in decision making, the company
cannot maintain the secrecy.
2.4 DIFFERENCE BE TWEEN PUBLIC COMPANY AND PRIVATE COMPANY Criteria Public Company Private Company Meaning: The public
company refers to
a company that is
listed on a
recognized stock
exchange. A private company is one that is
not listed on a stock exchange
and its securi ties are restricted or
held privately by its members
only Name: A public company
need not affix the
word “private” private company, it is mandatory
to affix the words “private
limited” at the end of its name Number of Members: There must be minimum seven members to start with a public company and no maximum number of members restricted. Private company can be started with a minimum of two members. Private companies can have a maximum of 200 members. Transfer of Shares The shares of a public company are freely transferable. The shares of a private company are not freely transferable. Transferability is allowed subject to the provisions in the Articles of Association. Issue of Prospectus Public Company issues the Prospectus for public subscription. A Private Company is restricted from issuance of prospectus as these companies cannot invite public for subscription. Statutory Meeting Compulsory to hold statutory meeting to obtain the certificate of commencement Not required to hold statutory meeting. Place of Holding AGM Annual General Meeting can be held at the registered office or any other place where the registered office is situated Place of Holding AGM munotes.in

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28 Business Law - II
28 2.5 1CONVERSION OF PRIVATE COMPANY INTO PUBLIC COMPANY Most of the business concern most of the time preferred for
formation of Private Limited Company because the advantages and
special privileges offered by it. Such companies don’t issue the
prospectus and invites from the near and dear and close friends of
the directors and other members Capital is sourced Therefore, the
Companies Act, 2013 does not impose stringent rules and
regulations as those imposed on Public limited companies. In certain
circumstances, a private limited would become a public company.
In the following circumstances a Private Limited Company can becomes a
Public Limited Company
1. Conversion by default
2. Conversion by operation of law
3. Conversion by choice or by option
Once a private company becomes a public company under any of the
above -mentioned circumstances , it would lose the privileges it enjoyed as
a private company. On conversion, the rules and regulations applicable to
public limited companies would become applicable.
1. Conversion by default:
A private company prohibits the right to transfer shares. T here is a limit of
the maximum number of members to 200 and prohibits invitation to the
public for subscription of shares or debentures. In violation of any of these
conditions laid down Private Company would become a public Company
by default.
2. Convers ion by operation of law:
In the following cases, a private company becomes a public company by
the operation of law: When not less than 25% of the paid -up share capital
of a private company is held by one or more public companies,
a. When the average tot al turnover of the private company is not less
than Rs.25 crores for three consecutive years,
b. When the private company holds not less than 25% of the paid up
share capital of a public company.
c. When the private company invites, accepts or renews dep osits from
the public. 1 https://accountlearning.com/under -what -circumstances -a-pvt-company -be-converted -to-
public -company/
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29 Memorandom of Association and Articles of Association - I The Companies Amendment Act 2000 has given an option to these
companies, either to continue as public limited companies or convert
themselves into private limited companies by making the necessary
changes in their articles.
3. Conversion by Choice or Option:
A private company out of its own free will can choose to convert itself
into a public company. Generally, when private companie s plan to expand
and require more capital resources, they would convert themselves into
public companies.
By becoming public companies, they can issue shares or debentures to the
public and get the required amount of capital. In India, many organizations
which commenced operations as private companies have got themselves
converted into public limited companies in order to expand and diversify.
Any private company which desires to get converted into a public
company should make the necessary changes in the Articles and follow
the below mentioned steps:
a. It should convene a general meeting and pass a special resolution duly
altering the Articles.
b. The copy of the resolution along with the amended Articles should be
filed with the Registrar within 30 days of passing the special
resolution.
c. The number of members should be increased to seven.
d. The company has to apply to the Registrar for obtaining a fresh
certificate of incorporation with the words ‘Private’ deleted from its
name.
2.6 SUMMARY Modes of formation. On the basis of liability of members. Allowed
number of members Management Control. Miscellaneous Category.
i. Types of Companies: A. Statutory Company ,Chartered Company,
Registered Company . Chartered Companies: Registered Companies:
Companies limited by shares, Companies limited by guarantee,
Unlimited companies. Companies limited by guarantee, Private
Company, Public Company, One Person Company, Holding and
Subsidiary Companies, Associate Companies, Government Company,
Foreign Compan ies, Dormant Companies.
Advantages and disadvantages of private company:
I Separate Legal Entity. Easy formation : Transferability of shares.
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30 Business Law - II
30 1. There is a restricts to transferability of shares by its Articles.
Restriction on maximum number of memberships: It cannot issue
prospectus to the public:
Advantages and Disadvantages of Public Company:
I Limited Liability of the members, Separate Legal Entity, Unlimited
source of raising fund.
II Difficult Legal Requirements and High cost of formation: Increased
Governmental, Interference: Lack of secrecy
2.7 QUESTIONS 1. What are the types of Company?
2. What is the procedure for converting public company into private
company?
3. What is the procedure for converting private compan y into public
company?
4. Distinguish Between Public Company and Private Company
5. Define the following terms:
a. Chartered Company
b. Private Company
c. Public Company
d. One man Company
e. Holding Company
f. Subsidiary Company

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31 3
MEMORANDUM OF ASSOCIATION AND
ARTICLES OF ASSOCIATION - II
Unit Structure
3.0 Objectives
3.1 Introduction
3.2 Definition and Meaning
3.3 Clauses under Memorandum of Association
3.4 Doctrine of Ultra Vires
3.5 Effects of Ultra Vires Transaction
3.6 Articles of Association
3.7 Distinction between Memorandum and Articles of Association
3.8 Doctrine of Constructive Notices
3.9 Doctrine of Indoor Management / Turquand (And Rule)
3.10 Summary
3.11 Questions
3.0 OBJECTIVES After studying the u nit, the students will be able to:
• Understand the Meaning of Memorandum of Association and Articles
of Association and their contents.
• Understand the Doctrine of Ultra Vires, Constructive Notice and
Indoor Management
• Understand the Distinction betwe en Memorandum of Association and
Articles of Association.
• Understand the Provisions for Alteration of Memorandum of
Association and Articles of Association.
3.1 INTRODUCTION Memorandum of Association is the fundamental and most important
document as to the formation of the company. A company is formed
where number of members come together for achieving a specific purpose.
This objective is usually commercial in nature. Companies are generally
formed to earn profit from business activities. To incorporat e a company,
an application has to be filed with the Registrar of Companies (ROC).
This application is required to be submitted with a number of documents.
One of the fundamental documents that are required to be submitted with
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32 Business Law - II
32 3.2 DEFINITION AND MEANING As per Section 2(56) of the Companies Act,2013 “memorandum” means
the memorandum of association of a company as originally framed or as
altered from time to time in pursuance of any previou s company law or of
this Act. Memorandum Of Association: Section 4 of the Companies Act,
2013 deals with MOA.
A Memorandum of Association (MOA) represents the charter of the
company. It is a legal document prepared during the formation and
registration pro cess of a company to define its relationship with
shareholders and it specifies the objectives for which the company has
been formed.
3.3 CLAUSES UNDER MEMORANDUM OF ASSOCIATION Memorandum of every company shall state:
1. Name of the company with “Limited ” as the last word of the name in
case of a public company and “Private Limited” in case of a private
company.
2. Registered office of the Company
3. Objects of the Company
4. Liability of the members
5. Details of Share Capital of the Company
6. Subscript ion or Association Clause.
1. Name Clause:
The name gives a personal existence; therefore, every company must have
its own name. Company is a legal person possessing a separate identity; it
must have a name with which it can be identified. Promoters of th e
Company have to make an application to the Registrar of Companies for
the availability. The company can adopt any name if:
i. There is no other company registered under the same or under an
identical name;
ii. The name should not be considered undesirabl e and prohibited by the
Central Government. A name which misrepresents the public is
prohibited by the Government under the Emblems & Name
(Prevention of Improper Use) Act,1950, for example, Indian National
Flag, name and pictorial representation of
Mahatm a Gandhi and the Prime minister of India, name and emblems of
the U.N.O., and W.H.O., the official seal and Emblems of the Central
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33 Memorandom of Association and Articles of Association - II A name which is identical with or too nearly resembles:
i. The name by which a company in existence has been previously
registered, or
ii. A registered trade mark, or a trade which is subject of an application
for registration, of any other person under the Trade Marks Act, 1999
may be deemed to be undesirable by the Central Government. The
Central Government, before deeming a name as undesirable, may
consult the Registrar of Trade Marks.
Where the name of the company closely resembles the name of the
company already registered, the court may direct the change of the name
of the company.
iii. Once the name has been approved and the company has been
registered, then:
a. The name of the company with registered office shall be affixed on
outside of the business premises;
b. If the liability of the members is limited the words “Limited” or”
Private Limited” as the case may be, shall be added to the name
c. The name and address of the registered office shall be mentioned in
all letter -heads, business letters, notices and Common Seal of the
Company.
d. However, the Central Government has the power t o grant a license to
a company to drop the word “limited” from its name. The license is
granted if:
i. The company is formed for the promotion of commerce, art, religion,
science, charity or any other useful object, and
ii. The company intends to apply its income, if any, in promoting its
objects and prohibits the payment of dividends to its members.
Alteration of Name Clause:
Section 13 of the Companies Act, 2013 associated with change of name
which states that.
• The name of the company can be changed by a passing a special
resolution and with the approval of the Central Government. Approval
of Central Government is not required if the change relates to the
addition/deletion of the words “private” to the name.
• Sub Section - 2 of Section 4 of the Companie s Act, 2013 provides
further that “no company shall be registered by name which: Is
identical with or resemble too nearly to the name of an existing
company registered under this Act or any previous company law
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34 Business Law - II
34 Alteration of Name shall not allow to follow ing Companies:
• Company who has not filed annual returns or financial statements due
for filing with the Registrar or
• Companies who has failed to pay or repay matured deposits or
debentures or interest thereon
On the alteration of the name of the comp any, the Registrar must enter the
new name of the company in the register and issue a fresh certificate of
incorporation. Change of name becomes effective only on the issue of the
new certificate
Alteration of name does not, in any way, affect the rights a nd
obligation of the company.
2. Registered Office Clause:
The memorandum of Association must contain the name of state in which
the registered office of the company is to be situated. Every company must
have registered office. The com pany shall from the date on which it
commences its business or 2 within thirty days of incorporation, whichever
is earlier, have a registered office. Intimation should be given to Registrar
within thirty days of incorporation. All communication and notices are to
be sent to its registered office. All the important documents and books of
the company such as the Registrar of Members, Minutes and book are kept
at the registered office.
Where the securities are held in a depository, the records of the beneficial
ownerships may be served by such depository on the company by means
of electronic mode or by delivery of floppies or disk.
Alteration of Registered Office Clause:
a) Registered office if shifts from one place to another within the same
city, town, or vill age it can be made by passing a resolution by Board
of directors.
b) Where registered office shifts from one place to another within the
same state and is within the same office of Registrar of Companies it
could be done by passing a special resolution at the shareholders
meeting. Even if the change is within the state it may fall within the
jurisdiction of another Registrar of Companies, in which the change
shall not be effective unless approved by Regional Director.
Intimation of the change is to be filed with the Registrar within 30
days of the change.
c) But, shifting of registered office from one state to another state
involves alteration of memorandum itself.
1 Proposed amendment under companies (Amendment Bill 2016 S. 12 (1) for the words “ on and
from the fifteenth day of its incorporation “ the words, “ within thirty days of its incorporation” can
be substituted. munotes.in

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35 Memorandom of Association and Articles of Association - II The alteration comes into force only when it is registered with the
Registrar of Companies of both the States i.e. the State in which the
registered office was originally situated and the state to which the office is
being situated.
A change in the registered office of the company is permitted from one
state to another on the following grounds: Substantive Limits:
i) To enable the company to carry on business more economically or
more efficiently
ii) To attain its main purpose by new or improved means (E.g. by new
scientific discoveries); or
iii) To enlarge or change the local area of its operations; or
iv) To carry on some business which un der the existing circumstances
may conveniently or advantageously be combined with the business
of the company; or
v) To restrict or abandon any of the objects specified in the
memorandum; or
vi) To sell or dispose of the whole, or any part of the undertak ing, or of
any of the undertakings of the company; or
vii) To amalgamate with any other company or body of persons.
3. Object Clause:
The third clause in the memorandum states the object which the company,
on its incorporation will pursue. The objects clause, also called the
objective clause, is considered the most important in the MOA. It defines
and limits the scope of the company’s operations. It details the company’s
scope of activity for the members and explains how the members’ capital
will be use d.
The object clause explained why the company has come into in existence.
Companies aren’t lawfully permitted to do any kind of business other than
the kind of business that is specifically stated in the object clause of MOA.
An object clause should conta in:
• A list of the main objects the company will be pursuing after it’s
Incorporation
• Incidental objects or the relative objects that are necessary to achieve
the main object
• Any other objects that which are not included in the main objects or
inciden tal object
• Nothing that’s against the public interest and nothing that’s against
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36 Business Law - II
36 The object clause to be divided into :
i) Main objects of the company to be pursued by company on its
incorporation
ii) Objects incidental o r ancillary to the attainment of the main objects;
and
iii) Other objects
Alteration of Object Clause:
The procedure for alteration of the Object clause is the same as the
alteration of registered office from one state to another.
4. Liability clause:
The liability of the members is limited to the extent of the shares
subscribed by the members if the company is formed with share capital or
to the extent of the guarantee given by the members if the company is
formed with guarantee. In the absence of this cla use it is deemed that
liability of its members is unlimited.
Alteration of liability clause:
The liability of the members cannot be altered so as to increase the
liability of the members, or prejudice their interests. The alteration can be
affected only wi th the consent of the members in writing, either before or
after a particular alteration is made by passing a special resolution and to
file form No.MGT 14 .
5. Capital Clause:
In case of a company having share capital unless the company is an
unlimited com pany, memorandum shall also state the amount of share
capital with which the company is to be registered and division thereof
into shares of a fixed amount.
Alteration of Capital Clause:
The capital can be increased by passing a ordinary resolution in the
general body meeting and shall not require to be confirmed by the court. It
should be noted that cancellation of shares shall not be deemed to be a
reduction of share capital. A notice of alteration of capital must be filed
with the registrar within 30 day s of such alterations.
6. Subscription or Association Clause:
It is a declaration made by the subscribers who have signed the
memorandum of their intention to form a company. The signature of the
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37 Memorandom of Association and Articles of Association - II 3.4 D OCTRINE OF ULTRA VIRES Object Clause is the heart of Memorandum of Association of the
company. It lays down the objectives which the company has to observe
on incorporation of the company under this Act. It is expected that the
company must observe and work within the object set by the object clause
under MOA. If the company acts beyond the objective set such act is
termed as an Ultra Vires and nether Board or any highest authority can
justify or confirm such act as, it is void ab initio in nature.
Anyt hing that a company does which is beyond the scope of the object
clause is called ultra vires the object clause and is null and void. Since the
Act is void it cannot be ratified by the shareholders either. When the
company does an act in furtherance of its objects, it is intra vires (intra
vires means within; and vires means power) the company. But, where the
company does an act which is outside the scope of the object clause, it is
ultra vires (outside the powers of) the company. This rule was first time
laid down by the House of Lords in Ashbury Railway, Wagon Co. v/s
Riche (1875), The objects of the Ashbury Company were: -
a. To manufacture and sell railway carriages etc. and
b. To act as mechanical engineers and general contractors.
The directors of the company entered into a contract with Riche to finance
the construction of railway line in Belgium. Subsequently, they repudiate
the contract, claiming it to be ultra vires the company. Riche brought an
action for damages for breach of contract. The House o f Lords held that
the contract was ultra vires the company and hence null and void.
3.5 EFFECTS OF ULTRA VIRES TRANSACTION 1. Ultra Vires Contracts:
A contract that is ultra vires the company is absolutely null and void. Such
a contract cannot become intra vires by reason of estoppels, ratification,
acquiescence, delay or lapse of time. The company is not liable on such
contract however:
a. If the company has lent money and this lending is ultra vires the
company, it can recover the money from the debtors. The debtors
would be stopped from contending that the company had no power to
lend.
b. If the company has rendered any particular service which is ultra
vires, it is entitled to receive the charges for the service rendered.
c. If the property of the compan y has been delivered to an outsider
through an ultra vires act, the company has a right to retrieve its
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38 Business Law - II
38 2. Ultra Vires Property:
If a company’s money has been utilized in acquiring some property and
such an act is ultra vires the company, the company is entitled to the
ownership of that property. This is because; the property through wrongly
acquired represents the capital of the company.
3. Personal Liability of Directors:
If the director of a co mpany makes an ultra vires payment, he becomes
personally liable, for that amount, to the company. He can be compelled to
refund the money.
4. Breach of Warranty of Authority:
If the directors induce, however innocently, an outsider to contract with
the co mpany in a matter that is ultra vires the company the directors shall
be personally liable to the outsider for any loss caused to him, provided he
has no knowledge of the fact that the act was ultra vires the company.
5. A company is liable for any tort, i f the following conditions are
fulfilled:
i) The activity, in the course of which the tort has been committed, falls
within the scope of the memorandum of association; and
ii) The servant of the company must have committed the tort within the
course of h is employment
(A tort is a civil wrong, not arising out of a contract, and the remedy for
which is damages)
3.6 ARTICLES OF ASSOCIATION Definition and Meaning:
As per Section 2(5) of the Companies Act,2013 “articles” means the
articles of association of a company as originally framed or as altered from
time to time or applied in pursuance of any previous company law or of
this Act.
Articles of association is a document containing rules and regulation for
the administration of the company. The following com panies are required
to file with the Registrar, their articles along with the memorandum:
a. Unlimited companies
b. Companies limited by guarantee; and
c. Private companies limited by shares
In case of public company limited by shares, articles of associa tion may be
submitted along with the Memorandum of Association. But in other case
namely unlimited company, company limited by guarantee and private munotes.in

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39 Memorandom of Association and Articles of Association - II company limited by shares, articles of association must be submitted along
with the memorandum of associati on.
Schedule I of the Act sets out several tables containing model forms of
articles applicable to different companies. The model set out in Table A
applies to a public company limited by shares. Thus, if a company limited
by shares does not frame its own articles, the form set out in Table A will
automatically apply to it.
Contents of Articles of Association:
Articles of a public company limited by shares usually provide for the
following rules:
i. Share Capital and alteration thereof
ii. Meetings of compa ny
iii. Rights of shareholders
iv. Accounts & audit
v. Dividends
vi. Indemnity
vii. Winding up
viii. Appointment, remuneration, qualification, powers, etc. of Board of
Directors
ix. Share Certificates and warrants
x. Payment, calls, transfer, lien, transmi ssion, forfeiture, etc. of shares
xi. Votes to members
xii. Capitalization of profits.
xiii. Seal
xiv. Adoption to preliminary contracts
Alteration of Articles of Association:
A company can, at any time, alter its articles subject to the following
conditio ns or restrictions:
i. Alterations of Articles can be made only by a Special Resolution of
the shareholders of the Company to that effect. Even if, the articles
prescribe an ordinary resolution for its alteration or even if the
members agree.
ii. No alter ation of Articles will be allowed, which will violate the
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40 Business Law - II
40 iii. No alteration of Articles will be allowed, which will violate the
conditions, contained in the Me morandum of Association of the
Company.
iv. Alteration must not contain anything illegal.
v. An alteration cannot require a member, or any class of members, to
purchase more shares or increase his/their liability without his/their
consent in writing
vi. Alteration of certain provision of Articles, such as provisions relating
to the number of directors and their remuneration, etc. requires the
previous consent of the Central Government.
vii. An alteration must not constitute a fraud on the minority. In other
words, an alteration must not affect the interests of the minority
shareholders.
viii. An alteration of Articles which has the effect of converting a public
company into a private company shall have effect only if the
alteration is approved by the Central Government.
ix. Alteration must be made bonafide in the interest of the company as a
whole, even though the private interests of some members may be
affected.
x. Lastly, Articles of Associations may be altered with retrospective
effect.
3.7 DISTINCTION BE TWEEN MEMORANDUM AND ARTICLES OF ASSOCIATION i. The Memorandum is the character of the company which defines its
objects and powers. The Articles are bye laws of the company for the
internal management of the affairs for achieving the objects set out in
the Memorandum
ii. The Memorandum is the supreme document of the company while the
Articles are subordinate to the memorandum. In case of inconsistency
between the memorandum and articles, the provision of the
memorandum will override the provisions of the articles.
iii. The Memorandum of Association should not contain any provision
contrary to the Companies Act. The Articles must not include any
provisions contrary to Companies Act as well as the Memorandum of
Association.
iv. Every company must have its ow n Memorandum. But a public
company limited by shares may or may not have its own Articles. It
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41 Memorandom of Association and Articles of Association - II v. The Memorandum defines the relationship between the company and
the outsiders while the Articles defines the relati onship between the
company and its members and among the members themselves.
vi. A new company must prepare its Memorandum and file it with the
registrar before the registration of the company is affected. But the
Articles are not required to be filed for the purpose of registration.
The company can adopt Table ‘A’ if it does not prepare its own
Articles.
vii. Any act of the company which is ultra vires the Memorandum is
wholly void and cannot be ratified, even by the whole body of
shareholders. But any act which is ultra vires the Article but intra
vires the Memorandum can be ratified by the shareholders by passing
a special resolution.
viii. The Memorandum cannot be altered easily. The procedure laid down
in the Act must be followed for altering the variou s clauses of the
Memorandum. In some cases the approval of the Central
Government is required. But the alteration of Articles is not difficult. The
Articles can be altered by passing a special resolution and the approval of
the Central Government is not ne cessary.
3.8 DOCTRINE OF CONSTRUCTIVE NOTICES Memorandum and articles of association of a company are public
documents. These documents are pre -requisite for registration of a
company. These documents are available for public inspection either in
the offi ce of the company or in the office of the Registrar of Companies on
the payment of fee.
Any person who is dealing with a company is presumed to have read and
understood the proper meaning of the documents. Every person, dealing
with the company must inspec t these documents to ensure whether they
are in conformity with the respective provisions. A party cannot take a
plea that he was ignorant of what has been stated in memorandum or
articles of association.
It comes to the aid of a company vis -à-vis the out siders. If a person deals
with the company, and the transaction is beyond the powers of the
company, he cannot enforce it against the company and he shall be
personally liable to bear the consequences of such dealings. If a person
deals with the company in good faith and the person with whom he is
dealing has ‘Ostensible authority’ to deal on behalf of the company.
The above doctrine is subject to one exception that is, so far as the internal
proceedings of the company are concerned the outsiders dealing w ith the
company, can assume that everything has been regularly done. This is
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42 Business Law - II
42 3.9 DOCTRINE OF INDOOR MANAGEMENT / TURQUAND (AND RULE) The principle of constructive notice operates against the person dealing
with the company by protecting the latter against the former. Whereas the
doctrine of indoor management protects the outsider against the company.
It is the duty of every person to read the memorandum and Articles of the
company, but he is not bound to inqui re into the internal affairs of the
company whether they are being conducted in accordance with the
Articles of the Company. He has a right to assume that internal
proceedings and affairs of the company are being regularly carried on in
accordance with the rules and regulations. The limitation to doctrine of
constructive notice is called ‘indoor management’
The directors of a company (Royal British Bank), borrowed a sum of
money from Turquand and issued a bond to him. The articles of the
company provided th at the directors might borrow on bonds such sums, as
may, from time to time, be expressly authorized by resolutions of
shareholders. The shareholders claimed that there had been no such
resolution authorizing the loan.
The company was held bound by the loa n because Turquand, the plaintiff,
had the right to assume that the necessary resolution must have been
passed.
Exception to the Rule of Indoor management:
The doctrine of indoor management is subject to five exceptions:
a) Knowledge of internal irregulari ties of the company:
Where the third person dealing with the company has actual or
constructive notice regarding the non -compliance and irregularity of the
internal procedure prescribed by the articles of association, they cannot
claim protection under thi s rule.
b) Suspicion of irregularity:
The doctrine also does not apply when the circumstances are so suspicious
that an inquiry is invited by the person dealing with the company.
c) Acts void ab initio:
This doctrine does not apply to acts that are void ab initio. Eg:.Where the
documents is a forged one.
d) Acts, outside the apparent authority of the company:
Where the acts of an officer do not fall within the apparent authority of
such an officer, the contract is not binding on the company. munotes.in

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43 Memorandom of Association and Articles of Association - II e) No knowledge of articles:
A person who at the time of entering into a contract with a company, has
no knowledge of the company’s articles of association, cannot be saved or
protected by the doctrine.
3.10 SUMMARY Clauses under Memorandum of Association
Name Clause, Registered Office Clause, Object Clause: Liability clause:
Capital Clause: Subscription Clause.
Effects of Ultra Vires Contracts : Ultra Vires Property: Personal Liability
of Directors: Breach of Warranty of Authority: A company is liable for
any tort, -
Contents of Articles of Association: Meetings of company, Rights of
shareholders, Accounts & audit, Dividends, Indemnity, Winding up
procedures etc.
Exception to the Rule of Indoor management : Knowledge of internal
irregularities of the company: Suspicion o f irregularity: Acts void ab
initio: Acts, outside the apparent authority of the company: No knowledge
of articles:
3.11 QUESTIONS 1. What are articles of association? Compare the relation of the articles
to memorandum of association.
2. Answer the follow ing
a. To what extent and how are the articles of association
amended.
b. What is the binding force of memorandum and articles of association?
3. Discuss fully the Doctrine of Indoor Management.
4. Critically examine the principle of th e Constructive notice.
5. Examine the Effects of Doctrine of Constructive Notice and Indoor
Management
3. Define the following terms:
a. Memorandum of association
b. Articles of Association
c. Doctrine of Ultra vires
***** munotes.in

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44 4
PROSPECTUS AND PRIVATE
PLACEMENT
(SECTIONS. 2.23, 26 TO 32 AND S. 42)
Unit Structure
4.0 Objectives
4.1 Introduction
4.2 Types of Prospectus
4.3 Contents of the Prospectus
4.4 Misstatement in the pros pectus
4.5 Legal Requirements of Prospectus
4.6 Private Placement
4.7 Summary
4.8 Questions
4.0 OBJECTIVES After studying the unit students will be able to:
• Define the various terms like prospectus, statement in lieu of
prospectus and Shelf prospec tus.
• Explain the contents of Prospectus.
• Discuss about the legal requirements of prospectus.
• Explain the liabilities against misstatement and how to defence
against this liability.
4.1 INTRODUCTION Chapter III of the Act deals with “Prospectus and a llotment of securities”,
the chapter is divided into two parts, Part I deals with Public Offer and
Part II deals with Private Placement. Section 23 of the Act provides that a
company whether public or private may issue securities. A public
company may issu e securities:
a) To public through prospectus (“public offer”) by complying with the
provisions of Part I of Chapter III of the Act; or
b) Through private placement by complying with the provisions of Part
II of Chapter III of the Act; or
c) Through a ri ghts issue or a bonus issue in accordance with the
provisions of this Act and in case of a listed company or a company
which intends to get its securities listed also with the provisions of the
SEBI Act, 1992 and the rules and regulations made thereunder. munotes.in

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45 Prospectus and Private Placement (Sections. 2.23, 26 To 32 and S. 42) For a private company the section provides that a private company may
issue securities (a) by way of rights issue or bonus issue in accordance
with the provisions of this Act; or
The section deals with issue of securities, which is a wider term not
restricted to equity, preference or debentures. Securities has been defined
under section 2(81) to mean the securities as defined in clause (h) of
section 2 of the Securities Contracts (Regulation) Act, 1956.
The relevant section says that securities include:
Shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate;
a) Derivative;
b) Units or any other inve stments issued by any collective investment
scheme to the investors in such schemes;
c) Government securities;
d) Such other instruments as may be declared by the Central
e) Government to be securities; and
f) Rights or interest in securities.
PROSPECTUS:
“Prospectus means any document described or issued as a prospectus and
includes any notice, circular, advertisement or other document inviting
deposits from the public or inviting offers from the public for the
subscription or purchase of any shares in, or debentures of a body
corporate”
Definition of prospectus includes any invitation to the public to subscribe
to shares or debentures. A document by which an invitation is issued to the
public to take shares or debentures of the company is called a prospect us.
Prospectus is thus a document described or issued as a prospectus. Even
inviting offers from the public for subscription to shares or debentures is a
prospectus.
4.2 TYPES OF PROSPECTUS Abridged Prospectus: [S. 2(1)]:
Section 2(1) of the Indian Com panies Act, 2013 described an abridged
prospectus as a memorandum that has all the salient features of the
prospectus as specified by the SEBI.
It is a summary of a prospectus filed before the registrar of the companies.
It includes all the features of a p rospectus. An abridged prospectus has all
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46 Business Law - II
46 and quick for an investor to know all the useful information in short and to
arrive at the investment decision.
There is a provision under s ection 33(1) of the Companies Act, 2013 that
when any form for the purchase of securities of a company is issued, it
must be accompanied by an abridged prospectus.
Deemed Prospectus [S. 25(1)]:
A deemed prospectus has been stated under section 25(1) of th e
Companies Act, 2013. When any company to offer securities for sale to
the public, allots or agrees to allot securities, the document will be
considered as a deemed prospectus through which the offer is made to the
public for sale. The document is deemed to be a prospectus of a company
for all purposes and all the provision of content and liabilities of a
prospectus will be applied upon it.
Red Herring Prospectus : – [S.32]:
Red herring prospectus does not contain all information about the prices of
securit ies offered and the number of securities to be issued. According to
the act, the firm should issue this prospectus to the registrar at least three
before the opening of the offer and subscription list.
Shelf prospectus – [S.31]:
Shelf prospectus is descri bed under section 31 of the Companies Act,
2013. Shelf prospectus is issued when a company or any public financial
institution offers one or more securities to the public. The validity period
of such prospectus will be not more than 1 year. The validity p eriod starts
with the commencement of the first offer. There is no need for a
prospectus on further offers. The organization must provide an
information memorandum when filing the shelf prospectus
4.3 CONTENTS OF THE PROSPECTUS For filing and issuing the prospectus of a public company, it must be
signed and dated and contain all the necessary information as stated under
section 26 of the Companies Act,2013:
• Name and registered address of the office, its secretary, auditor, legal
advisor, bankers, trustee s, etc.
• Date of the opening and closing of the issue.
• Statements of the Board of Directors about separate bank accounts
where receipts of issues are to be kept.
• Statement of the Board of Directors about the details of utilization and
non-utilization of receipts of previous issues.
• Consent of the directors, auditors, bankers to the issue, expert
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47 Prospectus and Private Placement (Sections. 2.23, 26 To 32 and S. 42) • Authority for the issue and details of the resolution passed for it.
• Procedure and time scheduled for the allotment and issue of
securities.
• The capital structure of the company in the manner which may be
prescribed.
• The objective of a public offer.
• The location of the business and its objectives
• Particulars related to risk factors of the specific project, gestation
period of the project, any pending legal action and other important
details related to the project.
• The details of the acts of material frauds committed against the
company in the last five years, if any
• The related party transactions entered during the last five financial
years immediately preceding the issue of prospectus.
• Minimum subscription and what amount are payable on the premium.
• Details of directors, their remuneration and extent of their interest in
the company.
• The aggregate amount proposed to be raised thr ough all the stages of
offers of specified securities made through the shelf prospectus,
• Reports for the purpose of financial information such as auditor’s
report, report of profit and loss of the five financial years, business
and transaction reports, s tatement of compliance with the provisions
of the Act and any other report.
4.4 MISSTATEMENT IN THE PROSPECTUS Every person authorizing the issue of prospectus has a primary
responsibility to see that the prospectus contains the true states of affairs
of the company and does not give any fraudulent picture of the public.
People invest in the company on the basis of information published in the
prospectus. They have to be safe guarded against all wrong or false
statement in prospectus. Prospectus must theref ore make full and honest
declaration of material facts without concealing or omitting any relevant
fact. This is known as the golden rule for framing prospectus. The true
nature of companies venture should be disclosed. The statement which
does not qualif y to the particulars mentioned in the prospectus, or any
information is intentionally and willfully concealed by the director of the
company, would be constructed as misstatement. They are in other words,
either false or untrue statement in the prospectus or information which
ought to have been disclosed is concealed, or omission of any material
fact. Statements which produce wrong impression of actual facts would
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48 Business Law - II
48 Misstatements includes:
i. Untrue statements
ii. Stateme nts which produce wrong impression
iii. Statement which are misleading
iv. Concealment of material fact
v. Omission of facts
The prospectus must make all statements with absolute accuracy and not
state the facts which are not strictly correct. A statement may be false not
only because of what it states but also because of what it conceals or
omits.
A statement included in prospectus shall be deemed to be untrue if:
i. Statement is misleading in the form and context in which it is
included
ii. The omission f rom prospectus of any matter is calculated to mislead
The prospectus which contains misstatements or misleading statements is
called “Misleading Prospectus”
Example:
1. A statement in the prospectus that share capital has been subscribed
when it has only b een allotted in fully paid shares to the company’s
contractor. It was held that it is a misstatement in prospectus.
Liability:
The liability may be civil or criminal.
I. CIVIL LIABILITY:
1. Compensation:
The above person shall be liable to pay compensation to every person who
subscribes for any shares or debentures for any loss or damage sustained
by him by reason of any untrue statement included therein.
2. Damages for deceit or fraud :
Any person induced to invest in the company by fraudulent statement in a
prospectus can sue the company and person responsible for damages. The
shares should be first surrendered to the company before the company is
sued for damages. Fraud occurs when any statement is made without
belief in the truth or carelessly. A statemen t made with knowledge that is
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49 Prospectus and Private Placement (Sections. 2.23, 26 To 32 and S. 42) 3. Rescission of the Contract for misrepresentation :
It means avoiding the contract. Any person can apply to the court for
rescission of the contract if the statement on which he has tak en the shares
are false or caused by misrepresentation whether innocent or fraudulent. It
must be of material fact and not of law. It should be noted that a person
cannot claim rescission of contract on misrepresentation, if he had the
means of discovering the truth with ordinary diligence.
4. Liability under general law :
Any person responsible for the issue of prospectus may be held liable
under the general law or under the Act for misstatements or fraud.
II. CRIMINAL LIABILIY:
Section 63 of the Companies Act deals with criminal liability for
misstatements in prospectus.
Where a prospectus issued, circulated, or distributed includes any
statement that is untrue or misleading in any form in which it is included
or where any inclusion or omission of any mat ter is likely to mislead,
every person who authorises such issue of the prospectus shall be liable
for fraud.
“Fraud” under Sec. 447 comprises of an act, omission, concealment of
any fact with an intent to deceive, gain undue advantage, or to injure the
interests of the company, its shareholders, its creditors or any other person.
It is not necessary that such an act involve any wrongful profit or wrongful
loss. If a person commits abuse of position, then that shall also be
considered fraud under this sect ion.
Punishment for mis -statement:
If a person is found to be guilty of the offence of fraud, then that person
shall be punished with imprisonment for a term that shall not be less than
six months and may extend to ten years. He shall also be liable to f ine,
which shall not be less than the amount involved in the fraud and may
extend to three times the amount involved in the fraud.
If the fraud so committed involves public interest, the term of
imprisonment shall not be less than three years.
4.5 LEGAL R QUIREMENTS OF PROSPECTUS 3Following are the legal requirements of prospectus:
1. A prospectus is required to be issued only after the incorporation of
the company.
2. The prospectus must contain all the particulars, listed in Schedule II to
the Companies ’ Act.
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50 Business Law - II
50 4. A prospectus must be signed by every person, mentioned therein as a
director or a proposed director, or his agent.
5. Every application form for shares, issued by the company, must be
accompanied by a copy of the prospectus except (a) application form,
issued for bona fide invitation to a person to enter into an
underwriting agreement, and (b) application forms, issued to existing
members and debenture holders.
6. A statement, relating to the affairs of the company by an expert, may
be included in the prospectus.
7. Consent of the expert must be obtained in writing and this fact must
be stated in the prospectus.
8. No deposit can be invited without issuing an advertisement in a daily
newspaper. The said advertisemen t must be containing a statement,
reflecting the company’s financial position issued by the Company
and in such a form or in such a manner, as may be prescribed.
9. Before a prospectus is issued, a copy of it must be registered with the
registrar of compan ies.
10. Prospectus shall be issued within 90 days of its registration.
Penalty for Non -Compliance of Section 26:
If a prospectus is issued by non -observance of the provisions of Section
26 of this Act, shall be punishable with fine which shall not be less than
Rs. 50,000/ - which may extend to Rs. 300,000/ - and every person who is
knowingly a party to the issue of such prospectus, shall be punishable with
imprisonment for a term which may extend to three years or with fine
which shall not be less than Rs. 50,000/ - and may extend to Rs. 3,00,000/ -
or both.
4.6 PRIVATE PLACEMENT Private placement by companies means offering its securities or inviting to
subscribe its securities for a select group of persons other than by way of a
public issue through a priva te placement offer letter.
3 Vipul Publication .Business Law kalaivani venkatesh page no 78 -79
Private placement of securities can be made only to select persons or
identified persons (as identified by the board of the company). A company
making a private placement cannot offer its securities through any public
advertisements or utilise any marketing, media, or distribution agents or
channels to inform the public about such an offer. If the offer is advertised
or marketed, it will be considered a public of fer and not a private
placement by the company.

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51 Prospectus and Private Placement (Sections. 2.23, 26 To 32 and S. 42) Rules for Private Placement:
1. Each Private Placement offer should be previously approved by the
shareholders of the company, by a Special Resolution.
2. No fresh offer can be made unless the allotments with respect to any
offer or invitation made earlier have been completed or that offer or
invitation has been withdrawn or abandoned by the company.
3. All money received under private placement to be made by cheque or
demand draft only. In any circumstan ces no cash can be accepted.
4. Qualified Institutional buyers and employees of the company being
offered securities under a scheme of employees’ stock option are
excluded in calculating the number.
5. Company shall not expected to utilise monies raised t hrough private
placement unless allotment is made and the return of allotment is filed
with the Registrar.
6. Company should be restricted to from making any advertisement of
the offer to public.
7. A company shall issue private placement offer cum applica tion letter
only after the relevant special resolution or resolution from the Board
has been filed with the Registrar.
8. The value of such offer or invitation per person shall be with an
investment size of less than Rs.20,000/ -of face value of the securit ies.
9. The company shall maintain a complete record of private placement
offers in Form PAS -5. A copy shall be filed with the Registrar along
with the requisite fee within 30 days of circulation of private
placement offer letter.
10. Allotment of securit ies shall be done within 60 days of receipt of the
application failing which the application money shall be refunded
within 15 days of the expiry of 60 days otherwise interest at the rate
of 12% per annum shall be required to be aid from the 60th day.
Procedure for Private Placement:
A private placement shall be made only to a selected group of persons
who have been identified by the Board, whose number shall not exceed
fifty or such higher number i.e., not more than 200, excluding the qualified
institution al buyers and employees of the company being offered
securities under a scheme of employees’ stock option, in a financial year.
1. A resolution must be passed by the Board of Directors for private
placement of securities.
2. Preparation of notice of board meeting along with draft resolution to
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52 Business Law - II
52 3. A General Body meeting must be convened, where in the proposed
offer of securities has been previously approved by the shareholders
of the company, by a special resolution, for eac h of the offers or
Invitation.
4. Opening of separate bank account for maintaining subscription money
and ensure that money received from only those persons whose name
is addressed in form.
5. Open separate bank account for keeping subscription money and
ensure that money received from only those persons whose name is
addressed in form.
Penalty for Non -Compliance of Private Placement :
A company, its directors and promoters will be liable for a penalty if the
company accepts monies or makes an offer in cont ravention of the Act and
Rules. The penalty may extend to the amount involved in the invitation or
offer or Rs.2 crore, whichever is lower. The company should also refund
all monies to the subscribers within thirty days of the order imposing the
penalty.
4.7 SUMMARY Types of Prospectus: Abridged Prospectus: Deemed Prospectus Red
Herring Prospectus : Shelf prospectus
Legal Requirements of the Prospects:
Misstatement in the prospectus: Untrue statements , Statements which
produce wrong impression, Statement which are misleading, Concealment
of material fact. Omission of facts
Civil Liability for Misstatement in the prospectu s Compensation:
Damages f or deceit or fraud: Rescission of the Contract for
misrepresentation:
Rules for Private Placement:
Each Pri vate Placement offer should be previously approved by the
shareholders of the company, by a Special Resolution. No fresh offer can
be made unless the allotments with respect to any offer or invitation made
earlier have been completed or that offer or invi tation has been withdrawn
or abandoned by the company.
Procedure for Private Placement :
Open separate bank account for keeping subscription money and ensure
that money received from only those persons whose name is addressed in
form.
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53 Prospectus and Private Placement (Sections. 2.23, 26 To 32 and S. 42) 4.10 QUESTIONS 1. What is prospectus? Must every company issue it.
2. What are the contents of a prospectus?
3. What are the remedies available to a shareholder for
misrepresentation or omissions in a prospectus?
4. What are th e provisions of the companies act relating to registration
and issue of prospectus?
5. Who are liable for misstatement in the prospectus?
6. What are the nature of liability for misstatement?
7. What are the defences available for misstatement?
8. Write sh ort notes on:
a. Minimum Subscription
b. Statement of lieu of prospectus
c. Liability of an expert for his statement in the prospectus
d. Civil liability for misstatement in prospectus
e. Criminal Liabilities of directors and other persons
responsible for issue of prospectus
9. Define the following terms:
a. Shelf Prospectus
b. Penalty for non -compliance of the provisions under Private
Placement.
c. Prospectus
d. Statement in lieu of prospectus
10. Explain the rules of Private Placement.
What are the Proce dures under Private Placement? (Footnotes)


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54 MODULE II
COMPANIES ACT
5
MEMBERSHIP OF A COMPANY
(SECTIONS. 2, 88, 91, 94, 95 OF
COMPANIES ACT 2013)
Unit Structure
5.0 Objectives
5.1 Introduction
5.2 Meaning and Definition of Member.
5.3 Acquisition of Membership
5.4 Cessation of Membership
5.5 Rights and Liabilities of Members
5.6 Register of Members
5.7 Closure of Register of Members or Debenture Holders or Other
Security Holders
5.8 Summary
5.9 Questions
5.0 OBJECTIVES After studying the unit students will be able to:
 Understand the meaning of member of company.
 How the membership can be acquired and terminated.
 Understand what is Register of members and its types.
 Understand the rights and liabilities of members.
5.1 INTRODUCTION The terms “members” and “shareholders” are usually used
intercha ngeably. In general, every shareholder is a member and every
member is a shareholder. However, there may be exceptions to this
statement, e.g., a person may be a holder of share(s) by transfer but will
not become its member until the transfer is registered in the books of the
company in his favor and his name is entered in the register of members.
Similarly, a member who has transferred his shares, though he does not
hold any shares yet he continues to be member of the company until the
transfer is register ed and his name is removed from the register of
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55 Membership of A Company (Sections. 2,88,91,94,95 of Companies Act 2013) 5.2 MEANING AND DEFINITION Section 2 (55) defines member under companies Act 2013
“member”, in relation to a company, means:
(i) The subscriber to the memorandum of the co mpany who shall be
deemed to have agreed to become member of the company, and on its
registration, shall be entered as member in its register of members;
(ii) Every other person who agrees in writing to become a member of the
company and whose name is ent ered in the register of members of the
company;
(iii) Every person holding shares of the company and whose name is
entered as a beneficial owner in the records of a depository.
Who can be a member?:
An individual or body corporate can be a member in a comp any. A person
who is of a sound mind and capable of contracting can be a member.
Therefore, person should be competent to a contract. Following are the
cases:
1. Minor:
As a minor is incapable of entering into a valid contract, he cannot become
a member. H owever, it has been held in Diwan Singh V. Minerva Films
Ltd. (1958 Com. Cas. 191), that there is nothing in law to prevent a minor
from acquiring or holding shares in a joint stock company, if he is
properly represented and acts by a lawful guardian. A gu ardian can
therefore hold shares in a company for and on behalf of minor. Minor’s
name may remain on company’s register of members, but during minority
he incurs no liability. If the allotment is made to the minor wrongly, the
company can repudiate or canc el the allotment but must repay all the
money received by such minor.
The minor on attending majority can rescind the contract and get his name
removed from the register of members. However if he does not do so, he
shall be a member of the company, and inc ur all the liabilities of a
member. The company however cannot be compelled to admit minor as a
member.
Every person who is competent to a contract may become a member.
Hence a minor and a person of unsound mind cannot be members of a
company. A minor can be admitted to the membership of a company
limited by shares, by means of transfer of shares provided the shares are
fully paid up. A minor during his minority can enjoy the benefits of
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56 Business Law - II
56 2. Company and sub sidiary company:
A company can become a member of another company as a company is a
legal person.
However, a subsidiary company cannot be a member of a holding. Any
allotment or transfer of shares by a holding company to its subsidiary shall
be void. It may become a member of another company provided it is not
prohibited by its memorandum of association. However, a company
cannot buy its own shares
A subsidiary company can however be a member of the holding company
in following cases:
i. Subsidiary Compan y is concerned as a legal representative of a
deceased member of the holding company
ii. When subsidiary company is concerned as a trustee
iii. When subsidiary company is a member of the holding company
before the commencement of Act and it continues to be so.
iv. Where subsidiary company was a member of the holding company
before becoming the subsidiary of the holding company.
3. Trust:
A trustee, who buys shares, will be treated as a member in his individual
capacity. It cannot hold share in a company. A trustee can however hold
shares in his name for and on behalf of the trust. Any person holding
shares in a company as a trustee is required to make a declaration to the
public trust within the prescribed time. A copy of such declaration is
required to be s ent by the trustee to the company concerned within 21 days
after the declaration to the public trust. Failure to do so will lead to
penalty.
4. Partnership Firm:
A firm is not a legal person or a body corporate. It cannot hold shares in
the company; howev er, partners in their individual capacity or as
nominees of the partnership firm can hold shares in a company. These
shares will constitute a part of the Assets of the firm. However, a firm can
be a member of any association registered under section 25 of the Act,
such as Chamber of Commerce or a Social Club or a Charitable Institution
5. Society:
A registered society under the Societies Registration Act, 1860 can
acquire shares in the company.

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57 Membership of A Company (Sections. 2,88,91,94,95 of Companies Act 2013) 6. Other:
An insolvent may be taken as member so long as hi s name appears in the
register of members, notwithstanding the right of official assignee or
receiver to be registered as a member.
7. Non -resident:
A non -resident cannot become a member of a company without the
permission of the Reserve Bank of India unde r the Foreign Exchange
Regulation Act, 1973
5.3 ACQUISITION OF MEMBERSHIP OF COMPANY The person whose name is entered into the register of members is known
as a member of the company member of a company means a person:
i. Who has subscribed his name to the memorandum.
ii. Any other person who has agreed in writing, to become a member and
whose name is entered in the register of members.
iii. Every person, holding equity share capital of a company and whose
name is entered as beneficial owner in the records of the depository
(Inserted by the Depositories Act, 1976)
On the other hand, a shareholder is one who holds shares in a company.
These two expressions are being used interchangeable
Therefore, membership of a company can be obtained in following ways:
i. By subscribing to the Memorandum of Association of a company;
ii. By agreeing in writing to become a member;
iii. Every person holding equity share capital and whose name is entered
as beneficial owner in the records of the depository.
The essential fact or to constitute membership is that the name of the
person in either of the above circumstances must appear in the register of
members of the company or as beneficial owner in records of depository.
ACQUISITION OF MEMBERSHIP:
1. By subscribing to the memor andum:
The subscribers to the memorandum are deemed to have agreed to become
members. Their names must be entered into the Register of member. Thus,
if the subscribers later do not subscribe to the shares to which they have
agreed, they will still be the ‘members’ and will be responsible for the
payment in respect of the shares which they have agreed to subscribe.
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58 Business Law - II
58 2. By undertaking qualification Share :
When the director agrees to take qualifi cation shares, such director is in
same position as if he has signed a memorandum of the company for those
shares of that number of value. They too are deemed to have become
members on registration of the company and will be liable in respect of
those qual ification shares.
3. By allotment:
A person can become a shareholder if he agrees to take shares in the
company by allotment. Allotment means an appropriation of shares out of
the previously un -appropriated capital of a company, to a particular
person. Re -issue of forfeited shares does not amount to allotment.
4. By transfer:
A person who takes shares from an existing member by sale, gift or some
other transaction, acquires membership, on his name appearing in the
register of member. Every person who agree s in writing to become a
member of the company and whose name is registered in its register of
members, is a member of the company. Thus, two ingredients are
necessary for membership by transfer of shares:
i. An application in writing to become a member, a nd
ii. An entry in the register
5. By Transmission:
The transmission of shares takes places on the death or insolvency of the
shareholder. On the death of a member, his executor or the person who is
entitle under the law to succeed to his estate gets the r ight to have the
shares transmitted to his name in the company’s register of members. In
case of transmission of shares no instrument of transfer is necessary.
Articles of association gives the formalities to be followed with regards to
transmission. The s hares of the company are freely transferable.
6. Membership by acquiescence and estoppels:
A shareholder is not a member unless his name is entered in the register of
members of the company. Where a person allows his name to be put on
the register of membe rs, or knowing that his name is put on the register,
does not take steps to have his name taken off, he shall be stopped from
denying that he is a member. Where his name is entered by mistake and he
is unaware of it then he does not become a member.
7. Joi nt members:
When two or more persons hold share in a company in their joint names it
is called a joint membership. They are to be treated as single member for
the purpose of sending notices, dividends, interest etc. and name of person
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59 Membership of A Company (Sections. 2,88,91,94,95 of Companies Act 2013) 5.4 CEASES OF MEMBERSHIP Membership ceases in following event:
1. By transfer of shares. In such case even though transferor ceases to be
a member, he remains liable to be placed in ‘B’ list for one year, if the
company goes int o liquidation.
2. By forfeiture of shares
3. By surrender of shares, where surrendering is permitted
4. By sales of shares by the company after it exercises its right of lien on
the shares or in execution of a decree by court or other proper
authority
5. By insolvency. Such shares of an insolvent vest in the Official
Receiver or Assignee.
6. By death, the name of deceased member continues till the shares are
registered in the name of his legal representative
7. By rescission of the contract to take shares o n the ground of
misrepresentation in the prospectus
8. When the company redeems its redeemable preference shares
9. On issue of share warrants by the company in place of share
certificates
10. On winding up of the company. However, a member remains liable as
a contributor and is also entitled to shares in the surplus assets, if any.
5.5 RIGHTS AND LIABILITIES OF MEMBERS RIGHTS OF MEMBERS:
Following are rights of the members :
1. Right to receive notices of all general meetings
2. A member has a right of prio rity to have shares offered in case of
increase of capital
3. Right to attend and vote at meetings
4. Right to appoint directors and auditors of the company
5. Right to receive copies of annual accounts of the company
6. Right to transfer his shares
7. Right to receive a share certificate
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60 Business Law - II
60 9. Right to inspect the register of members, register of debenture holders
and copies of annual returns.
10. If his name is omitted in the register of m embers, he can apply to
court for rectification of the register.
11. In case of statutory meeting, he is entitled to a copy of statutory
report.
12. Right to receive dividends in case of preference shares
13. Right to be registered as a shareholder in Comp any’s Book
14. Right of Privilege of immunity from personal liability of company’s
debts.
15. Right to participate in dividend distribution, if ordered in the
discretion of directors
16. Right to rescind the contract and claim damages in case of his
acqui ring shares on account of mis -statement in the prospectus.
17. Right of Priority to have shares offered to him in case of increase of
capital by the company.
18. Right to petition to High court for relief in cases of oppression and
mismanagement.
19. Right to petition to High court for winding up of the company
20. Right to petition to the Central Government for ordering an
investigation into the affairs of the company
21. Right to participate in appointments of directors and auditors in
annual general meet ings
22. Right to apply to the Central Government for calling an annual
general meeting if the board of directors fails to call such a meeting
23. Right to apply to the Court for calling an extra ordinary meeting of
the company
24. Right to participate in the distribution of assets in case of liquidation
of the company.
25. Right to bring representative suits and company’s cause of action, to
remedy mismanagement or unauthorised acts and thereby to compel
the company to enforce its rights.
LIABILITIES OF A MEMBER:
1. Liability of members depends on the nature of the company. In the
case of an unlimited company, the liability of each member is
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61 Membership of A Company (Sections. 2,88,91,94,95 of Companies Act 2013) debts of the company, contracted during the p eriod of his
membership.
If the company is limited by guarantee, each member is bound to
contribute, in the event of winding up, a sum of money specified in
the liability clause of its memorandum of association.
If the company is incorporated with the liab ility of its members
limited by shares, each member is liable to pay only the full nominal
value of the shares held by him.
2. He is liable as a contributory in the case of winding up of the
company.
3. A shareholder continues to be liable to the company e ven though he
have transferred his shares to another company, until his name is
deleted from the register of members and the name of transferee is put
in his place.
4. He is liable to abide by the acts of the majority of members unless the
majority acts op pressively or fraudulently.
5. A member is liable to accept the share if they are allotted to him
within a reasonable time and in compliance with the provisions of the
Act.
6. A member is liable to pay for the shares allotted to him either when
allotment i s made and/or when calls are validly made in accordance
with the provisions of the articles. If the full nominal value of the
shares has already been paid at the time of application, the liability of
the shareholder to pay ceases.
7. A member is liable to have his shares forfeited in event of non -
payment of any call. Shares can he forfeited only if all the conditions
for a valid forfeiture exist. These conditions are:
a. Forfeiture must be in accordance with the provision of the company’s
articles.
b. Share can be forfeited only for non -payment of a call due in respect of
the shares.
c. A proper notice requiring him to pay the exact amount on or before a
specified day (Which must not be earlier than fourteen days from the
date of service of the notice) shou ld be given to the shareholder. The
slightest defect in the notice invalidates forfeiture.
d. A formal resolution declaring the forfeiture of shares must be passed
and a notice of the same served on the defaulting shareholder.
e. The power to forfeit share s should have been exercised in good faith
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62 Business Law - II
62 5.6 REGISTER OF MEMBERS: (S.88) COMPANIES ACT 2013 RULE 2014 Every company shall keep and maintain the following registers as
mentioned in the above act and rule. :
(a) Regi ster of Members mentioning separately for each class of equity
and preference shares held by each member residing in or outside
India;
(b) Register of Debenture -holder and
(c) Register of any other security holders.
4 Provision: “Every company shall, from the date of its registration, keep
and maintain a register of its members in one or more books in Form No.
MGT -1. In the case of existing companies, registered under the
Companies Act, 1956, particulars shall be compiled within six months
from the da te of commencement of these rules.”
CONTAINS IN THE REGISTER:
1. The name, address and occupation, if any of each member
2. It contains the details of each class of shareholders like their basic
info, allotment, transfer, folio details etc.
3. In case of a company having a share capital, the shares held by each
member, distinguishing each share by its number, except where such
shares are held with a depository, and the amount paid or agreed to be
considered as paid on those shares
4. It contains the details of debenture holders like their basic details,
allotment or redemption/conversion details.
5. The date at which each member was entered in the register as a
member.
6. This register is made in reference to register of members stating the
details of direct ors or employees to whom the sweat equity shares
have been given.
7. This register is made in reference to register of members stating the
details of directors or employees to whom the sweat equity shares
have been given.
8. The date on which any person ce ases to be a member
9. This register is made in reference to register of members stating the
details of directors or employees to whom the sweat equity shares
have been given.
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63 Membership of A Company (Sections. 2,88,91,94,95 of Companies Act 2013) The register of member shall be prima facie evidence of any matter
directed or authorized to be inserted therein by the Companies Act.
Other entries in Register of Members or in respective registers are as
under:
Any, cancellation reduction, sub -division, buy -back or, forfeiture of
shares, transmission of shares, shares issued under any scheme of
arrangements, mergers, or any of such scheme provided under this Act or
by issue of duplicate or new share certificates or new debenture or other
security ce rtificates, entry shall be made within seven days after approval
by the Board or committee, in the register of members or in the respective
registers, as the case may be.
Foreign Register:
“Foreign Register”, means it contain the names and particulars of the
members, debenture -holders, other security holders residing outside India.
A company may keep a part of the its register in any country outside India,
if it is, authorized by its articles, called foreign register of members,
debenture holders, other s ecurity holders or beneficial owners residing
outside India.
Provisions:
A company which has issued debentures or any other security may, if so,
authorized by its articles, keep in any country outside India, a part of the
register of members or as the case may be, of debenture holders or of any
other security holders or of beneficial owners, resident in that country
(hereafter in this rule referred to as the “foreign register”.
The company shall file Form MGT -3 with the Registrar for notice of the
situation of the office within 30 days from the date of the opening of any
foreign register along with the fee as provided in Annexure B .
If a foreign register is kept by a company in any country outside India, the
decision of the appropriate authority in regard to the rectification of the
register shall be binding.
5.7 CLOSURE OF REGISTER OF MEMBERS OR DEBENTURE HOLDERS OR OTHER SECURITY
HOLDERS At least seven days previous notice should be given as prescribed by the
and under Security Exchange Board of India be fore closing of register of
members or the debenture holder or the register of other security holders.
If such company is a listed company or intends to get its securities listed,
by advertisement at least once in a vernacular newspaper in the principal
vernacular language of the district and having a wide circulation in the
place where the registered office of the company is situated, and at least
once in English language in an English newspaper circulating in that
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64 Business Law - II
64 of the company is situated and publish the notice on the website as may be
notified by the Central Government and on the website, if any, of the
Company.
(2) The Private Companies shall serve a notice for closure o f register of
members or debenture holders or other security holders not less than seven
days prior.
Penalty :
If a company fails to maintain; a Register of Members or a Register of
Debenture holders other security holders or does not maintain them in
accordance with the provisions contained herein above.
5.8 SUMMARY Who can be a member : Minor: Company and subsidiary company :
Trustees in their individual capacity, Partners in the Partnership Firm
individually ,Society:
ACQUISITION OF MEMBERSHIP : By subs cribing to the
memorandum, By undertaking to buy qualification: By allotment: By
transfer: By Transmission: Membership by acquiescence and estoppels:
Joint members:
CEASES OF MEMBERSHIP: By transfer of shares. forfeiture of share,
By surrender of shares, By sales of shares ,By insolvency. By death,
RIGHTS OF MEMBERS : Right to receive notices of all general
meetings, A member has a right of priority to have shares offered in case
of increase of capital, Right to attend and vote at meetings, Right to
appoin t directors and auditors of the company, Right to receive copies of
annual accounts of the company, Right to transfer his shares, Right to
receive a share certificate
5.9 QUESTIONS 1. Who can be a member of a company? How does a member cease to
be a membe r?
2. Enumerate and explain the various modes of membership of a
company.
3. State and discuss the rights and liabilities of a member.
4. Answer in brief -
a. What are “Register of Members” and Foreign Register
b. When can a company close its register of me mbers?
c. When can the register of members be rectified?
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65 Membership of A Company (Sections. 2,88,91,94,95 of Companies Act 2013) a. Forfeiture of shares
b. Member and shareholder
c. Register of members
d. Membership by acquiescence
6. Define the following terms:
a. Certificate of Incorporation
b. Foreign Reg isters
c. Member of a company

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66 66 6
DIRECTORS OF COMPANIES
APPOINTMENTS AND QUALIFICATIONS
(SECTIONS.2, 149 -183, 196, 203 -205)
Unit Structure
6.0 Objectives
6.1 Introduction
6.2 Meaning and Definition
6.3 Directors Identification Number
6.4 Who can become a Director? (Qualifications and D isqualification).
6.5 Appointment of Directors
6.6 Legal Position of Directors
6.7 Powers and Duties of Directors
6.8 Key Managerial Personnel
6.9 Conditions and Qualifications For Appointment of Managing
Director, Whole Time Director or Manager (Kmp) (Sec tion 196):
6.10 Summary
6.11 Questions
6.0 OBJECTIVES After studying the unit students will be able to:
 Understand the Qualification and Disqualifications of the Director
 Understand how the directors can be appointed.
 Understand the legal positions of directors.
 Understand powers and duties of directors.
 Understand the functioning of Key Managerial Personnel
6.1 INTRODUCTION Company is a body corporate and does not have any physical existence it
its own. Company is an artificial person and gets the wo rk done from the
human agency. The factors of such agencies like directors and other
members of the company thy work on behalf of an artificial person that is
company.
Section 2 (34) of the Act prescribed that “director” means a director
appointed to the Board of a company. A director is a person appointed to
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67 Directors of Companies Appointments and Qualifications (Sections.2, 149-183, 196, 203-205) with the provisions of the Companies Act, 2013. company are termed as
‘directors.
6.2 MEANING AND DEFINITION Section 2 (34) of the Act prescribed that “ director ” means “a director
appointed to the Board of a company”. A director is a person appointed to
perform the duties and functions of director of a company in accordance
with the provisions of the Companies Act, 2013. company a re termed as
directors.
Section 2(10) further defines the Board of Directors as “Board of
Directors” or “Board”, in relation to a company, means the collective body
of the directors of the company.”
Provisions as to Companies Act 2013 Rules (2014) prescrib es the
Appointment, Qualifications, Disqualifications of the Directors. It further
prescribes the minimum and maximum numbers of directors are as under.
Every company is required to have a Board of directors and it should be
consisting of individuals as d irectors. Section 149 prescribes the minimum
number of directors required in a company as follows:
Public Company – At least 3 directors
Private company - At least 2 directors
One person company – Minimum 1 director
There can be a maximum of 15 directors. A c ompany may appoint more
than 15 directors after passing a special resolution.
6.3 DIRECTOR IDENTIFICATION NUMBER (SECTION 153- 159 AND RULES 2, 4) “Rule 2(d) of the Companies (Appointment and Qualification of
Directors) Rules, 2014 defines DIN as an ident ification number allotted by
the Central Government to any individual, intending to be appointed as
Director or to any existing director of a company for the purposes of
identifying as a director of a company”.
DIN is a unique Director identification numbe r allotted by the Central
Government to any person intending to be a Director or an existing
director of any company. It is an 8 -digit unique identification number that
has lifetime validity. Any person intending to become a director in an
already existing company shall have to make an application for allotment
of DIN through e-Form DIR -3.
 The Central Government may cancel the DIN due to the following
reasons
 If a duplicate DIN has been found which had issued to the director. munotes.in

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68 Business Law - II
68  If DIN was obtained by fraudul ent means or by submitting the fake
documents
 On the death of the concerned person the DIN can be withdrawn
 If the holder of DIN or person has been declared unsound mind by the
competent court the Central Government may cancel the DIN and if
the person has been adjudicated as insolvent
If any person or director contravenes any provisions laid down in respect
if DIN shall be punishable with an imprisonment for a term which may be
extended to Rs. 50,000/ - and on continuation of the contravention a
further f ine which may extend to Rs. 500/ - per day after the first during
which the contravention continues.
6.4 WHO CAN BECOME A DIRECTOR? (QUALIFICATIONS AND DISQUALIFICATIONS).
(SECTION 164 ) There is no qualifications laid down or prescribed under Companies Act,
2013 for an appointment of a position as ‘Director’ the only condition to
be fulfilled being he must be competent to contract. Section 164 has
made in regards with certain disqualifications for appointment of
directors. When a person is disqualif ied under Section 164 he shall not be
eligible to be appointed as a Director in a company.
1. A person shall not be eligible for appointment as a director of a
company, if —
(a) He is of unsound mind and stands so declared by a competent court;
(b) He is an undischarged insolvent;
(c) He has applied to be adjudicated as an insolvent and his application is
pending;
(d) He has been convicted by a court of any offence, whether involving
moral turpitude or otherwise, and sentenced in respect thereof to
impri sonment for not less than six months and a period of five years
has not elapsed from the date of expiry of the sentence:
(e) An order disqualifying him for appointment as a director has been
passed by a court or Tribunal and the order is in force;
(f) He has not paid any calls in respect of any shares of the company held
by him, whether alone or jointly with others, and six months have
elapsed from the last day fixed for the payment of the call;
(g) He has been convicted of the offence dealing with relat ed party
transactions under section 188 at any time during the last preceding
five years; or
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69 Directors of Companies Appointments and Qualifications (Sections.2, 149-183, 196, 203-205) 2. No person who is or has been a director of a company which —
(a) has not filed financial statements or annual returns for any continuous
period of three financ ial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon
or to redeem any debentures on the due date or pay interest due
thereon or pay any dividend declared and such failure to pay or
redeem continues for one year or more ,
6.5 APPOINTMENT OF DIRECTORS A director is a person duly appointed to the Board of a Company,
collectively called as Board or Board of Directors. The Board is
responsible for the management of affairs of a company. They have the
responsibility to act in the best interest of the company. Although,
directors act on behalf of the company but the individual acts done by a
director cannot bind the company, unless the director is authorized by a
Board Resolution. Act further states that no person should be ap pointed as
director who has not allotted a Director Identification Number along with
a declaration that he has not been disqualified to become a director under
the said Act.
A person shall be eligible for reappointment as a director provided, he is
not a r etiring director and further provides that his name should be
intimated to the Registered Office of the company with in at least 14 days
before the meeting.
The freedom for private company for an administration of the appointment
procedure of directors und er old act that is under Companies Act 1956 has
been removed.
A company which contravenes any provisions under this chapter/section,
the company and every officer of the company who shall be punishable
with fine which shall not be less than Rs. 50,000/ - and may be extended up
to Rs. 5,00,000/ -
Following are the modes of appointment of directors:
Appointment of First Director:
Provisions must be made in the articles of the company for an appointment
of First Director of the Company. Where no provision is ma de in the
articles of a company for the appointment of the first director, the
subscribers to the memorandum who are individuals shall be deemed to be
the first directors of the company until the directors are duly appointed and
in case of a One Person Com pany an individual being member shall be
deemed to be its first director until the director or directors are duly
appointed by the member in accordance with the provisions of this section .

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70 Nominee Director (Section 149 (7) ):
This section defines “nomine e director” as a director nominated by any
financial institution in pursuance of the provisions of any law for the time
being in force, or of any agreement, or appointed by any Government, or
any other person to represent its interests. Further it is stat ed that the
Nominee Director cannot be considered as an Independent Director in a
company.
Section 161(3) provides an authority to Board to appoint any person as a
director nominated by any institution in pursuance of the provisions of any
law for the ti me being in force or of any agreement or by the Central
Government or the State Government by virtue of its shareholding in a
Government company.
Additional Director Section [161(1)]:
As per the provisions made under Articles of Association of the Company
this Section 161(1) of the Companies Act, 2013 speaks about the
appointment of the additional director. The Board of Directors may
appoint an additional director to the Board only if articles provides for the
same. The additional director shall hold offic e from the date of
appointment till the date of the ensuing annual general meeting or the last
date on which annual general meeting should have been held, whichever is
earlier.
Independent Director Section [149(6)]:
An Independent Director is a non -executi ve director of a company and
helps the company in improving corporate credibility and governance
standards. Section 149 of the Companies Act, 2013 falls under chapter XI
Appointment and Qualification of Directors. Section 149 (6) An
independent director in relation to a company means a director other than
a managing director or a whole -time director or a nominee director.
For example: ABC Bank grants a loan of ¹ 25 lakhs to X Ltd. ABC Bank
appoints Mr. S as nominee director in A Ltd. Mr. S cannot become an
Independent Director in A Ltd.
Resident Director Section [149 (3)]:
The above section provides that “Every company shall have at least one
director who has stayed in India for a total period of not less than one
hundred and eighty -two days in the previo us calendar year.”
The resident Director will act as any other Director of the company. He
will be responsible as any other Director of the Company; as far as
operational control is concerned his insolvent is not considered. To fulfill
the statutory requi rement Resident director is usually appointed. He may
participate in Board Meetings of the company whenever required. Like
any other director the Resident Director is required to attend at least one
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71 Directors of Companies Appointments and Qualifications (Sections.2, 149-183, 196, 203-205) Alternate Director: [ S.161 (2)]:
The board may appoint a person as an alternate director if the articles
provides or a resolution passed in the General Meeting in this regard for
the same. An alternate director is appointed where an original director so
appointed remains outs ide India for a period of not less than 3 months.
The term of office of an alternate director shall vacate the office when the
original director returns to India or where the term of original director
expires before his return to India the term of alternat e director shall also
expires at that time.
Appointment of Directors in Casual Vacancy [Section 161(4)]:
1In case if, the office of any Director appointed by the Company in
General Meeting is vacated before his term of office expires in the normal
course, the resulting casual vacancy may, in default of and subject to any
regulations in the articles of the company, be filled by the Board of
Directors at a meeting of the Board which shall be subsequently approved
by members in the immediate next General Meeti ng. Any person so
appointed shall hold office only up to the date up to which the Director in
whose place he is appointed would have held office if it had not been
vacated. [Section 161(4)]
Casual Vacancy in the Office of Director happens under the follow ing
situations:
 Resignation by the Director
 Disqualification of the Director
 Death of the Director
 Insolvency of the Director
Woman Director: Section 149 (1) Second Provision, S. 152 (5) and
Rule 3
The said rule lays down the provisions relating to appoi ntment of Woman
Director are as under:
Every listed company; Every other public company having paid –up share
capital of one hundred crore rupees or more or turnover of Rs.300 crore or
more. Further is provides that the Woman Director should submit the
consent form No 112 along with the Director’s Identification Number
Provided by Central Government.
Any new company registered under this act should comply the provisions
of an appointment of woman director with in a period of 06 months from
the date of incor poration.

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72 Business Law - II
72 6.6 LEGAL POSITION OF DIRECTOR In the words of Bowen, L.J.:
“Directors are described sometimes as agents, sometimes as trustees and
sometimes as managing partners. But each of these expressions is used not
as exhaustive of their powers and responsibilities but as indicating useful
points of view from which they may for the moment and for the particular
purpose to be considered.”
In short it is dif ficult to express the legal position of the directors of a
company. The Companies Act makes no effort to define the exact
positions of the directors. Director is a multifaceted personality as at
various times been described by judges as agents, trustees or managing
partners.
1. Directors as trustees:
Trustee is a person whom the trust vested. He is a custodian of the funds
of the company. A trustee is a person in whom is vested the legal
ownership of the assets which he administers for the benefit of anothe r or
others. Directors are regarded as trustees of the company’s assets, and of
the powers that vest in them because they administer those assets and
perform duties in the interest of the company and not for their own
personal advantage. Case - Ramaswamy Iy er v/s. Brahmayya & Co. [1966]
1 Comp. LJ 107 (Mad.)
There is a contrast view in respect of the above discussion as a Trustee can
acquire property in his own name on behalf of the trust whereas director
cannot. Secondly director has to play multifaceted ro le while representing
the company to that of trustees.
2. Directors as Managing Partner:
In a company the management is in the hands of plural executives. So, the
directors are managing partners (the term partner used in the sense of the
Partnership Act). Even though substantial powers may be entrusted upon
directors or to an outsider, such a person has to act under the
superintendence, control and direction of the board of Directors.
Therefore, unlike in a partnership firm, no power can be delegated on a
single director as a managing partner. The principle of delegates non -
protest delegate, i.e., power once delegated cannot be further delegated, is
applicable to company management.
3. Directors as Agent:
That directors are agents is their first feature. As company is an artificial
person and it gets the work done through human agency. However,
directors being agents are not personally liable for their acts unless they
contravene the provisions of the Act as specifically mentioned in it.
Further a notice g iven to the agent is the notice to the principal, similarly
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73 Directors of Companies Appointments and Qualifications (Sections.2, 149-183, 196, 203-205) It is quite distinct from the principle of agency. The acts and intention of
its agents are the acts and intention of the body corporate. Even a company
can be held liable for the animus contended by its directors. Directors are
not agents of the members of the company.
4. 2Directors as Employee:
A director is elected by the shareholders in general meeting, and once so
elected, he enjoys well -defined rights and powers under the Act or the
articles. Even the shareholders who elect them cannot interfere with their
rights or powers except under certain circumstances. An employee
appointed by the company under a contract of service is a servant of the
company. He does not enjoy any powers other than those vested in him by
the employer, who can always direct his actions and interfere in his work.
As such directors are agents of the company but they are not employees or
servants of the co mpany. However, there is nothing in law to prevent a
director from accepting employment under the company under a special
contract which he may enter into with the company Case Law - R.R.
Kothandaraman v. CIT (1957).
Accordingly, where a director accepts em ployment under the company
under a separate contract of service, in addition to the directorship, he is
also treated as an employee or servant of the company. He shall, in such a
case, be entitled to remuneration and other benefits admissible to
employees, in addition to his remuneration as Director under the Act.
5. Directors as organs of corporate body:
In the case of Bath v. Standard Land Co. Ltd., Neville J. stated that the
board of directors are the brain of the company and a company does act
only thro ugh them.
Company is a body corporate and does not have its own mind or body to
act. In the case of Bath v. Standard Land Co. Ltd., Neville J . stated that
the board of directors are brain of the company and company does act
through them. If we consider a company as a human body, the directors
are the mind and the will of the company and they control the actions of
the company. On the other hand, organ of the body does not suffer from
any illness without its immediate effect on the whole body. The
concl usion of this is director actually works in different capacities at
different level to ensure that the company is being managed as per the
procedures laid down under law.
6.7 POWERS AND DUTIES OF DIRECTORS Section 166 of the Companies Act 2013 stipulates the following duties of
the directors of a Company:
1. A director must function in accordance provisions made in the
company’s Articles of Association.
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74 Business Law - II
74 2. A director must act in the best interests of the company’s
stakeholders, in good faith and promote the company’s aims and
objectives.
3. It is expected that a director shall use his independent judgment in
carrying out his responsibilities with du e care, skill and diligence.
4. A director should constantly be aware of potential conflicts of interest
and endeavor to avoid them in the best interests of the firm.
5. A director must verify that appropriate considerations have taken
place and that the transactions are in the company’s best interests.
6. Director has to assure that the company’s vigilance mechanism and
users are not prejudicially affected on such use.
7. Confidentiality of sensitive proprietary information, trade secrets,
technology, and undisclosed prices must be protected and should not
be released unless the board has approved it or the law requires it.
8. It is expected that the company’s director must not assign his or her
office, and any such assignment shall be invalid.
9. If a cor porate director violates the terms of this section, he or she will
be fined not less than one lakh rupees but not more than Rs.
5,00,000/ -
FIDUCIARY DUTIES OF DIRECTORS :
Fiduciary duties are basically relating with the concept of good faith, and
are owed t o the company as a result of the management control that
directors exercise over the Company. It is the duty of directors to act in the
best interest of the Company. Fiduciary duties are a Legal obligation and
cannot be waived in any manner.
a. Duty of Lo yalty. The most important fiduciary duty is the duty of
loyalty: The decision that taken place within the company should act
in the interests of the company, and not in the own interests of
directors.
b. Duty of Care : Directors, in circumstances where the y do not have a
clash of interest, is the duty of care , the duty to pay attention and to
try to make good decisions in the interest of the company.
c. Duty of Disclosure of the facts: Director is bound to disclose all the
facts to the members, in the in terest of the company.
d. Must act in accordance with the provisions of Articles of
Association: It is expected that the director must act in accordance
and the provisions laid down in the Articles of Association of the
company.
e. No Secret Profit: Director of the company shall not achieve or
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75 Directors of Companies Appointments and Qualifications (Sections.2, 149-183, 196, 203-205) sacrifice of the company. If any director is found guilty of making any
undue gain, he shall be liable to compensate the amount to the
company which is equivalent to the gain or benefit earned.
If a corporate director violates the terms of this section, he or she will be
fined not less than one lakh rupees but not more than Rs. 5,00,000/ -
POWERS OF BOARD OF DIRECTORS :
There are also certain pow ers of the board that those resolutions can only
be passed by calling a board meeting. The said provisions are applicable
under Section 175, Companies Act 2013 .
i. To make calls on shareholders for unpaid money in respect of their
shares.
ii. To Issue sec urities and shares
iii. To borrow monies
iv. To approve the financial statement
v. To approve amalgamation merger and reconstruction arrangement of
the companies.
vi. To Invest the funds of the company
vii. To grant loans or to provide securities in respec t of loans.
viii. To diversify the business of the company
ix. To take over a company.
x. To authorise the buyback of securities and shares
6.8 KEY MANAGERIAL PERSONNEL (SECTION 2, 196, 203-205 ) Key Managerial Personnel means to a group of people who are in charge
of maintaining the operations of the company. Key Managerial Personnel
are persons who have authority and responsibility for planning, directing
and controlling the activities of enterprise. These group includes Chief
Executive Office, Chief F inancial Officer, Company Secretary, Whole
Time.
According to Section 2 (51) “key managerial personnel”, in relation to a
company, means :
“(i) The Chief Executive Officer or the managing director or the manager;
(ii) The company secretary;
(iii) The whol e-time director;
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76 Business Law - II
76 (v) Such other officer, not more than one level below the directors who is
in whole -time employment, designated as key managerial personnel
by the Board; and
(vi) Such other officer as may be prescr ibed;”
Companies are required to appoint Key Managerial Personnel
a) Any listed companies
b) Any public limited company which have paid -up capital of Rs. 10
Crores or above. Those companies are required to appoint full -time
managerial person as Managing di rector of the company or CEO or
full-time director; and Chief Financial Officer (CFO); and Company
Secretary
Key Role & Responsibilities of Managing Director /Whole time
Director/ Manager in a Company:
a) Managing Director is assigned with considerable p owers to manage
the affairs of the company as per the provisions under memorandum
and articles of association of the company.
b) To supervise the company’s operations, financial performance,
investments, and business and to give systematic guidance and
direction to the board to see that the company achieves aims and
objectives.
c) Developing and implementing business plans to improve cost -
effectiveness.
d) Maintaining positive relations with business partners, shareholders,
and authorities.
e) Delegating e xecutives in their duties.
f) Assessing, managing, and resolving ambiguous developments and
circumstances.
g) Authenticating documents and other financial -statements proceedings
contract on behalf of company.
h) Every Key managerial personnel is required t o disclose its interest in
any company before the board within 30 days from date of its
appointment



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77 Directors of Companies Appointments and Qualifications (Sections.2, 149-183, 196, 203-205) 6.9 CONDITIONS AND QUALIFICATIONS FOR APPOINTMENT OF MANAGING DIRECTOR, WHOLE
TIME DIRECTOR OR MANAGER (KMP) (SECTION
196): The tenure of appointments o f KMP shall be for a term not exceeding 5
years at a time. Company must not appoint any person KMP who is below
the age of twenty -one years or has attained the age of seventy years.
Following person or group of persons are not qualified to get
appointed as KMP
The person who has been undischarged insolvent declared by the
competent court.
The person at any time suspended payment to his creditors;
The person at any time has been convicted by a court in any offence and
sentenced for a period of more than six months
The person had been sentenced to imprisonment for any period, for any
acts as specified under Schedule V of the Companies Act, 2013
The person had been detained for any period under the “Conservation of
Foreign Exchange and Prevention of Smuggl ing Activities Act”
3Penalty amount in case of contravention with provisions of law:
Any company or its officer who contravenes the provisions under the Act
Key managerial personnel shall be held liable for penalty.
Every defaulting company shall be liabl e to pay penalty amount of Rs.
100000 which may extend to amount of Rs. 500000.
In case of director or any officer in default penalty amount may extend to
Rupees Fifty thousand. In case of continuing default, the penalty may
extend to Rupees One thousand per day till default continues
6.10 SUMMARY Director Identification Number (Section 153 - 159 and Rules 2, 4)
Who can become a director? (Qualifications and Disqualifications)
1. A person shall not be eligible for appointment as a director of a
company, if— (a) he is of unsound mind and stands so declared by a
competent court; etc
2. No person who is or has been a director of a company which — (a)
has not filed financial statements or annual returns for any continuous
period of three financial years;etc
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78 Business Law - II
78 Modes of appointment of directors: Appointment of First Director:
Nominee Director Additional Director ,Independent Director,
Resident Director ,Alternate Directo r, Appointment of Directors in
Casual Vacancy , Woman Director
LEGAL POSITION OF DIRECTOR: Directors as trustees, Directors
as Managing Partner: Directors as Agent ,4Directors as Employee:
Directors as organs of corporate body.
POWERS AND DUTIES OF DIR ECTORS: 1. A director must
function in accordance provisions made in the company’s Articles of
Association. . director must act in the best interests of the company’s
Register of Companies: Foreign Register, Closure of register of
members or debenture hold ers or other security holders.
Key Managerial Personal Includes:
(i) The Chief Executive Officer or the managing director or the manager;
(ii) The company secretary;
(iii) The whole -time director;
(iv) The Chief Financial Officer; and
(v) Such othe r officer, not more than one level below the directors who is
in whole -time employment, designated as key managerial personnel
by the Board; and
(vi) Such other officer as may be prescribed ;”
6.11 QUESTIONS 1. What are the types of directors?
2. How dir ectors are appointed - Explain in detail the appointment
process and qualification and disqualifications of directors.
3. Who can be a “director” of a company?
4. Explain fully the provision of the companies act, 2013 about DIN
5. Explain the Legal Position s of the Director of a Company
6. Explain the key role and responsibilities of Managing Director or
Whole Time Director of the company
7. Explain the Criteria for an appointment of Key Managerial Personnel
in the company.
*****
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79 7
MEETINGS
(SECTIONS.96 -122, 173 -176)
Unit Structure
7.0 Objectives
7.1 Introduction
7.2 Meaning and Definition
7.3 Annual General Meeting (A GM)
7.4 Extra Ordinary General Meeting
7.5 Meetings by Tribunal
7.6 Class Meeting
7.7 Summary
7.8 Questions
7.0 OBJECTIVES After studying the unit students will be able to:
 Understand the Meaning and Definition of Meeting
 Understand the procedures to be followed to conduct meetings of the
company.
 Understand the legal positions of directors.
 Understand powers an d duties of directors.
 Understand the functioning of Key Managerial Personnel
7.1 INTRODUCTION Meeting is not defined under any provisions of Companies Act of 2013,
but taking references from common business and market parlance meeting
generally defined as a gathering or getting together of a number of persons
for transacting any lawful business and to arrive at proper fruitful
conclusion. There must be at least two persons to form a meeting.
7.2 MEANING AND DEFINITION Meetings:
Board of Directors Meeting:
Board meetings are meetings at the top level, i.e. a meeting where board
members or their representatives are present. A company is not a living
person but it is a non -living person which acts through the human agency,
and such agencies are taking the decisions as per time required. All
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80 Business Law - II
80 act as agents through which the company takes actions as well as makes
decisions.
The Board of Directors is the highest authority in a company an d they
have the powers to take all major decisions for the company. The board is
also liable for managing the affairs of the entire company.
The first board meeting as far as Public Limited Company is concerned
should be held within 30 days of the incorpor ation or registration. In the
case of a Public Limited Company, the first board meeting has to be held
within the first 30 days. The Board should keep in mind that there should
not be a gap of more than 120 days between two meetings.
In the case of Small Companies or one person company , at least two
meetings must be held, one in each half of the financial year. Additionally,
the gap between the two meetings must be at least 90 days. In a
circumstance where the meeting is held at a short notice, at least o ne
independent director must be attending the meeting.
Quorum for the Board Meeting:
The quorum for the Board Meeting refers to the minimum number of
members of the board that are required to conduct lawful meeting. Section
174 of Companies Act, 2013, prov ides that the minimum number of
members of the board required for a valid meeting is 1/3rd of a total
number of directors. However, a minimum of two directors must be
present. Such rules do not apply to One Person Company,
Notice of Board Meeting:
It cont ents a document that are sent to all the directors of the company for
conveying the Board Meeting. This document tells about the details of the
meeting scheduled viz, the venue, date, time, and agenda of the meeting.
A notice of at least Seven days before the actual day of conduction of
meeting, required to be sent to every director of companies. Of all type of
companies.
7.3 ANNUAL GENERAL MEETING (AGM) Annual General Meeting Under the Companies Act, 2013 :
An interaction An Annual General Meeting (AGM) i s held to have
communication and interaction between the management and the
shareholders of the company. The Companies Act, 2013 makes it
mandatory to hold an annual general meeting to discuss the important
matters pertaining to appointment of auditors, y early results of the
company, etc. A company should observe the procedures under the
Companies Act, 2013 to conduct the Annual General Meeting.
All companies except one person company (OPC) should hold an Annual
General Meeting after the end of each fina ncial year. A company must
hold its AGM within a period of six months from the end of the financial
year. However, in the case of a first annual general meeting, the company munotes.in

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81 Meetings (Sections.96-122, 173-176) can hold the AGM in less than nine months from the end of the first
financial year . In such cases where the first AGM is already held, there is
no need to hold any AGM in the year of incorporation. Do note that the
time gap between two annual general meetings should not exceed 15
months.
An annual general meeting (AGM) under Companies A ct, 2013 is a yearly
meeting of company’s shareholders to receive, confirm, accept the Annual
Financial Statements ending on 31st March every year along with the
Board of Directors Report and Report of the Auditors thereon. Matters
that are discuss in AGM are:-
 Dividend declaration to shareholders.
 Appointment of directors to replace the retiring directors.
 Appointment of auditors and deciding the auditor’s remuneration.
 Apart from the above ordinary business, any other business may be
conducted as a spec ial business of the company.
Provisions has made under Section 96 of the Companies Act, 2013, in
respect of conduct of Annual General Meeting of the Company.
Every company other than a One Person Company shall in each year hold
in addition to any other m eetings, a general meeting as its annual general
meeting and shall specify the meeting as such in the notices calling it, and
not more than fifteen months shall elapse between two annual general
meeting of a company. The first annual general meeting of the Company
should be held within a period of nine months from the date of closing of
the first financial year of the company and in any other case, within a
period of six months, from the date of closing of the financial year.
Provided that if a company hold s its first annual general meeting as
aforesaid, it shall not be necessary for the company to hold any annual
general meeting in the year of its incorporation.
NOTICE OF AGM:
The company must serve a notice not less than before 21 days’ to its
members i n writing /by post or in electronic mode. The notice should
include the place, the date and day of the meeting, the hour at which the
meeting is planned to conduct. The notice should also contain the business
to be conducted at the Annual General Meeting.
A company should send the notice of the AGM to the following: -
 All members of the company including their legal representative of a
deceased member
 Assignee of an insolvent member.
 The statutory auditor(s) of the company.
 All director(s) of the company .
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82 Business Law - II
82 QUORUM OF AGM:
In the case of a private company, the quorum for Annual General Meeting
in case of Public Company are as under: - .
 If the number of members is within thousand. Five members should
be present at the meeting.
 If the number of members are m ore than one thousand but within five
thousand then minimum Fifteen members present at the meeting.
 Thirty members present at the meeting if the number of members is
more than five thousand .
 In case the quorum for the meeting is not present within half an hour
from the time scheduled, the meeting will be postpone to the same
day in the next week for the same time and at the same venue or
place.
Minutes of Annual General Meeting:
A formal written record of or proceedings of meetings are known as
‘Minutes’. The said record may be in physical or electronic form in the
minutes book. Every company has to be prepared a Minutes of Annual
General Meeting mandatorily. The minutes should be signed and entered
in the minute book within thirty days from the AGM. The Minutes book
will be kept at the Registered Office of the company or at such other place
permitted by the Board.
PROXIES:
Meaning:
Member of the company is Member of the company entitled to attend the
meeting and vote at the meeting has a right to appoi nt another person as a
proxy to attend and vote at the meeting on his behalf.
Proxy shall have not a right to speak at the meeting and shall have right to
vote except on a poll. A Person appointed as a proxy shall act on behalf or
favour of such number of member(s) not more than fifty. The proxy form
(MGT -11) must be deposited with the company shall not be a longer than
a period of 48 hours. Section 8 company for “promotion of commerce,
art, science, sports, education, research, social welfare, religion, charity,
protection of environment or any such other object”, no member of this
company shall have right to appoint proxy unless shall other person is also
member of such company. Company, at its own expense cannot invite to
its member for appointing proxy .
If there is any default made in fulfilling with this provision, penalty of
Rs.5000 will be imposed as per the above provision.

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83 Meetings (Sections.96-122, 173-176) Voting through Electronic Mode:
Relevant Rules / Procedure prescribed in the Companies
(Management and Administration) Rules , 2014 as under:
As per the relevant provisions of Companies Act 2013 Rules 14 every
listed company or Company having not less than one thousand
shareholders may pass any resolution by electronic voting system in
accordance with the provisions of this rule .
Such companies shall provide to its members the facility to exercise their
right to vote at general meetings by way of electronic modes. A member
may exercise his right to vote at any general meeting by electronic method
and company
i. The notice of th e meeting shall be sent to all the members, auditors of
the company, or directors either: -
 by speed post or registered post OR
 through courier service
 through electronic modes like registered e -mail id
ii. The notice shall also be placed on the website of the company
iii. The notice of the meeting shall distinctly mention that the business
which may be transacted via electronic voting system and the
company is providing facility for voting by electronic means and
distinctly indicate the process and trai ning for voting by electronic
means and the time schedule including the time period during which
the votes may be cast and shall also provide the login ID and create a
facility for generating password and for maintaining security and
casting of vote in a secure manner.
Voting through Postal Ballot: Relevant Rules / Procedure prescribed
in the Companies (Management and Administration) Rules, 2014 as
under:
(Section 110 of the Companies Act, 2013)
Postal ballot includes voting by post or through electroni c modes within
a period of thirty days from the date of dispatch of the notice meeting.
Where a company is required or decides to come up with any resolution
by way of postal ballot, it shall send a notice to all the shareholders, along
with a draft resolu tion containing the reasons there for and requesting
them to send their consent or discord in writing on a postal ballot.
The notice shall be sent either:
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84 Business Law - II
84  Through courier service for ease of the communication of the c onsent
or discord of the shareholder to the resolution within the said period
of thirty days.
 Through electronic means like registered e -mail id OR
i. Scrutinizer shall be appointed who is not in employment of the
company so that the voting process shall b e in a fair and transparent.
ii. If a resolution is consented to by the required majority of the
shareholders by means of postal ballot including voting by electronic
means, it shall be like to have been duly passed at a general meeting
called for the pu rpose.
iii. Postal ballot received back from the shareholders shall be kept in the
safe custody of the scrutinizer and after the receipt of consent or
discord of the shareholder in writing on a postal ballot, the ballot
paper should not be discarded or t he identity of shareholder should
not be disclosed.
iv. A report shall be submitted by the scrutinizer at the earliest after the
last date of receipt of postal ballots but not later than seven days
thereof.
v. All other papers and the postal ballot relat ing to the voting should be
kept in the custody of the Scrutinizer until the chairman’s approval is
received. On the signing the minutes by the chairman, the same and
other papers should be returned to the registrar safely.
vi. The consent or discord re ceived after thirty days from the date of
issue of notice shall be treated as if reply from the member has not
been received.
vii. The results shall be declared by declaring it, along with the
scrutinizer’s report, on the website of the company.
The resolu tion shall be likely to be passed on the date of at a meeting
convened in that behalf.
7.4 EXTRA ORDINERY GENERAL MEETING: (Section 100-117) Special General Meeting can be known as an ‘Extra Ordinary General
Meeting’ Matters requiring immediate considerat ion by members, which
cannot be postponed till next Annual General Meeting, to overcome such
emergencies, the companies can facilitate for holding of emergency
meetings of the members which are termed as Extra Ordinary General
Meeting.
 Section 100 of th e Companies Act, 2013 with rule 17 of The
Companies Rules, 2014 associated with matters related to holding
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85 Meetings (Sections.96-122, 173-176)  Like Annual General Meeting there is no fixed time for holding an
Extra -ordinary General meeting. However, th ere are some
transactions which are urgent which cannot made wait or postpone till
next Annual General Meeting, then an Extra -ordinary General
meeting can be called which gives a company freedom to transact
business in whom the consent of shareholders/ m embers are required.
 As per the Provisions under Companies Act, 2013 there is no specific
reasons or purpose of business for which the EGM is called.
However, an EGM might be called to deal with any of the following:
• Matter on whom approval of members is /are required
• Removal of Auditor
• Related party transactions
• Removal of Director
• Any matter that can not wait until the next shareholders meeting.
 The notice for Extra -ordinary General meeting has to be served at
least twenty -one days before the conduct ion of actual day of meeting.
 1An Extra -ordinary General meeting (EGM) can be called by: -
• Company or
• Requisition made by,
a) In the case of a company having a share capital, such number of
members who hold, on the date of the receipt of the requisition, not
less than one -tenth of such of the paid -up share capital of the
company as on that date carries the right of voting;
b) In the case of a company not having a share capital, such number of
members who have, on the date of receipt of the requisition, not less
than one -tenth of the total voting power of all the members having on
the said date a right to vote
c) A meeting by the requisitionists shall be called and held in the same
manner in which the meeting is called and held by the Board.
d) Any reasonabl e expenses incurred by the requisitionists in calling a
meeting under sub -section (4) shall be reimbursed to the
requisitionists by the company and the sums so paid shall be deducted
from any fee or other remuneration under the Companies Act, 2013
payable to such of the directors who were in default in calling the
meeting.
1 https://www.cagmc.com/extraordinary -general -meeting -
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86 Business Law - II
86 7.5 MEETING BY TRIBUNAL (SECTION 97 - 99) Tribunal means National Company Law Under Section 2(90) of
Companies Act. Tribunal can call a meeting under following
circumstances.
1 https://www.cagmc.com/extraordinary -general -meeting -
 An application under section 97 for calling or obtaining a direction to
call the annual general meeting of the company shall be made by any
member of the company.
 A Company whether private or public, limited or unlimited, having a
share capital or not, fails to hold its AGM within the prescribed time
then the Tribunal under Section 97 of the Act of 2013 is empowered
to call or direct the calling of AGM of such company on the
application of any member of the company and further order for any
measures or directions as it deems fit awarded by the Tribunal . Such
meeting held under the directions of the tribunal shall be deemed to be
an AGM of such company.
7.6 CLASS MEETING Class meeting is a meeting of a group of shareholders, debenture holders,
creditors etc having identical interests. Such meetings is convened by a
particular class of shareholders only and only if they think that their rights
are being altered or if they want to vary their attached rights.
7.7 SUMMARY MEETINGS: Board of Directors Meeting, Quorum for the Board Meeting,
Annual General Meeting Under the Companies Act, Notice of Annual
General Meeting and its Contents, Quorum required f or Annual General
Meeting. Minutes Of Annual General Meeting: Provisions for Proxies:
Extra Ordinary General Meeting, Class Meeting, Meetings by Tribunal.
Class Meeting.
Voting through Electronic Mode:
Relevant Rules / Procedure prescribed in the Companie s (Management
and Administration) Rules, 2014.
Voting through Postal Ballot: Relevant Rules / Procedure prescribed in
the Companies (Management and Administration) Rules, 2014
7.8 QUESTIONS 1. Define the term ‘Meeting’ What are the various types of prov isions of
meetings have been made under Companies Act 2013.
2. Explain the procedure for conducting an Annual General Meetings munotes.in

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87 Meetings (Sections.96-122, 173-176) 3. What are the legal formalities to conduct the voting on different
modes?
4. What is extra -ordinary general meeting (EOGM). Wh at are the
procedure and requirements to hold Extra Ordinary General Meeting?
5. Write a Short Note: -
a) Postal Ballot
b) Tribunal meeting
c) Quorum
d) Prox ies


*****
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88 MODULE III
THE INDIAN PARTNERSHIP ACT 1932

8
FORMATION OF PARTNERSHIP AND
TYPES OF PARTNERSHIP
Unit Structure
8.0 Objectives
8.1 Introduction
8.2 Meaning and Definition
8.3 Who May Be a Partner
8.4 Essential Elements of Partnership
8.5 Partnership Dee d or Articles of Partnership
8.6 Test of Partnership
8.7 Types of Partners
8.8 Types of Partnership
8.9 Distinguish Between. Partnership Firm With Joint Family Business,
Company And Hindu Undivided Family Business
8.10 Summary
8.11 Questions
8.0 OBJ ECTIVES After studying the unit students will be able to:
 Understand the meaning of Partnership and Partnership deed.
 Explain the features of Partnership
 Distinguish between Partnership and co -partnership, HUF and
Company.
 Discuss about Dissolution of Par tnership Firm
8.1 INTRODUCTION Partnership form of business organisation have come into existence due to
some of the limitations of sole trading concern such as limited capital,
managerial ability etc.
Formerly partnership business was regulated by Indian contract act 1872
but subsequently authorities found it necessary to have a separate law for
this purpose, as a result of which Indian partnership Act 1932 came into
effect. The act was established to define and modify as and when required. munotes.in

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89 Formation of Partnership and Types of Partnership Partnership der ived from the word ‘part’ and implies sharing. Persons
come together to share profits and properties of the business. The
relationship of partnership arises from contract and not status.
8.2 MEANING AND DEFINITION Definition:
Section 4 of the Act defines Partnership as “the relation between the
persons who have agreed to share the profits of business carried on by all
or any of them acting for all”. Person who has entered into partnership
with one another are called individually partners and collectively a firm.
The name under which their business is carried on is called firm name.
8.3 WHO MAY BE A PARTNER 1. INDIVIDUAL – An individual who satisfies all conditions required
for a valid contract can become a partner.
2. MINOR – A minor cannot become a partne r. He may be entered into
partnership business with consent of all other partners.
3. LUNATIC – A person of unsound mind is not competent to contract
and therefore cannot become a partner.
4. CORPERATE BODY – A corporate body being an artificial person
can become a partner and can enter into partnership agreement.
5. A FIRM -A firm cannot be a partner of another firm, though its
partner can be in their individual capacity.
WHO ARE NOT PARTNERS:
 The members of Hindu undivided family carrying in family busines s.
However partnership contract inter se between members of family is
permissible.
 Lender of the money receiving a rate of interest from any person
engaged in business or about to engage in business.
 An agent engaged in business receiving commission from p rincipal.
 Widow or a child of deceased partner receiving a portion of profit as
annuity.
 A previous owner or part owner of the business selling his business
along with the good will and receiving a portion of the profit in
consideration of sale.
 Joint or c o-owners of property sharing profits arising from the
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90 Business Law - II
90 8.4 ESSENTIAL ELEMENTS OF PARTNERSHIP Following are the elements of Partnership:
1. Two or More Persons:
Minimum two persons are required to form a partnership. In case of
banking business max imum number of partners allowed is ten, while in
any other business the numbers cannot exceed 20.
2. Competency:
All partners must have attained an age of majority and must be of sound
mind to enable him to enter into contracts.
3. Agreement:
There has got to be an agreement to form partnership. This agreement may
be expressed or implied. Express agreement arises out of words spoken or
written. Similarly implied agreement arises out of the conduct and custom
of business. Section 5 of the act states “The rel ation of the partnership
arises from contract and not from status.
4. Lawful business:
Term business refers any lawful activity, which if successful would result
in profits. It include every trade, occupation and profession. It is not
necessary that a busi ness be permanent undertaking. A Partnership may
exist even for a single venture example: X and Y are partners for
producing a film.
5. Profit Sharing:
An agreement entered into by all the partners concerned must be for
sharing the profit of the business. Profit means net profit arrived at after
providing for all expenses. It must be remembered that profit sharing is
must irrespective of profit -sharing ratio. However, it must be noted that
near sharing of profits between persons would not necessarily determ ine
the existence of partnership. For Example : Joint owner of a shop who
shared the rent of the shop will not be called partners.
6. Mutual Agency between Partners: Another important aspect of the
definition of a partnership is that the business must be carried on by all the
partners or by any (one or more) acting on their behalf of them, i.e., joint
agency
8.5 PARTNERSHIP DEED OR ARTICLES OF PARTNERSHIP Partnership may be expressed or implied. Express Partnership arises by
words spoken or written. Implie d Partnership may arise from conduct of
the parties. Partnership agreement must satisfy all conditions of valid
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91 Formation of Partnership and Types of Partnership Sometimes minor may be admitted to the benefits of the partnership with
the consent of all the partners. As relationship of partners to one another is
that of agency, no consideration is required to create partnership. The
documents which contain the terms of partnership as agreed among the
partner is called partnership deal.
Following are the contents or provisions of the deed:
a) Name of the firm
b) Name and address of all partners
c) Nature and place of business
d) Duration of the partnership.
e) Amount of capital of each partner with profit sharing ratio.
f) Interest on drawin gs and Interest on capital.
g) Interest on loan advanced by partner.
h) Salary or commission payable t any partner.
i) Method of valuation of goodwill in case of admission, retirement or
death of a partner.
j) Settlement of account in case of retirement or death of a partner or
dissolution of a firm.
8.6 TEST OF PARTNERSHIP The true test of a partnership is the existence of a Mutual Agency. There
are other circumstances where the sharing of profit exists but there is no
partnership. But if an agency exists between the parties who run a business
together and share profits it will be deemed that a partnership exists.
Following three tests must be undertaken to determine whether or not a
group of persons doing lawful activity constitute partnership or not.
1. Agreement to share profits:
Sharing of profit is prima facie evidence of existence of partnership. The
term profits mean net profit i.e surplus left after deducting all expenses
paid or payable. In what ratio profit is to be shared is immaterial.
2. Mutual agency:
U/S 18 of the Indian partnership act a partner is both agent and principal.
It means each partner is both agent and a principal. A partner is an agent
of the other partner in the sense that by his act he can bind other partners.
He is principal in the sense that he can be held liable for the acts of the
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92 Business Law - II
92 3. Intention of parties:
The intention of the partners may be gathered from their conduct, course
of dealings, circumstances of their entering into business.
8.7 TYPES OF PARTNERS A partnership is when two or more people join together do engage in a
particular venture and share the profits carried on from such venture or
business. However, one must not always assume that all partners
participate in the work or profits or even liabiliti es of the firm equally. In
fact, there are various types of partners based on the degree of their
liability, or their involvement in the firm.
1. Active Partner:
An Ostensible Partner or an active partner first type of partner. As the
name suggests he ta kes an active part in the firm and carrying of the
business activity. He performs on the daily business on behalf of all the
partners. This means he acts as an agent of all the other partners on a day -
to-day basis and with regards to all routine business o f the firm.
2. Sleeping Partner:
This is a partner that does not take actual part in the daily functioning, i.e.
he does not take an active part in the daily activities of the firm. He is
bound by the action of all the other partners.
He will continue to s hare the profits and losses of the firm and even bring
in his share of capital like any other partner. If such a dormant partner
retires, he need not give a public notice of the same.
3. Nominal Partner
This is a partner that does not have any significant interest in the
partnership. So, in essence, he is only lending his name to the partnership.
He will not make any capital contributions to the firm, and so he will not
have a share in the profits. But the nominal partner will be liable to
outsiders and th ird parties for acts done by any other partners in the
partnership.
4. Partner by Estoppel:
When a person holds out to another that he or she is a partner of the firm,
either by his words, actions or conduct then such a partner cannot deny
that he/she is not a partner. This actually means that though such a person
is not a partner he/she has represented himself /herself as such, and so he
becomes partner by estoppel.
5. Partner in Profits Only:
Such types of partners will only share the profits of the firm , he will not be
liable for any liabilities. Even when dealing with third parties he will be munotes.in

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93 Formation of Partnership and Types of Partnership liable for all acts of profit only, he will not share any of the liability of the
firm.
6. Minor Partner:
A minor cannot be a partner of a firm according to the Co ntract Act.
However, a partner can be admitted to the benefits of a partnership if all
partner gives their consent for the same. He will share profits of the firm
but his liability for the losses will be limited to his share in the firm.
Such a minor partn er on attaining majority has six months to decide if he
wishes to become a partner of the firm. He must then declare his decision
by giving a public notice. He will have to give the public notice in the
circumstances whether he continues as a partner or d ecides to retire.
8.8 TYPES OF PARTNERSHIP 1. Partnership for a Fixed Term:
It is a partnership where at time period is fixed. Such a partnership gets
dissolved at the expiry of the time period. Before the fix period it may be
dissolved by mutual consen t. However, if it continues after the fix period
it becomes partnership at will
2. Particular Partnership :( Section 8):
Where two or more persons agree to do business in a particular adventure
or undertaking such partnership is called particular partnersh ip.
E.g. X & Y enter into partnership for producing advertising film.
3. Partnership at Will:
It is a partnership in which duration is not fixed and can be dissolved by
any partner by giving a notice. The firm may be dissolved by any partner
by giving 14 d ays advance notice in writing to all the other partners
indicating his intention to dissolve the firm.
8.9 DISTINGUISH BETWEEN PARTNERSHIP FIRM WITH JOINT FAMILY BUSINESS, COMPANY AND
HINDU UNDIVIDED FAMILY BUSINESS 1. Distinguish Between Partnership and C o-ownership : Partnership Co ownership 1 Business: To carry on business is an essential element of partnership. Co ownership may exist without carrying on any business. 2. Mutual agency: There exist mutual agency among the partners of the firm. No mutual agency exists among co owners munotes.in

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94 Business Law - II
94 3. Creation: Partnership is created by an agreement Co ownership is created by an agreement or by law or by virtue of status. 4. Profit: An agreement to share profit is essential element of partnership. Sharing 5. Lien: A partner has a lien on the property of the firm owned in common Co ownership has no lien on the property owned in common. 6. Partition of property: A partner cannot demand the partition of property of the firm. A co-owner is entitle to claim partition of property.7 7. Agreement: Partnership arises from an agreement 8. No of partners: Minimum 2, maximum 10 for banking, 20 for other business. There is no maximum limit of co owners.
2. Distinguish Between Partnership and Company : Partnership Company 1. Meaning: Partnership is the relationship between the persons who have agreed to share profits of the business carried on by all or any one of them acting for all. A company means a company formed and registered under company’s act or an existing company. 2. Legal person: A firm is not a legal entity. A company is a legal person created in the eye of a law. 3. Liability: liability of a partner is unlimited. Even personal property of the partner is liable to settle claim of creditor. In case of company the liability of the member is limited to the extent of unpaid amount on calls. 4 Transfer of share: in a firm a partner cannot his share without the consent all the partners. In a company shareholder can transfer his shares subject to the provision of A.A. 5 Agency : every partner is an agent of other partner. Shareholder of the company is not an agent of the company. 6 Registration: registration of firm is not compulsory under partnership act 1932. Registration of company is compulsory under companies act 1956. 7 Management: Management vests in the hands of the partners except in the case of sleeping partner Management 8 Creditors: Creditors of the firm are also the creditor of the partners individually as well. Creditors are only the creditors of the company and not 9 Accounts: Accounts of the partnership need not be audited Accounts munotes.in

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95 Formation of Partnership and Types of Partnership by the auditors 10 Ownership of property: The property of the Firm collectively belongs to the partner. The property of the company, belongs to the company, and not to the shareholders 11 Effect of death: In case of a death or insolvency of a partner firm gets dissolved, unless there is contract to the contrary. In case of company, death or insolvency of a member of the company does not results in to dissolution of the company. 12 Disposal of property: A partner can dispose the property of the firm A shareholder cannot dispose of the property of the company. 13 No of members: Minimum 2, maximum 10 in case of banking and 20 in case of general business. In case of private c ompany
maximum 50 members and
public company can have any
number of shareholder. 14 Existence: Partnership has no perpetual or continuous life. Company has long and stale life

3. Distinguish Between Partnership and HUF : Partnership Hindu undivided Fami ly 1 Meaning: partnership is the relationship between the persons who have agreed to share profits of the business carried on by all or any of the acting for all. A joint Hindu family which carries on business handed down from its ancestors. 2 Agreement: It can arise only by an agreement of the partner It arises by the operation of the law. 3 Admission of new member: A new partner can be admitted in the partnership, only with the consent of all the partners. A person becomes member only by birth in the family. 4 Numbers: maximum 5 Mutual agency: There exist mutual agency among the partners i.e. all is acting for one and one is acting for all. There is no such agency relationship between members of the family. The karta i.e. head or manager of the family is the only representative of the family. 6 Implied authority: Every partner has an implied authority to bind the firm by his acts done in the ordinary course of the business. Only karta has an implied authority to bind the family by his acts. 7 Liability: A partner is personally liable for the business obligation of the firm. The share of each partner in the property and profits along with his private A member is not personally liable for the business obligation of the family. Only his share of profits and property in the family is liable for discharge the debts munotes.in

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96 Business Law - II
96 property is liable for the discharge of the debts of the firm. of the family. 8 Dissolution/partition: A partner has right to demand for dissolution of firm. A partner has right to demand for dissolution of firm. 9 Death/insolvency: Firm gets dissolved on death or insolvency of any one partner. It is not dissolved on the death or insolvency of any of the members.
8.10 SUMMARY Partnership: Section 4 of the Act defines Partnership as “the rela tion
between the persons who have agreed to share the profits of business
carried on by all or any of them acting for all.
Who can become a Partner: Individual, Body Corporate,
Who can not become a Partner in Partnership: The members of Hindu
undivided family carrying in family business. Lender of the money
receiving a rate of interest from any person engaged in business or about
to engage in business. An agent engaged in business receiving commission
from principal. etc
Essentials of Partnership: Two Or More Persons: Competency:
Agreement: Profit Sharing: Mutual Agency between Partners:
PARTNERSHIP DEED OR ARTICLES OF PARTNERSHIP
Partnership Deed: Meaning: Partnership Deed is nothing but an agreement
between the Partners in respect of the Partnership.
Contents:
a) Name of the firm, Name and address of all partners, Nature and place
of business, Duration of the partnership, Amount of capital of each
partner with profit sharing ratio. etc
Types of Partnership: Agreement to share profits: Mutual agency:
Intention of parties:
Types of Partners: Active Partner, Sleeping Partner, Nominal Partner,
Partner by Estoppel, Partner in Profits Only, Minor Partner
Types of Partnership: Partnership for a Fixed Term: Particular
Partnership: Partnership at Will:
8.11 QUESTIONS 1. State and Explain the concept of partnership and essential elements of
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97 Formation of Partnership and Types of Partnership 2. How the Partnership Firm can be formed? State types of Partnership?
3. What are types of partners?
4. “Mutual Agency’ is an essence of the Partnership’ Expl ain this
statement.
5. Distinguish between Partnership and Company
6. Distinguish between Partnership and Joint Hindu Family Business.
7. Write Short Note on
a. Distinguish Partnership and co -ownership
b. Public notice
c. Partnership Deed
d. Who can b ecome a partner in partnership?

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98 9
REGISTRATION OF FIRMS AND
CONSEQUENCES OF NON -
REGISTRATION
RELATIONS AMONST THE PARTNERS
AND DISSOLUTION OF FIRM
Unit Structure
9.0 Objectives
9.1 Introduction
9.2 Consequences of Non - Registration of Partnership.
9.3 Rights, Duties and Liabilities and Authority of Partners
9.4 Rights of a Partner
9.5 Duties of Partners
9.6 Liabilities of Partners
9.7 Implied Authority of Partner
9.8 Mutual Relationship of Partners to Each Other
9.9 Relationship of Partners to Third Persons
9.10 Minor’s Positio n in Partnership
9.11 Minor Become A Full -Fledged Partner.
9.12 Rights of the Minor If He Elects Not to Become A Partner
9.13 Effects or Consequenses of Dissolution
9.14 Public Notice
9.15 Summary
9.16 Questions
9.0 OBJECTIVES After studying the unit students will be able to:
 Understand importance of registration of Partnership.
 Understand the consequences of non -registration of firm
 Understand rights duties and mutual rights duties of partners
 Understand the Minors position in partnership
 Understand L iability of Partners to the firm and to a third parties.
 Understand the concept of Dissolution and Effects of Dissolution. munotes.in

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99 Registration of Firms and Consequences of Non-Registration Relations Amonst the Partners and Dissolution of Firm 9.1 INTRODUCTION Registration of a partnership firm is not compulsory under law. The
provisions under Partnership Act, 1932 made spec ifically that if the
partners so wish to register, may register the firm with the Registrar of
Firms of the state in which the firm’s main office is situated. A partnership
firm may be registered at the time when it is formed or at any time
thereafter. Procedure for partnership Registration so that to get a
partnership firm registered, an application in a prescribed form must be
submitted with the Registrar of Firms. The application must include the
following information:
 The name of the firm
 The prin cipal place of business of the firm
 Names of other places where the firm’s business is carried on.
 Names in full and permanent addresses of the partners.
 The date on which each partner joined the firm
 Duration of partnership, if specified
The filled an d prescribed application should be signed and verified by
each partner, after that it is to be submitted to the Registrar of Firms of the
place in which the main office of the firm’s business is located or
proposed to be located. The registration fee is also deposited along with
the application. On submission of the application, the registrar will
scrutinize the application. If he is satisfied that everything that required to
fulfill has fulfilled and all the legal formalities have been taken care, he
will make an entry in the register of firms. He will also issue a certificate
of registration. Any change in the information submitted at the time of
registration should be communicated to the Registrar.
9.2 CONSEQUENCES OF NON - REGISTRATION OF PARTNERSHIP . The consequences of a partnership firm which is not registered are as
follows:
 It cannot enforce its claims against the third party in a court of law.
 It cannot file a legal suit against any of its partners
 Partners of an unregistered firm cannot file an y suit to enforce a right
against the firm.
 A partner of an unregistered firm cannot file suit against other
partners. It cannot claim adjustment for any sum exceeding Rs. One
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100 Business Law - II
100 Example: Suppose an unregistered firm owes Rs. 2000 to Sahil and Sah il
owes Rs.1000 to the firm. The firm cannot enforce an adjustment of
Rs.1000 in a court of law.
Partnership Property (Section 14) :
Partnership Property is also known as property of a firm, partnership
assets, joint stock, common stock, or joint estate. A partnership property
includes all property and rights, and interest in property that the purchases
by partnership firm.
These properties are collectively owned by all the members of the in the
course of partnership business which includes Goodwill.
There fore, a partnership property includes of the following items if there is
no agreement between the partners showing any contrary intention. All
property and rights and interest in property that the partners purchase in
the common stock as their contribution to the common business purpose.
Goodwill of the business:
To arrive at the conclusion or to decide whether a particular property is
partnership property or not it depends on the fair and true objective or
agreement between the partners.
Therefore, if a fi rm uses the property of a partner for its purposes, it does
not make it a partnership property unless that was the real intention. At
any time, the partners may agree to convert the property of a partner or
partners into partnership property.
9.3 RIGHTS, D UTIES AND LIABILITIES AND AUTHORITY OF PARTNERS The Partnership Deed includes the mutual rights, duties and obligations of
the partners, in certain cases, the Partnership Act also makes a compulsory
provision in respect of the rights and obligations of pa rtners. When
Partnership Deed is silent.
9.4 RIGHTS OF A PARTNER The rights of a partner are as follows:
1. Right of the partner to take active part in the day -to-day affiars of the
firm.
2. Right to be consulted and heard when taking any decision regardi ng
the business.
3. Right as agent of the firm and implied authority to bind the firm for
any act done in carrying the business.
4. Right to share the profits equally or as agreed upon by the partners as
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101 Registration of Firms and Consequences of Non-Registration Relations Amonst the Partners and Dissolution of Firm 5. Right to get interest on capital contributed by the partners to the firm.
6. Right of access to books of accounts and call for the copy of the same
for inspection.
7. Right to prevent admission of new partners/expulsion of existing
partners.
8. Right to enjoy in terest on advances paid by the partners for business
purpose.
9. Right to the use of partnership property exclusively for partnership
business only not for his personal use or benefit.
10. Right to retire with the consent of other partners and according to the
terms -and conditions of deed.
9.5 DUTIES OF PARTNERS The duties of a partner are as under:
a. To carry on the business to the greatest common advantage:
Every partner is bound to carry on the business of the firm to the greatest
common advantage. In other words, the partner must use his knowledge
and skill in the conduct of business to provide maximum benefits for the
firm.
b. To be just and faithful to each other :
Every partner must be faithful to other partners of the firm. Every partner
must observ e utmost good faith and fairness towards other partners in
partnership activity.
c. To render true accounts:
Every partner must render true and proper accounts to his co -partners, as
they are mutually related.
d. To provide full information :
Every partner must provide full information and details of activities
affecting the firm to the other co -partners. No information should be hide.
e. To attend diligently to his duties:
Every partner is bound to attend diligently and faithfully to duties in the
conduct of the business of the firm.
f. To indemnify for loss caused by fraud or willful neglect:
It is the duty of the partners to indemnify the firm for loss If any caused to
the firm because of a partner’s willful neglect in the conduct of the
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102 Business Law - II
102 g. Should not hold and use partnership property exclusively for the
firm:
The partners must hold and use the partnership property exclusively for
the purpose of partnership activity of the firm not for their personal
advantage.
h. No Secret Profit and to account for personal profits :
If a partner secured any personal benefit or profit from partnership
transactions or from the use of the property of the firm or business
connection the firm or the firm’s name, he must a ccount for such profit
and reimbursed it to the firm.
i. Not to carry on any competing business:
A partner must not engage in competing activities to that of the firm. If he
carries on and earns any profit then he must account for the profit made
and pay it to the firm.
j. To share losses:
When there is no agreement as to partnership, partners have to share the
losses of the firm equally as per profit sharing ratio
9.6 LIABILITIES OF PARTNERS a. Joint & Several : Every partner is liable jointly and several ly for all
the acts of the firm done while he was a partner. The liability of a
partner is unlimited.
b. Liability for Secret Profits : A partner is liable to account for and pay
to the firm any personal profits earned from the business of the firm
or prope rty .
c. Liability for Profits from Business of a same nature : If a partner
carries on any business of the same nature and competing with that of
the firm, he would be liable to account for and pay to the firm all
profits made by him in that business.
d. Liability to Render True Accounts : A partner is liable to render true
statements of accounts to other partners. He is liable to disclose all the
accounts which fall within the scope of business of the firm.
e. Liability for Losses of the firm: As a partner has a right to share the
profits of the firm likewise is he liable to share the losses equally
unless otherwise agreed upon.
9.7 IMPLIED AUTHORITY OF PARTNER The authority of a partner to bind the firm is called his “implied
authority”. Partners in the partnership firm are playing dual role that is as
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103 Registration of Firms and Consequences of Non-Registration Relations Amonst the Partners and Dissolution of Firm form of express or by words spoken and the Indian Partnership Act is has
not specifically mentioned any authority by expression. In th e absence of
any usage or custom of trade to the contrary, the implied authority of a
partner does not confer any rights to him to —
a. submit a dispute relating to the business of the firm to arbitration,
b. open a banking account on behalf of the firm in his own name,
c. acquire immovable property on behalf of the firm,
d. admit any liability in a suit or proceeding against the firm.
e. suspend any claim or portion of a claim by the firm,
f. depart a suit or proceeding filed on behalf of the firm,
g. trans fer immovable property belonging to the firm enter into
partnership on behalf of the firm.
9.8 MUTUAL RELATIONSHIP OF PARTNERS TO EACH OTHER Each partner has a right to share in the profits of the partnership .
Unless the provisions made in the partnership deed otherwise, partners
share profits equally. Moreover, partners must contribute equally to
partnership losses unless a provision made in the partnership deed for
another arrangement.
Each partner has a right to participate equally in the working of
man agement of the partnership . In many partnerships a majority vote
resolves disputes relating to management of the partnership. Except, some
decisions, like as admitting a new partner or expelling a partner, require
the consent from all the partners.
Each partner owes a Fiduciary duty to the partnership and to copartners.
This duty requires that a partner deal with copartners in Good Faith, and it
also requires a partner to account to copartners for any benefit that he or
she receives while engaged in partn ership business. If a partner generates
profits for the partnership, for example, that partner must hold the profits
as a trustee for the partnership.
9.9 RELATIONSHIP OF PARTNERS TO THIRD PERSONS A partner is an agent of the partnership. When a part ner has the actual
authority and acts on behalf of the firm, the partner binds the partnership
and every partner for the obligations.
Similarly, a partner’s admission concerning the partnership’s affairs is
considered an admission of the partnership. A pa rtner may only bind the
partnership, however, if the partner has the authority to do so and
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104 Business Law - II
104 a third person, however, knows that the partner is not authorized to
act on behalf of th e partnership, the partnership is generally not liable
for the partner’s unauthorized acts. Moreover, a partnership is not
responsible for a partner’s wrongful acts or omissions committed after the
dissolution of the partnership or after the dissociation o f the partner. A
partner who is new to the partnership is not liable for the obligations of the
partnership that occurred prior to the partner’s admission.
9.10 MINOR’S POSITION IN PARTNERSHIP A person who has not attained the age of 18 years of his or he r age is
known as minor as provided to Section 3 of the Indian Majority Act.
Section 4 of the Indian Partnership Act, 1932, defines partnership and
partner as follows:
“Partnership is the relation between persons who have agreed to share
the profits of a business carried on by all or any of them acting for all”.
Persons who have entered into a partnership business with one another are
called “partners” individually and collectively it is called as “firm”, and
the name by which their partnership busine ss is carried on is called the
“firm name”.
As per Indian Contract Act, 1872 , minors can neither take an active
party in any partnership business nor to enter into any agreement. An
agreement involving a minor is void -ab-initio. However, the Indian
Partnership Act has its own sets of legal rules in respect of minors.
Minor admitted to benefits of partnership
A partnership firm cannot be formed with a minor as the only other
member. The relation of partnership arises from a contract
“Section 30 of the Ind ian Partnership Act, provides that a minor cannot
become a partner, however with the consent of the adult partners, he may
be admitted to the benefits of partnership.
A minor can only be admitted to the benefits of a partnership, and that
partnership has to exist independently. Also, there cannot be a contract
between two minors.
Rights of Minor :
A minor admitted to the benefits of a partnership in consultation and
unanimous consent of all the other major partners.
 Such minor is entitled to his agreed sha res of the property and of the
profits of the firm.
 Such minor has the right to access and taking copies of the book of
accounts of the firm. But has no right of access to those other books
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105 Registration of Firms and Consequences of Non-Registration Relations Amonst the Partners and Dissolution of Firm  Such minor is not personally liable to the third parties for the debts of
the firm, but his liability is limited only up to his shares in the
partnership assets and profits.
 Such minor is not entitled to take part in the conducting of the actual
business activities a s he has no capacity to contract
9.11 MINO R BECOME A FULL -FLEDGED PARTNER  On attaining the age of majority, the minor has his own choice
whether to continue with the same partnership or not and accordingly
he should specify his interest with in a time spec ified that is within six
months on attaining the majority. If he fails to do the same, he
becomes personally liable to the third parties for all the debts of the
firm with retrospective effect from the date of he gets admitted to the
benefits of partnershi p.
9.12 RIGHTS OF THE MINOR IF HE ELECTS NOT TO BECOME A PARTNER  His rights and liabilities shall continue to be those of a minor up to the
date of giving public notice;
 His share shall not be liable for any acts of the firm done after the date
of the not ice;
 He shall be entitled to sue the partners for his share of the property
and profits.
 If after attaining the age of majority but before choosing to become a
partner the minor represents and knowingly permits himself to be
represented as a partner in the firm, he will be personally liable to
anyone who on the faith of such representation granted credit to the
firm on the ground of ‘holding out’.
From the above discussion, we can say that a partnership firm cannot be
formed with a minor as the only other m ember. The relation of partners in
partnership business come into in existence from a contract. Section 11 of
Indian Contract Act states that a minor is not competent to contract and
hence not entitled to have the contractual relations amongst the other
partners as he is not able to form the sensible judgment and such contracts
are void ab initio as mentioned in the landmark judgement in the case of
Mohoribibi V/s Dharmodash Ghosh.
DISSOLUTION OF FIRM:
MEANING OF DISSOLUTION:
Partnership, as we are aware i s a result of an agreement. All agreements
can be discharged or terminated. This termination of the contractual
relationship in case of partnership is called as dissolution. Dissolution
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106 Business Law - II
106 “Dissolution of partnership”. Commonly both are taken to mean the same
and are used interchangeably. However, legally there is a difference in the
two. Dissolution of the firm means complete breakdown of the relations
among all partners. Whereas disso lution of the partnership means, the
relationship between same partners came to be an end while the firm
continues. It would be right for us to say dissolution of the firm
necessarily implies dissolution of partnership whereas dissolution of
partnership do es not necessarily involve dissolution of firm.
Example:
1. A, B,C, D. are partners in a firm. A, dies B, C, D decides to close
down the firm. This amount to dissolution of the firm.
2. A, B, C, D, and E are partners in a firm. There is an agreement that
the firm shall not be dissolved on the death, retirement or expulsion of
any partner. C dies, this amounts to dissolution of partnership as the
firm continues. Only relationship with C. comes to an end.
MODES OF DISSOLUTION :
There are modes of dissolution o f a firm
1) Voluntary dissolution.
2) Dissolution by operation of law.
3) Dissolution by intervention of court.
1. Voluntary dissolution :
It includes dissolution by any of the following manner.
a) By consent: All partners may consent for the dissolution of the firm.
This can happen whether the firm is for a fixed duration or not.
b) By agreement: A firm may be dissolved in accordance with a
contract. For example partnership formed for a specific period or for a
particular venture.
c) By Notice: Whenever a p artnership is at will any partner can give 14
days’ clear notice in advance indicating his intention to disassociate
from the firm.
2. Dissolution by operation of law:
It includes dissolution in any of the following manner.
a) Compulsory dissolution: In th is case firm is compulsorily dissolved
due to insolvency or some new law makes the business of the firm
unlawful
b) Some event making the business unlawful, if carried on in
partnership, due to change in its number, example a firm carrying in
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107 Registration of Firms and Consequences of Non-Registration Relations Amonst the Partners and Dissolution of Firm c) On happening of certain contingencies such as expiry of fixed period
or particular venture for which it was formed, on death of a partner
and on insolvency of a partner.
3. Dissolution by intervention of court :
It arises on th e following ground:
a) Insanity of a partner :
When a partner becomes of unsound mind. The other partner can institute
case against such partner to dissolve the firm.
b) Permanent incapacity:
In case a partner becomes permanently incapable in discharging hi s duties,
the court may order dissolution of the firm.
c) Misconduct of a partner:
When a partner is guilty of misconduct which adversely affects the
business of the firm then court may order dissolution of the firm provided
other partner take legal action .
d) Willful or persistent breaches of agreement:
Sometimes, a partner willfully or persistently commits a breach of
agreement relating to the management of the affairs of the firm or
conducts the business in such a way that the other partners find it diff icult
to carry on business with him. In such a cases any partner other than the
guilty partner may approach the court for dissolution.
e) Transfer of interest:
Sometimes a partner may transfer the whole of his interest or share to a
third party or the shar e may be charged or the share has been sold for the
recovery of arrears of land revenue in which cases the other partner or
partners may seek for dissolution of the firm
f) Losses in Business:
Where the business of the firm cannot be carried on except at a loss the
court can order for dissolution.
g) Any other just an equitable ground:
Where the court is satisfied that is just an equitable to dissolve the firm.
9.13 EFFECTS OR CONSEQUENSES OF DISSOLUTION Dissolution of firms :
Section 39 of the Indian Par tnership Act, 1932 defines the dissolution of
partnership firms. “The dissolution of the firm means to stop all the munotes.in

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108 Business Law - II
108 business activities with the firm” There is a difference between the
dissolution of the firm and the dissolution of the partnership.
When a ll the activities in respect of partnership business comes to an end
and all the profit and loss is settled among the partners is called
dissolution of the firm and when the partner retires or dies even though
the firm continues to perform its partnership business with existing
partners is called dissolution of a partnership.
RIGHTS OF A PARTNER ON DISSOLUTION OF A FIRM :
1. Rights to have the business wound up.
2. Right to repayment of premium on premature dissolution.
3. Where the firm was dissolved on a ccount of fraud or
misrepresentation by a partner, the innocent partner can rescind the
contract and also have right to retain surplus if any for the capital and
sum paid to be indemnified for all debts paid with regard to the firm.
4. Right to restrain pa rtners from the use of the firm name or firm
property.
Liabilities of Partners on dissolution
Liabilities for an act of the partners on dissolution specified under Section
45 of the Indian Partnership Act, 1932
1. According to this section, the partners o f the firm are liable to the
third party for any act done by any of them unless they give public
notice of the dissolution of the firm.
2. It also states that the partner who dies, retries, becomes insolvent or
that of a person who the third party is not aware of being the partner
of the firm, is not liable under this section.
Return of premium after dissolution
Section 51 of the Indian Partnership Act specifically tells about the return
of premium after dissolution. At the time of entering into a partners hip
firm, the partner has to pay an amount as premium. However, when the
firm gets dissolves before the maturity due to any reason, then such
partners are entitled to the repayment of premium at the time of
admission.
9.14 PUBLIC NOTICE Section 72 of I ndian Partnership Act describes the manner and the in
which the public notice of certain matters relating to partnership firm is to
be given. According to this section, public notice must be given in the
following circumstances:
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109 Registration of Firms and Consequences of Non-Registration Relations Amonst the Partners and Dissolution of Firm b) On the dissolution of a registered firm.
c) On the election of a minor to become or not to become a partner on
attaining majority.
Following are the modes by which the public notice pertaining to the
above matte r is to be given are as under:
a) By notice to the Registrar of firm under Section 63.
b) By, publication in the Official Gazette.
c) By publication in at least one vernacular newspaper circulating in the
district where the firm to which it relates has its place or principal
place of business.
Following are the repercussions or Consequences when public notice is
not given:
 When a minor admitted to benefits of partnership fails to give public
notice within six months of his attaining majority, he becomes a
partner in the firm on the expiry of the said period and would be liable
as a partner.
 If a partner does not give a public notice of the retirement, he and the
other partners shall continue to be liable as partners to third parties for
any act done by any o f them which would have been an act of the firm
if done before retirement.
 If in case of expulsion of a partner, a public notice is not given, the
expelled partner and other partners shall continue to be liable to third
parties dealing with the firm as in the case of a retired partner.
 If on dissolution of a registered firm a public notice is not given, the
partners shall continue to be liable to third persons for any act done by
any of them which would have been an act of the firm done before
dissolution.
9.15 SUMMARY Registration of Partnership :
Registration of a partnership firm is not compulsory under law
Consequences of Non - Registration of Partnership:
It cannot enforce its claims against the third party in a court of law. It
cannot file a legal suit against any of its partners, Partners of an
unregistered firm cannot file any suit to enforce a right against the firm.


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110 Business Law - II
110 Rights of a Partner:
Right of the partner to take active part in the day -to-day affairs of the firm.
Right to be consulted and hea rd when taking any decision regarding the
business.
Duties of Partners:
To carry on the business to the greatest common advantage: To be just and
faithful to each other: To render true accounts:
To provide full information. To attend diligently to his du ties: No Secret
Profit and to account for personal profits: Not to carry on any competing
business:
LIABILITIES OF PARTNERS :
Joint & Several: Liability for Secret Profits : Liability for Profits from
Business of a same nature : Liability for Losses of the f irm:
Implied authority of Partner:
Submit a dispute relating to the business of the firm to arbitration, open a
banking account on behalf of the firm in his own name, acquire
immovable property on behalf of the firm,
Mutual Relationship of Partners to Ea ch Other: Each partner has a
right to share in the profits of the partnership . Each Partner has
right to participate equally in the working of management of the
partnership . Fiduciary Duty.
Relationship of Partners to Third Persons:
A partner is an agen t of the partnership. If a third person, however, knows
that the partner is not authorized to act on behalf of the partnership, the
partnership is generally not liable for the partner’s unauthorized acts.
Minor’s Position in Partnership:
Minor admitted t o benefits of partnership, Rights of Minor, Minor become
a full -fledged Partner.
Dissolution of Firm: MODES OF DISSOLUTION :
Voluntary dissolution. Dissolution by operation of law. Dissolution by
intervention of court.
RIGHTS OF A PARTNER ON DISSOLUTION O F A FIRM:
Rights to have the business wound up. Right to repayment of premium on
premature dissolution. Where the firm was dissolved on account of fraud
or misrepresentation by a partner, the innocent partner can rescind the
contract and Voluntary dissolu tion: Dissolution by operation of law;
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111 Registration of Firms and Consequences of Non-Registration Relations Amonst the Partners and Dissolution of Firm 9.16 QUESTIONS 1. Define partnership. Explain its features
2. What are the effects of non -registration of Partnership Firm?
3. Explain Test of partnership
4. What do you mean by the p roperty of the firm ?
5. Explain kinds of partnership
6. What do you mean by dissolution of the partnership firms? How
dissolution takes place by operation of law?
7. Explain dissolution by intervention of court.
8. What are the modes of dissolution of Par tnership?
9. Distinguish between partnership & co -ownership
10. Distinguish between partnership & company
11. Distinguish between partnership & Hindu undivided family.
12. Write a Short Note: -
a. Partnership
b. Partnership Deed
c. Particular Partnership
d. Dissolution of Partnership

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112 112 10
LIMITED LIABILITY PARTNERSHIP
FUNCTIONING AND NATURE OF
LIMITED LIABILITY PARTNERSHIP
[SECTION: 2, 11-12, 55-58]
Unit Structure
10.0 Objectives
10.1 Introduction
10.2 Definition and Meaning
10.3 Procedure for Incorporation of LLP
10.4 Features of LLP
10.5 Designated Partners in Limited Liability Partnership Firm (L LP)
10.6 Essential Clauses of the Limited Liability Agreement (L LP)
10.7 Advantages and Disadvantages of LLP
10.8 Distinguish Between Limited Liability Partnership and Partnership
10.9 Distinguish Between Limited Liability Partnership and Company
10.10 Summary
10.11 Questions
10.0 OBJECTIVES After studying the unit students will be able to:
 Understand the concept of LLP Act 2008.
 Understand the procedures of incorporation of LLP
 Understand the Advantages and Disadvantages of the same.
 Understand the difference between LLP with Partnership and
Company.
 Understand the procedures to be observed to convert the Firms,
Private Companies into LLP.
10.1 INTRODUCTION An approach or an idea o f the Limited Liability Partnership (LLP) come
to India in the year 2008. An LLP has the features of both the partnership
firm and company. LLP is a body corporate and separates from partners
like wise members are separate from the company. It is the we ll accepted
and favoured form of organization among entrepreneurs as it incorporates
the benefits of both partnership firm and company into a single form of
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113 Limited Liability Partnership Functioning And Nature of Limited Liability Partnership [Section: 2,11-12,55-58] good features. LLPs in In dia are regulated by the Limited liability
Partnership Act, 2008.
10.2 DEFINITION AND MEANING “A limited liability partnership or LLP is a form of partnership where an
individual partner is not liable for the malpractice of another partner in the
company. This form of company is most often found in medical practices,
law offices, or accounting firms where liability is a big issue. This protects
innocent partners from other partners performing services negligently.”
LLP stands for Limited Liability Partners hip. It is an alternative corporate
vehicle that provides the benefits of limited liability of a company along
with the flexibility of a partnership. LLP is a legal entity and is liable to
the full extent of its assets but the liability of a partner is lim ited to their
contribution in the LLP.
In LLP, one partner will not be liable for the wrongdoing of another
partner. The partner will be held responsible only for his own actions. LLP
is called a hybrid form between company and partnership as it
incorporat es properties of both the organisation structures.
10.3 PROCEDURE FOR INCORPORATION OF LLP Identification of Designated Partners: Two designated partners should
identify who will work on behalf of LLP. At least one of the designated
partners must be resid ent in India (i.e., person who has stayed in India for
not less than 182 days in the immediately preceding one year).
Acquire Digital Signature : The proposed designated partners are
required to obtain digital signature. It is required to file an on -line
application for Every form or application is filed online with the Ministry
of Corporate Affairs (MCA), which requires to be signed digitally by the
applicants and partners of the LLP.
Reservation of Name of LLP : It is required to check availability of
name using name search facility on MCA Portal and should apply for
name reservation in Form 1. Rule 18 of LLP Rules provides cases in
which name will not be reserved further the name should not be one
prohibited under the Emblems and Names (Prevention of Improper Use)
Act, 1950
Submi ssion of Incorporation Document : Incorporation documents
includes the following.
1. Proof of office address and Registered Office Address of LLP.
2. Copy of approval in case the proposed name contains any word(s) or
expression(s) wh ich requires approval from Central Government.
3. Proof of identity and residential address of the subscribers
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114 5. In case, a designated partner does not have a DIN, is required to
attach.
6. State ment in a prescribed form signed either by professionals like an
Advocate, Chartered Accountant, Cost Accountants, stating that all
the requirements for formation or incorporation are complied with.
7. All the Designated Partners must have digital signatures .
8. Detail of LLP(s) and/or Company(s) in which partner or designated
partner is a director/partner
9. Apply for incorporation of LLP in Form 2
10.4 FEATURES OF LLP 1. Body Corporate: LLP is a body corporate and has a separate legal
entity and it resembles with co mpanies.
2. Cost of Formation: The cost of formation is less and compliances
and regulations are applicable less as compared with companies.
3. Liability: The liability of each partner is limited up to the
contribution made by the partner.
4. Maintenance of Book s of Accounts: LLP must maintain proper
books of account mandatorily. The accounts may be on cash basis or
accrual basis.
5. Agreement: As this is a hybrid type of incorporation. Agreement is
needed in respect of partners in the LLP. Hence agreement is an
essence of the LLP.
6. Change in LLP Agreement : LLP is required to file information to
the Registrar of Companies about the LLP Agreement, any changes
that is substitution, deletion.
7. Designated Partners: At least 02 designated partners should be
appointed in LLP. Designated Partners will play a role of an active
partner in the LLP.
Filled an application form, documents along with requisite fees shall be
submitted to the Registrar of Companies (ROC). After the scrutinization
of the shall grant it a certifi cate of incorporation within Fourteen Days of
submission of an application for incorporation. Certificate of
incorporation of LLP is like a certificate of incorporation of the companies
which stands as a conclusive proof which can not be denied at the lat er
stage. Such certificate is an evidence that the LLP has come into an
existence and has a corporate personality, and separate legal entity.
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115 Limited Liability Partnership Functioning And Nature of Limited Liability Partnership [Section: 2,11-12,55-58] 10.5 DESIGNATED PARTNERS IN LIMITED LIABILITY PARTNERSHIP FIRM (LLP) Every LLP must have at least two individua ls termed as designated
partners. Apart from these two partners one of them must be resident in
India (i.e., person who has stayed in India for not less than 182 days in
the immediately preceding one year). The incorporation document may
specify who will be the designated partners by denoting their names and
occupations and other identity. Every designated partner must obtain
DPIN that is Designated Partners Identification Number. Now instead of
DPIN, every partner who will be appointed as Designated Par tner, will
need to apply for DIN and not DPIN. (Amended the Limited Liability
Partnership Rules, 2009.) Individuals holding both DPIN and DIN, their
DPIN stands cancelled. To obtain DPIN the individual has to apply in
Form DIN -1 under Companies (Director Identification Number) Rules,
2006.
A Limited Liability Partnership firm may appoint a designated partner
within 30 days of vacancy arising for any reason. Each partner in the
partnership is deemed to be a designated partner, if there is no designated
partner, or if at any time there is only one designated partner. Designated
partners are responsible for doing all acts, matters and things that are
required to be done for complying with the provisions of the Limited
Liability Partnership Act and they are liable to all penalties imposed on the
LLP in contravention.
10.6 ESSENTIAL CLAUSES OF THE LIMITED LIABILITY AGREEMENT (LLP) Limited Liability Partnership is governed by the agreement amongst the
partners. Therefore, preparing for LLP agreement is an ess ential task and
necessary to cover various factors governing ventures and relation
amongst partners and between LLP and its partners. They are as under: -
A. Definition/interpretation clause
B. Names of designated partners
C. Lawful business clause
D. Registered Off ice clause
E. Capital & contribution clause
F. In case of conversion of partnership/Company into LLP appropriate
clauses for such takeover
General terms amongst the Partners:
a) Admission of new partner retirement of partner
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116 Business Law - II
116 c) Terms of Resignation of partner and Expulsion of partner
d) Rights & duties of partners
e) Sharing of profit / Sharing of loss
f) Amount Share in goodwill
g) Meetings of partners
h) Voting rights and its determination
i) Restriction authority of partners
j) Provisions for Acts requiring consent of requisite number of
percentages of the partners
k) Provision for Appointment of auditors
l) Provision for Removal of auditor
m) Nomination for signatory to bank accounts, agreement, etc.
n) Assignment monetary interest of partners
o) Rights of legal representative
p) Provision for Duration of the LLP and Provision for Voluntary
winding up
q) Provision for Meeting, recording in meeting, etc.
r) Provision for Changes/amendment in agreement
s) Arbitration clause for settlement of disputes if any
t) Changes that may occ ur in future and the procedure for the same.
10.7 ADVANTAGES AND DISADVANTAGES OF LLP The following are advantages of incorporating an LLP in India:
1. No requirement of minimum contribution:
No minimum capital is required in LLP. LLP can be formed with t he
minimum possible capital. The contribution of a partner can consist of
tangible, movable or immovable or intangible property or other benefits to
the LLP.
2. No limit on owners of the business:
LLP requires a minimum of minimum 2 partners and there is n o limit on
the maximum number of partners. This is in opposite to a private limited
company whereby there is a restriction of not having more than 200
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117 Limited Liability Partnership Functioning And Nature of Limited Liability Partnership [Section: 2,11-12,55-58] 3. Registration Cost is low:
The cost of registering LLP is low as compared to the cost of
incor porating a private limited or a public limited company
4. No requirement of compulsory Audit:
All companies, whether private or public, irrespective of their share
capital, are required to get their accounts audited. But in case of LLP,
there is no such co mpulsory requirement. This is recognized to be a
significant compliance benefit.
5. Partners are not liable for an act of other partners:
In partnership partners are mutual agent of each other and hence they are
liable for any wrong act done by any single partner as there is a mutual
agency. Whereas in LLP partners are not liable for a wrong done by
another partner.
6. Easy to dissolve or wind -up:
LLP is easy to dissolve or wind up as no government formalities and
regulations need to observe.
7. Flexibil ity:
As LLP is a hybrid concern, it includes good features of partnership and
good features of company. A limited liability partnership (LLP) is a
corporate entity that integrates the organizational flexibility of a
partnership with the limited liability protection along the lines afforded to
a limited liability company.
8. Penalty for Non -Compliance:
LLP is required to file an income tax return each year even though it does
have any activity or in a dormant Even if an LLP does not have any
activity, In ca se an LLP fails to file Form 8 or Form 11 (LLP Annual
Filing), a penalty of Rs.100 per day, per form is applicable.
9. LLP cannot raise funds from the public:
LLP stands for Limited liability partnership which means a company form
of business where the on ly the partners contribute in the capital and their
liability remains limited to the extent of their capital contribution in the
business. Therefore, LLP cannot raise funds from public in any form.
10. Higher Income Tax Rate:
The income tax rate for a comp any with a turnover of upto Rs.250 crores
is 25%. However, LLPs are taxed at a 30% rate irrespective of the
turnover.

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118 Liability may extend to personal assets of partners:
In such a scenario the liability of all the partners is unlimited for all or any
other debts of the LLP. But even in such an event the personal assets of
the partners are not to be exhausted to fulfil such other debts, but the
liability extends only to the extent of the fraudulent activity carried out.
10.8 DISTINGUISH BETWEEN LIMITED L IABILITY PARTNERSHIP AND PARTNERSHIP . Points Limited Liability Partnership Partnership Meaning and Definition LLP is a hybrid business form that offers the combined benefits of a partnership and a company Revenue reserve is created to meet unforeseen events in a business organization Act Limited Liability Partnership Act 2008 Indian Partnership Act 1932 Registration Registration is compulsory Registration is optional Legal Status LLP has a legal status Partnership is not a separate legal entity Perpetual Succession Perpetual succession is present as it is registered firm like company. Secondly partners may come and go in an LLP Feature of Perpetual succession f is not present in partnership. Maximum Partners allowed No such limit laid down as to number of partners in LLP Minimum. 2 partners and Maximum 10 Partners in case of banking and 20 Maximum in case of other business.
10.9 DISTINGUISH BETWEEN LIMITED LIABILITY PARTNERSHIP AND COMPANY Points Company Limited Liability Partnership Act Indian Companies Act 2013 Limited Liability Act 2008 Meetings A company is required to hold minimum of 4 board meetings during a No such meetings required to conduct. munotes.in

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119 Limited Liability Partnership Functioning And Nature of Limited Liability Partnership [Section: 2,11-12,55-58] financial year, thereby holding 120 days gap between 2 meetings wherein the general meeting of shareholders has to be conducted once a year mandatorily. Audit Statutory audit is mandatory for a company Statutory Audit is not required unless partner’s contribution exceeds 25 lakhs and annual turnover exceeds 40 lakhs. Transferability of Shares In a Company, shares can be transferred easily. The Article of Association can only restrict it. In an LLP, shares can be
transferred by executing an
agreement before a notary
public Cost of Formation The Statutory minimum fee for incorporation of the Company is Relatively High. The cost of the formation of
LLP and its statutory filing fees
is comparatively lesser than the
cost of the formation of the
Company. Voting Rights In a Company, the voting rights of the members are determined in accordance with the total number of shares held by each member. In an LLP, the voting rights are decided as per the terms of the LLP Agreement. Capital No mandatory requirement for capital. Company limited by share must have a minimum authorized and paid-up share capital. Share capital has to be divided into shares.
Conversion of Private Limited Company into LLP :
Section 56, ( Schedule III and IV) LLP Act - 2008 a Private Limited
Company or Unlisted Public Company may convert into a Limited
Liability Partnership in accorda nce with the provisions of Section 56
and the Third and Fourth Schedule of LLP Act, 2008.
Limited Liability Partnerships are popular due to the multiple advantages
as they are a mixture of both Company and Partnership firms. LLP offers
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120 Business Law - II
120 The Limited Liability Partnership is a legal entity where the liability of the
partners is limited. The LLPs can enter into contracts and holding
properties in their own name.
This article covers the concept of c onversion of Private Limited
Companies into an LLP. Each shareholder of the private limited company
must submit a statement and consent for the conversion of a company into
LLP along with the application.
Process for Conversion of Company into LLP
 A Board Meeting shall be convened and pass Board Resolution for
such intended conversion of the company into LLP.
 A written consent of all the shareholders for conversion of Company
into LLP is mandatory.
 Filing of an application for name availability with the Re gistrar of
Company by attaching the Board Resolution and proposed object
clause with the name availability application.
 Once the name is approved, it is required for actual execution of all
required documents like consent, subscriber sheet etc. and file fo rm
and form 18 with the Registrar of Companies (ROC).
10.10 SUMMARY LLP is a hybrid type of concern. It is a good mixture of features of
Partnership and Company. An approach or an idea of the Limited
Liability Partnership (LLP) come to India in the ye ar 2008.
PROCEDURE FOR INCORPORATION OF LLP
Identification of Designated Partners: Acquire Digital Signature :
Reservation of Name of LLP ,Submission of Incorporation Document:
Features of LLP: Body Corporate, Cost of Formation: Liability:
Maintenance of Books of Accounts: Agreement: Change in LLP
Agreement, Designated Partners:
DESIGNATED PARTNERS IN LIMITED LIABILITY
PARTNERSHIP FIRM (LLP) Essential clauses of the Limited
Liability Agreement (LLP): Definition/interpretation clause, Names of
designated partners. Lawful business clause, Registered Office clause,
Capital & contribution clause, In case of conversion of
partnership/Company into LLP appropriate clauses for such takeover,
ADVANTAGES AND DISADVANTAGES OF LLP: - No
requirement of minimum contri bution, No limit on owners of the
business, Registration Cost is low. No requirement of compulsory
Audit, Partners are not liable for an act of other partners: Easy to
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121 Limited Liability Partnership Functioning And Nature of Limited Liability Partnership [Section: 2,11-12,55-58] 10.11 QUESTIONS 1. Explain t he Nature of LLP
2. What are the advantages and disadvantages of LLP
3. Who is designated partner in LLP.? Explain his role for conducting a
partnership business.
4. Explain the procedure for incorporation of LLP
5. Distinguish between Company and LLP
6. State the extent and limitation of liability of LLP and its partners.
7. Write a short note:
a. Concept of LLP
b. Designated partners
c. Whistle Blowing
d. Incorporation of LLP
e. Conversion into LLP


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122 122 11
EXTENT AND LIMITATION OF
LIABILITY OF LLP AND PARTNERS IN
LLP
DISSOLUTION AND WINDING UP OF THE
LIMITED LIABILITY PARTNERSHIP
Unit Structure
11.0 Objective
11.1 Introduction
11.2 Liability of Partners
11.3 Winding Up of LLP
11.4 Whistle Blowing [Sect ion 31]:
11.5 Summary
11. 6 Questions
11.0 OBJECTIVE After studying the unit students will be able to:
 Understand the extent and limitation of liability of partners
 Understand the liability of Partnership.
 Understand the liability of partners under L LP
 Understand the concept of Whistle Blowing.
 Understand the winding -up process of LLP.
11.1 INTRODUCTION A Limited Liability Partnership (LLP) is a body corporate and the
liabilities of the partners are limited, the liability of the partners only
enhance d to their professional roles. LLP is a hybrid of a company and a
partnership; this structure has been looked upon with increasing approval
by mushrooming entrepreneurs who wish to skip the burdensome
regulatory compliance requirements of companies. Seco ndly, they do not
wish to be held personally liable for the misconduct of any partner, as per
the Partnership Deed.
11.2 LIABILITY OF PARTNERS Section 26 -31 of the Limited Liability Partnership Act lay down the extent
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123 Extent and Limitation of Liability of Llp And Partners in LLP Dissolution and Winding Up of The Limited Liability Partnership As per the provisions made under this section, every partner in an LLP is
an agent for the purposes of partnership business but is not the agent of
any other partner like they used to be under Indian Partnership Act 1932 .
This section differentiate s the liability of one partner from that of other
partners. But being a body corporate, every act of partner would bind the
LLP. It would not bind a particular partner in his individual capacity. 1Indian Partnership Act, also confers the role of an agen t for the purpose of
partnership to its partners. They too are made agents of the partnership
business and not the other partners. In case of any discrepancy, the
liability arising from the act of the partner shall be discharged, firstly from
the firm’s a ssets, and if that falls short then from the erring partner’s
individual assets.
11.3 WINDING UP OF LLP Section 27 – Extent of Liability of Limited Liability Partnership :
This section described the limitation of the liabilities arouse by the
partners or th e LLP as a whole. They can be classified as below:
1. Liability of person not authorised to act .
2. Liability of LLP if partner has incurred liability due to wrongful act or
omission.
3. Obligations of LLP as an entity.
1. Liability of Person not Authorised to Act :
This section provides the LLP is not bound by anything done by a partner
in his dealings with a person if the partner has no authority to do so, and
the person, he is dealing with aware that the particular partner has no
authority to act so or does not know him to be a partner.
2. Liability of LLP if Partner has Incurred Liability due to Wrongful
Act or Omission
This section subject to conditions, provides the LLP responsible if the
liability arose by the partners of a third person by his wrongful act in
course of the business and in exercise of his authority. The oppressed
party may proceed in a suit against the partner and the LLP, holding them
jointly and severally liable, but the proceeding cannot be initiated against
them singly.
3. Obligation of LLP as a Who le
Provision has been made under Section 27(3) that any liability incurred by
the LLP shall be its liability as a whole and cannot confer individually
upon the partners. The LLP being a body corporate is eligible to enter into 1 ipleaders.in/liability -of-partners/ munotes.in

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124 Business Law - II
124 contracts and if such contrac t is diluted, the liability is confirmed on the
LLP as a whole acting through its agents, partners etc.
Extent of Liability of Partners :
Section 28 of LLP lays down that a partner shall not be obligated as per
Section 27(3) in his individual capacity, bec ause he’s a partner in the LLP.
However, he cannot depart from their responsibility for any wrongful act
done in his individual capacity, outside the limit of his lawful authority.
Further can be stated that, the LLP and the partner are jointly and several ly
liable under section 27(2), as the wrongful act done by partner was
originally accredited by the LLP, making it responsible for any damage or
loss caused.
The LLP can be held responsible for any loss suffered by the other party
and both LLP and the part ner can be held liable for any wrongful act done
by partner in the course of business.
Holding Out [ Section 29 ] :
This section laid down the provisions for principle of holding out. Any
person who holds out as a partner of an LLP shall be held liable t o the
person who on faith of such representation gives credit to the LLP.
This means that the partner holding out shall be bound by estoppel and
prevented from denying the liability incurred on account of any financial
aid received by him or the LLP. This leads to the LLP bound to the third
party to the extent of the financial benefits obtained by them.
Unlimited Liability in Case of Fraud [ Section 30 ] :
This section acts as an exception to the principle of limited liability since
it imposes unlimited lia bility on its partners and the LLP if ….
 LLP intends to defraud its creditors
 LLP is entered into to carry on fraudulent activities .
In this case the liability of all the partners is unlimited for all or any other
debts of the LLP. But even in such an even t the personal assets of the
partners are not to be drained to recover such other debts, but the liability
extends only to the extent of the fraudulent activity carried out. The LLP
can depart from the liability if it establishes that the fraud was carried out
by the partners without the knowledge of LLP or LLP is not aware of such
fraudulent acts. This would exempt the LLP of all liability and only the
partner will be held liable for the fraudulent activity.
Any such activity being carried out shall be p unishable with imprisonment
for two years and a fine. If any damage caused due to such fraudulent
activity it is the responsibility of the LLP and the partner to reimburse the
third party.
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125 Extent and Limitation of Liability of Llp And Partners in LLP Dissolution and Winding Up of The Limited Liability Partnership 11.4 WHISTLE BLOWING [SEC TION 31] 2In general sense whistle Blowi ng means exposing a wrong doing with an
intention to bring this wrong act to an end. This section provides alleviate
from the imposition of fine or imprisonment on the partner if such partner
decides to come forward and contribute valuable information abou t the
fraud committed against which the investigation is being conducted
leading to conviction of the guilty party. No partner or employee of any
LLP may be discharged, demoted, suspended, threatened, harassed or in
any other manner discriminated against t he terms and conditions of his
limited liability partnership or employment. This section, therefore tries to
bring forth the fraudulent activity as expeditiously as possible.
11.5 SUMMARY LLP is a hybrid type of concern. It is a good mixture of features of
Partnership and Company. An approach or an idea of the Limited
Liability Partnership (LLP) come to India in the year 2008.
Extent of Liability of Limited Liability Partnership: Liability of person
not authorised to act . Liability of LLP if partner has incurred liability due
to wrongful act or omission. Obligations of LLP as an entity. Liability of
Person not Authorised to Act ,Liability of LLP if Partner has Incurred
Liability due to Wrongful Act or Omission, Obligation of LLP as a Whole .
11.6 QUEST IONS 1. State and Explain the extent of liability of partnership in LLP
2. Write a Short Note on Following:
a. Whistle Blowing
b. Holding out
c. Unlimited Liability in the case of Fraud.

*****



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103
126 12
THE CONSUMER PROTECTION ACT 1986
Unit Structure
12.0 Objectives
12.1 Introduction
12.2 Reasons for Enactment of Act
12.3 Objectives and Reasons
12.4 Concepts and Definition
12.5 Summary
12.6 Questions
12.0 OBJECTIVES After studying the unit the students will be able to:
 Understand rationale for enactment of specific act
 Understand the Objectives of the Act.
 Understand various concepts and definitions pertaining to the
Consumer Protection Act.
12.1 INTRODUCTION The Consumer Protection Act, 1986 seeks to provide fo r better protection
of the interests of consumers and for that purpose to make provision for
the establishment of consumer councils and other authorities for the
settlement of consumer’s disputes and for matters connected therewith.
The interests of consum ers were also protected even earlier under the
provisions of several legislations but these legislations failed to protect the
ultimate consumer from defective goods or deficient services,
overcharging of prices and unscrupulous exploitation. Further, ther e is
ignorance of the consumer of his rights. The consumers have not yet
organised themselves into a powerful movement. The consumer needed
better protection which led to the enactment of the Consumer Protection
Act of 1986. The Act is a very important soc io-economic legislation with
its main thrust on giving speedy redressal and compensation to the
consumer.
12.2 REASONS FOR ENACTMENT OF ACT Rationale behind the enactment of the Consumer Protection Act:
 Sellers were engaged in many unfair practices which tend to the rise
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127 The Consumer Protection Act 1986  To give the protestation to the consumers from the exploitation in the
marketplace, there was no legal system was available.
 In the 1960s, the consumer movement started rising in an organised
form due to the rampant adult eration of edible oil and food, black
marketing, hoarding, and rampant food shortages.
 Multiple Laws were prevailing, like Indian Contract Act. Like, Indian
Contract Act, Sale of Goods Act, The Essential Commodities Act etc.
The common consumer used to ge t confused which law should apply.
 Holding exhibitions and writing articles were largely the methods
used till the 1970s, by the consumer organisations.
 To look into the malpractices in ration shops and overcrowding of
public road transports, consumer grou ps were formed.
 In the recent past, India saw a big rise in the number of consumer
groups.
 Due to the above -mentioned efforts, the Government was forced to
bring in legislation to protect the consumers from unfair business
practices.
 Doctrine of Caveat Emp tor gives the rise to Consumer Protection
Movement. This doctrine used to hold buyer totally responsible
though the seller knows the fault in the goods.
Therefore, a need felt that there should be appropriate law to provide
requisite and urgent remedy to the aggrieved consumer which is
compensatory in nature. Observing this Consumer Protection Act 1986
was enacted.
12.3 OBJECTIVES AND REASONS Statement of Objects and Reasons are as under:
 The right to be protected against marketing of goods which are
hazardous to life and property;
 The right to be informed about the quality, quantity, potency, purity,
standard and price of goods to protect the consumer against unfair
trade practices;
 The right to be assured, wherever possible, access to an authority o f
goods at competitive prices;
 The right to be heard and to be assured that consumers interests will
receive due consideration at appropriate forums;
 The right to seek redressal against unfair trade practices or
unscrupulous exploitation of consumers;
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128 Business Law - II
128  Protection from spurious goods or fostering deceptive practices in the
provision of services.
3. These objects are sought to be promoted and protected by the
Consumer Protection Council to be established at the Central and
State level.
4. To provide speedy and simple redressal to consumer disputes, a quasi -
judicial machinery is sought to be setup at the district, State and
Central levels. These quasi -judicial bodies will undertake the
principles of natural justice and have been a uthorized to give relief of
a specific nature and to award, wherever appropriate, compensation to
consumers. Penalties for non -compliance of the sanctions or orders
given by the quasi -judicial bodies have also been provided.
12.4 CONCEPTS AND DEFINITION 1. Consumer [Sec.2(1)(d)]:
Under Sub -Clause (i) of Section 2(1)(d), a consumer for the purpose of
goods means any person, who :
(a) Buys any goods for consideration which has been paid or promised or
partly paid and partly promised or under any system of deferred
payment.
(b) Includes any user of such goods other than the person who buys them,
when such use is made with the approval of the buyer.
The person claiming himself as ‘consumer’ should satisfy that
(i) There must be a sale transaction between the seller and the buyer,
(ii) The sale must be of goods,
(iii) The buying of goods must be for consideration,
(iv) The consideration has been paid or promised or partly paid and partly.
Promised or under any system of deferred payment,
(v) The user of the goods may also be a consumer when such use is
made with the approval of the buyer.
Who is not a consumer?:
A person is not a consumer if he obtains goods for resale or for any
commercial purpose. Commercial purpose does not include use by a
consumer of goods bought by and used by him exclusively for the purpose
of earning his livelihood, by means of self- employment for e.g. buying a
car to run it as a taxi or a widow purchasing a sewing machine for her
lively hood etc.
When the manufacturer sells the goods to the wholesaler, who in turn sells
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129 The Consumer Protection Act 1986 of the word consumer as he has brought the goods for ‘resale’ or for
‘commercial purpose’. A person buying the goods for resale or for
commercial purpose, even if for consideration, is not a consumer.
Commercial purpose is commerce, mercantile, having profit as the main
aim. It includes all business activities. A purchase of a car by a
company for use by its business, by director and employees is purchased
for commercial purpose. ( Case - V. M. Agarwal J. By ford Leasing Ltd.
1992 CPJ 29 Del).
2. Complainant [Sec.2(1)(b)]:
“Complainant” means
(i) a consumer or
(ii) any voluntary consumer association registered under the Companies
Act, 1956 or under any other law for the time being in force. or
(iii) the Central Government or any State Government, who or which
makes a complaint, or
(iv) one or more consumers, where there are numerous consumers having
the same interest.
(v) in case of death of a consumer, his legal heir or representative who or
which make a compl aint.
Explanation:
A person seeking redressal of his complaint, must come within any of the
above -mentioned categories, otherwise he has no Locus Standi to proceed
with the case before the consumer Redressal Forum.
Example:
Kumar.Chotu seriously injured and died because of the ignorance on the
part of the hospital in treatment as there is non -payment of deposit money.
The parents could approach the Consumer Dispute Redressal Forum for
claiming the relief.
3. Complaint [Sec. 2 (1)(c):]
Complaint means any allegation in writing made by a complainant in
regard to one or more of the following :
(i) An unfair trade practices or a restrictive trade practice has been
adopted by any trader.
(ii) The goods bought by him or agreed to be bought by him, eager suffer
from one or more defects.
(iii) The service hired or availed of or agreed to be hired or availed of by
him suffer from deficiency in any respect.
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130 Business Law - II
130 in excess of the price fixed by or under any law for the ti me being in
force or displayed on the goods or any package containing such
goods.
(v) Goods which will be hazardous to life and safety when used, are
being offered for sale to the public in contravention of the provision
of any law for the time being in force requiring traders to display
information in regard to the contents, manner and effect of use of such
goods.
Explanation (I) : In the Consumer Protection Act, 1986. (c “complaint”
means any allegation in writing, made by a complainant against any unfair
trade practice or a restrictive trade practice has been adopted by any trader
or service provider.
Explanation (II): In order to obtain any relief under this Act the
complaint must be made in writing specifying the name and address of the
complainant and th e opposite party. It must state the facts and also must
specify the relief which the complainant is seeking.
4. Manufacturer [ Sec.2(1) (j)] :
Manufacturer means a person who:
(1) Makes or manufactures any goods or part of it or
(2) Assembles parts of any goods which are made or manufactured by
others and claims the end product to be goods manufactured by
himself or
(3) Puts his own mark on any goods made or manufactured by any other
manufacturer and claims such goods to be goods made or
manufactured by himself.
Explana tion: Where a manufacture dispatches any goods or parts thereof
to any branch office maintained by him, such branch office is not the
manufacturer, even though the parts dispatched are assembled at such
branch office and are sold or distributed from such b ranch
5. Consumer Dispute [Sec. 2(1)(e)]:
“Consumer Dispute” means a dispute where the person against whom a
complaint has been made, denies or disputes the allegations contained in
the complaint.
Explanation : A complaint has been made against any person who denies
the allegation made against him or her. Dispute must be pertaining to the
goods delivered or services provided.
6. Defects: Sec. 2(1)(f):
“Defect” means any fault, imperfection or shortcoming in the quality,
potency purity or standard which is requir ed to be maintained by or under
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131 The Consumer Protection Act 1986 implied or as is claimed by the trader in relation to any goods.
Explanation: When the goods are sub standard or engaged with some
inappropriate fault or imperfection in it is known as defects in the goods.
In short when the goods are not in accordance with the standard sets by the
law the goods called imperfect or defective.
 Supply of contaminated agricultural products which contain pesticides
and harmfu l soil particles, which caused to food poisoning.
 Product made for children that contains choking hazards
 Products like a helmet that cracks or breaks from small impact
 Unstable structures, such as tables or chairs that collapse
 Mechanical defects on cars and other electronic goods.
 Defects in the clothing materials. Etc.
7. Deficiency: Sec.2(1)(g):
“Deficiency means any fault, imperfection or shortcoming or inadequacy
in the quality, nature and manner of performance which is required to be
maintained or has been undertaken to be performed by a person in
pursuance of a contract or otherwise in relation to any service “.
Explanation: Deficiency is in services. If there is imperfection or
shortcoming or inadequacy in the nature or manner of performance of any
services as per the standard sets by the law, there is said to be deficiency
in services .
Cases:
a) Abhoya Kumar Panda V. Bajaj Auto Ltd:
The complainant purchased a Bajai Auto Trailer manufactured by the
respondent. The vehicle suffered from a major struct ural manufacturing
defect. The National Commission held that the manufacturer should not
have sold initially a product which suffered from a major manufacturing
defect.
Deficiency in telephone service :
b) Overbilling – In Union of India V. Nilesh Agarwal. :
A complaint was made averring that there were excess charges in the
telephone bill. The Rajasthan State Commission held that the complainant
who is a subscriber is a ‘consumer’ and the telephone service provided by
the Telecom Department is a ‘service’ fo r which he pays rent and over
billing of telephone is “deficiency in service” within the meaning of the
section.
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132 Business Law - II
132 8. Person [Sec. 2 (m)] Person includes :
(i) a firm whether registered or not
(ii) a Hindu undivided family
(iii) a co-operatives society
(iv) every other association of persons whether registered under the
Societies Registration Act, 1860 or not.
A person has to be a consumer within the definition of the word consumer
under the Consumer Protection Act to get remedy.
9. Service [Sec.2 (1)(o)]:
“Service” means service of an y description which is made available to
potential users and includes the provision of facilities in connection with
banking, financing, insurance, transport, processing, supply of electrical
or other energy, board or lodging or both, (housing construction )
entertainment, amusement or the purveying of news or other information
but does not include the rendering of any service free of charge or under a
contract of personal service.
Explanation: Contact of personal service is excluded from the
definition. A service offered by an Advocate to his client or service
rendered by a private tutor is therefore not included in the definition. The
law excludes some of the services from the purview of above definition
viz:
 Free Services: Government or Municipal Hospita ls rendering Free
Services
 Services rendered by Government officials
 Services provided under any contract of personal service.
 Services provided under sovereign function .
10. “Unfair trade practice" [Section 2 (1)]:
Means a trade practice which, for the pur pose of promoting the sale, use
or supply of any goods or for the provision of any service, adopts any
unfair method or unfair or deceptive practice including any of the
following practices, namely
The practice of making any statement, whether orally or in writing or by
visible representation which, -
a) falsely represents that the goods are of a particular standard, quality,
quantity, grade, composition, style or model;
b) falsely represents that the services are of a particular standard, quality
or grade
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133 The Consumer Protection Act 1986 or old goods as new goods
d) represents that the goods or services have sponsorship, approval,
performance, characteristics, accessories, uses or benefits which such
goods or services do not h ave;
e) represents that the seller or the supplier has a sponsorship or approval
or affiliation which such seller or supplier does not have;
f) makes a false or misleading representation concerning the need for, or
the usefulness of, any goods or services;
g) gives to the public any warranty or guarantee of the performance,
efficacy or length of life of a product or of any goods that is not based
on an adequate or proper test thereof
h) permits the publication of any advertisement whether in any
newspaper or otherwise , for the sale or supply at a bargain price, of
goods or services that are not intended to be offered for sale or supply
at the bargain price.
i) permits the sale or supply of goods intended to be used, or are of a
kind likely to be used, by consumers, knowin g or having reason to
believe that the goods do not comply with the standards prescribed by
competent authority relating to performance, composition, contents,
design, constructions, finishing or packaging as are necessary to
prevent or reduce the risk of injury to the person using the goods.
12. Appropriate Laboratory: Section 2 (1) (a):
"Appropriate laboratory" means a laboratory or organization
(i) Recognised by the Central Government;
(ii) Recognised by a State Government, subject to such guide lines as m ay
be prescribed by the Central Government in this behalf; or
(iii) any such laboratory or organisation established by or under any law
for the time being in force, which is maintained, financed or aided by
the Central Government or a State Government for carrying out
analysis or test of any goods with a view to determining whether such
goods suffer from any defect;
Explanation: Appropriate Laboratory is a recognised body set up or
funded fully or party by Central Government or State Government of
Both. T he function of such laboratory is to analyse the sample of the
goods which is in query to report the findings to the Dispute Redressal
Mechanism for further action at their end.


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134 Business Law - II
134 12.5 SUMMARY Rationale behind the enactment of the Consumer Protection Act :
 Sellers were engaged in many unfair practices which tend to the rise
of Consumer Movement by the dissatisfied customers.
 To give the protestation to the consumers from the exploitation in the
marketplace, there was no legal system was available.
 seller kn ows the fault in the goods.
Objectives and Reasons: The right to be protected against marketing of
goods which are hazardous to life and property; The right to be informed
about the quality, quantity, potency, purity, standard and price of goods to
prote ct the consumer against unfair trade practices;
Service : “Service” means service of any description which is made
available to potential users. “Unfair trade practice" Means a trade
practice which, for the purpose of promoting the sale, use or supply of an y
goods or for the provision of any service, adopts any unfair method or
unfair or deceptive practice including any of the following practices,
12.6 QUESTIONS 1. Explain the need for enactment of Consumer Protection Act.
2. Who can file a complaint under the c onsumer protection act and under
what circumstances?
3. Who is a consumer and who is not a consumer under the consumer
protection act?
4. What are an unfair trade practices?
5. Write a Short Note on : -
a. A trader?
b. Consumer Dispute
c. Deficiency
d. Defects
e. Contract of Perso nal service
f. Service
g. Manufacturer
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135 13
THE CONSUMER PROTECTION
COUNCILS
Unit Structure
13.0 Objectives
13.1 Introduction
13.2 Central Consumer Protection Council
13.3 State Consumer Protection Council
13.4 District Consumer Protection Council
13.5 Summary
13.6 Questions
13.0 OBJECTIVES After studying the unit the students will be able to:-
 Understand the Composition and Functioning of Central Consumer
Protection Council.
 Understand the composition and Functioning of State Consumer
Protection Council
 Understand the composition and Functi oning of District Consumer
Protection Council
13.1 INTRODUCTION Consumer Protection Act 1986 has come into in existence to protect the
interest of the consumers in various manners. Right to heard, Right to be
protected against the against marketing of goo ds which are hazardous to
life and property, right to be informed about the quality, quantity, potency,
purity, standard and price of goods to protect the consumer against unfair
trade practices, and most importantly right to consumer education, such
right s are conferred by this particular Act to the consumers. Again, to get
the simple and speedy redressal of grievances, this Act has established
Councils and Forums at District, State and National levels for effective
protection of the consumer’s interest. T he resolution passed by the
councils are recommendatory in nature.
13.2 CENTRAL CONSUMER PROTECTION COUNCIL Composition:
(l) The Central Government shall, by notification, establish with effect
from such date as it may specify in such notification, a Council to be
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136 Business Law - II
136 (2) The Central Council shall consist of the following members, namely:
a) The Minister in charge of the consumer affairs in the Central
Government, who shall be its Chairman,
b) The Minister of State or Deputy Minister In charge of Consumer’s
Affairs in the Central shall be Vice -Chairman
c) Representative of women not less than ten in number.
d) A person capable of representing Consumers Interest not mentioned
here in above 15 in numbers,
e) Two member s of parliament each one from Lok Sabha and Rajya
Sabha,
f) Secretary In -charge of Consumer’s Affairs in the State, nominated by
the Central Government and the same is not exceeding 3 in numbers,
g) An administrator of Union Territory, to represent Union Territo ry, on
rotational appointment as per the term of the Council and
h) Such number of other official or non -official members representing
such interests as may be prescribed. 1Objectives of the Central Council:
The objects of the Central Council shall be to pr omote and protect the
rights of the consumers as laid down under section 6 of Consumer
Protection Act. They are as under:
 The right to be protected against the marketing of goods and services
which are hazardous to life and property;
 The right to be infor med about the quality, quantity, potency, purity,
standard and price of goods or services,
 The right to be 'assured, wherever possible, access to a variety of
goods and services at competitive prices;
 The right to be heard and to be assured that consumer's interests will
receive due consideration at appropriate Forum;
 The right to seek redressal against unfair trade practices or restrictive
trade practices;
 The right to consumer education.
Procedures for Meeting:
1. The meeting of the Central Council shall be presided over by the
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137 The Consumer Protection Councils 2. Council may meet as per requirement, at least one meeting shall be
conducted every year mandatorily.
3. Meeting may be called by giving a notice not less than 10 days before
hand to the members who are entitled to receive the same.
4. Notice must contain the place , day and hour of the meeting enclosed
with an agenda.
5. As the resolution passed in the meeting is recommendatory only
hence no quorum is required,
6. In connection with the journey undertaken, non -official members are
entitled to avail first class or two -tier air - conditioned class of railway
accommodation.
7. The non -official members shall be entitled to have sum of Rs.1000
per day as daily allowance.
13.3 STATE CONSUMER PROTECTION COUNCIL Composition:
The State Government s hall, by notification, in the official gazette
established a State Consumer Protection Council:
The State Council shall consist of the following members, namely: —
1. The Minister in charge of consumer affairs in the State Government
who shall be the Chairman of the Council;
2. Such number of other official or non -official members representing
such interests as may be prescribed by the State Governments;
3. Such number of other official or non -official members, not exceeding
ten in number, nominated by the Central G overnment.
Procedures for Meeting:
 The State Council shall meet as and when required; but at least two
meetings shall be held every year.
 It is provided that the State Council shall meet at such time and place
as the Chairman decides.
Objects of the Stat e Council:
The objects of the State Council is to promote and protect the Consumers
Rights laid down under section 6 of the Act.
13.4 DISTRICT CONSUMER PROTECTION COUNCIL In order to promote and protect the rights of the consumers at the district
level, provisions have been made in the Consumer Protection Act, 1986. munotes.in

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138 Business Law - II
138 The State Government shall establish for every district, by notification, a
Council to be known as the District Consumer Protection Council
Composition:
The Collector of the district, who shal l be its Chairman, and
1. Such member of other official and non-official members representing
such interests as may be prescribed by the State Government.
2. The Council shall meet as and when necessary but not less than two
meetings shall be held every year.
3. The Council shall meet as such time and place within the District as
the Chairman may think fit.
Procedure for the meetings of the District Council:
1. Every meeting of the District Council shall be convened by the
Member Secretary in accordance with the direc tions of the Chairman.
2. The meeting of the District Council shall be presided over by the
Chairman
3. Quorum meeting of the District Council shall be seven.
4. Every meeting of the District Council shall be called only after giving
not less than seven days’ notic e, to each member:
5. The resolutions passed by the District Council shall be
recommendatory in nature.
13.5 SUMMARY Central Consumer Protection Council. Composition: - The Central
Government shall, by notification, establish with effect from such date as
it may specify in such notification, a Council to be known as the Central
Consumer Protection Council.
Objectives of the Central Council: The objects of the Central Council
shall be to promote and protect the rights of the consumers as laid down
under section 6 of Consumer Protection Act. the right to be protected
against the marketing of goods and services which are hazardous to life
and property; etc
Procedures for Meeting: The meeting of the Central Council shall be
presided over by the Chairman. Council ma y meet as per requirement, at
least one meeting shall be conducted every year mandatorily.
State Consumer Protection Council: The State Government shall, by
notification, in the official gazette established a State Consumer Protection
Council: the Minister in charge of consumer affairs in the State
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139 The Consumer Protection Councils Objects of the State Council: The objects of the State Council is to
promote and protect the Consumers Rights laid down under section 6 of
the Act.
District C onsumer Protection Council: The State Government shall
Establish for every district, by notification, a Council to be known as the
District Consumer Protection Council
13.6 QUESTIONS 1. Explain in detail the Constitution of State and Central Council
2. Explain the objectives for formation of Consumer Protection Council
3. Write a Short Note on: -
a. Consumer Protection Central Council
b. Consumer Protection District Council
c. Procedure for meetings of State and Central Council



*****

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140 14
CONSUMER PROTECTION REDRESSAL
AGENCIES (SEC. 9 TO 27 A)
Unit Structure
14.0 Objectives
14.1 Introduction
14.2 District Forum
14.3 State Commission
14.4 National Commission
14.5 Summary
14.6 Questions
14.0 OBJECTIVES After studying the unit the studen ts will be able to:
• Understand the Composition and Functioning of District Forum
• Understand the composition and Functioning of State Commission
• Understand the composition and Functioning of National Commission
14.1 INTRODUCTION To provide simple, sp eedy and inexpensive redressal of consumer
grievances, the Act envisages Three -tier quasi -judicial machinery at the
district, state and national level. At the district level there will be
“District Forum” to entertain consumer complaints where the value of
goods or services and compensation does not exceed rupees twenty lakhs,
and at the state level there will be ‘State Commission’ to deal with the
complaints where the claim exceeds rupees twenty lakhs but does not
exceed rupees One crore. At the national level there is a ‘National
Commission’ has the original jurisdiction carries where the value of goods
or services and compensation if any exceeds Rs. One Crore.
14.2 DISTRICT FORUM Each district of the state shall have a Consumer Dispute Redressal Forum
known as ‘District Forum’ it is to be established by the State Government
by notification to be published in official Gazette. With the 1993
amendment, the constitution and setting up of the District Forum is now
under the exclusive domain of the State Gove rnment. The State
Government, if it deems fit, establish more than one District Forum in a
district.
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141 Consumer Protection Redressal Agencies (Sec. 9 To 27 A) • Composition of the District Forum:
Each District Forum shall consist of:
(a) A person who is or has been or is qualified to be a District judge, who
shall be its President.
(b) Two other members, one of whom shall be woman.
Qualifications :
The person must:
a. Be of ability, integrity and standing and have adequate knowledge or
experience of or have shown capacity in dealing with problems
relating to e conomics, law, commerce, accountancy, industry, public
affairs or administration.
b. Be not less than 35 years of age.
c. Possesses bachelor degree from recognised university.
Disqualifications:
He is not fit to get appointed if he or she:
a. Adjudged ins olvent.
b. Is of unsound mind declared by the competent court.
c. Has been removed from the services of State or Central Government
or any body corporate owned fully of partly by State or Central
Government.
d. Has been convicted and sentenced to imprison ment for an offence
involves moral turpitude.
e. Any other disqualification prescribed by the competent authority from
time to time.
Selection Committee:
Every appointment shall be made by the State Government on the
recommendation of a selection commit tee consisting of the following:
(i) The President of the State Commission - Chairman.
(ii) Secretary, Law Department of the State - Member.
(iii) Secretary in -charge of the Department dealing with consumer affairs
in the State - Member.

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142 Business Law - II
142 • Terms and Cond itions:
Every consumer of the District Forum shall hold office for a term of five
years or up to the age of 65 years whichever is earlier and shall not be
eligible for re -appointment.
A member may resign his office in writing under his hand addressed to th e
State Government. His office shall become vacant on his resignation being
accepted by the State Government. Any vacancy so caused may be filled
by appointment of a person possessing the required qualifications.
• Salary or Honorarium:
The salary or hono rarium and other allowances payable to, and the other
terms and conditions of service of the members of the District Forum shall
be as may be prescribed by the State Government.
• Jurisdiction of the District Form:
Subject to the other provisions of this Act, the District Forum shall have
jurisdiction to entertain complaints where the value of the goods or
services and the compensation, if any claimed does not exceed rupees five
lakhs.
The provisions of Sec. 11 are intended to bring justice as near as poss ible
to the consumers and at the same time the defendant should not be put to
under inconvenience of travelling long distance.
• Pecuniary Jurisdiction:
The Forum can entertain the complaints where the value of goods or
services and the compensation claim does not exceed Rs, Twenty Lakhs.
‘The pecuniary Jurisdiction depends upon the amount of relief claimed
and not upon the value of the subject matter, nor upon the relief allowed
by the forum.
• Territorial Jurisdiction:
This section provides that a complai nt shall be instituted in a District
Forum within the local limits of whose jurisdiction.
a. The opposite party or each of the opposite parties at the time of
institution of the, complaint
(i) Actually and voluntarily resides or
(ii) Carries on business or
(iii) Has a branch office or
(iv) Personally works for gain.
b. Where there are more than one opposite parties, any of the opposite
parties at the time of the institution of the complaint: munotes.in

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143 Consumer Protection Redressal Agencies (Sec. 9 To 27 A) • Actually, and voluntarily resides or
• Carries on busines s or
• Has a branch office or
• Personally, works for gain. Provided that in such case either the
permission of the District Forum is given or
• The opposite party who does not reside or
• Carry-on business etc., consents in such institution.
Who can mak e the complaint?:
a. The consumer to whom such goods are sold or delivered or agreed to
be sold or delivered or such service provided or agreed to be
provided.
b. Any recognised consumer association whether the consumer to whom
the goods sold or delivered or agreed to be sold or delivered or service
provided or agreed to be provided is a member of such association or
not.
c. One or more consumers, where there are numerous consumers having
the same interest, with the permission of the District Forum, on beh alf
of or for the benefit of, all consumers so interested.
d. The central or the State Government.
Thus the complaint may be filed by the affected consumer himself or by
any recognised consumer association. It meant any voluntary consumer
association regis tered under the Companies Act, 2013 or any other law for
the time being in force.
• Procedure on receipt of complaint:
This section lay down the procedure which is to be followed by the
District Forum on the receipt of a complaint under the Act, where a
complaint does not require analysis or testing of the goods, it should be
decided as far as possible within a period of 90 days from the date of the
notice received by the opposite party and within 150 days if it requires
analysis or testing of goods.
• Rem edies available to consumers:
The Act enumerates the relief that can be granted to a complainant by the
District Forum.
If, after the proceeding conducted and the District Forum is satisfied that
the goods complained against suffer from any of the defect s specified in
the complaint or that any of the allegations contained in complaint about
the services are proved, it may grant relief by directing the opposite party
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144 Business Law - II
144 (a) To remove the defect pointed out by the app ropriate laboratory.
(b) To replace the goods with new goods of similar description,
(c) To return the price or charges paid by the complainant,
(d) To pay compensation for loss or injury suffered by the consumer due
to the negligence of the opposite party .
(e) To remove the defects or deficiencies in the services in question.
(f) To discontinue the unfair trade practice or the restrictive trade practice
or not to repeat it,
(g) Not to offer the hazardous goods for sale,
(h) To withdraw the hazardous goods from being offered for sale,
(i) To provide for adequate costs to parties.
The satisfaction of the District Forum must be based upon the judicial
approach and after complying with the procedure laid down in appropriate
section of the Act.
Cases:
1. In Pat el Ramabhai Shankerlal vs. Indian Airlines Corporation:
Gujarat State Commission has held that power to re -schedule the flight is a
rare power and if the Indian Airlines Corporation exceeds that power, the
corporation should be considered to be negligent and hence it should be
held liable to bear damages.
2. In Secretary Karnataka Electricity Board v/s. Se cretary Bellary
Citizen’s Forum :
The complainants alleged that due to sudden high voltage surge, the
electric equipment and fitting got damaged and clai med compensation for
the same. The Karnataka State Commission held that mere fluctuation in
the electricity voltage will not by itself give cause of action to the
consumers for claiming damages. The complainants have to prove
negligence of the officials of the Electricity Board.
• Appeals:
Any person aggrieved by an order made by the District Forum may prefer
an appeal against such order to the state commission within a period of
thirty days from the date of the order, in such form and manner as may be
prescribed. State commission that he has sufficient cause for not preferring
the appeal within the period of limitation.
14.3 STATE COMMISSION A consumer dispute redressal forum at the State level established by the
State Government is known as State Commissio n. munotes.in

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145 Consumer Protection Redressal Agencies (Sec. 9 To 27 A) Composition of the State Commission:
Each state commission shall consist of:
a. A person who is or has been a judge of a High Court, appointed by the
State Government, who shall be its President provided that no
appointment under this clause shall be ma de except after consultation
with the Chief Justice of the High Court.
b. Two other members, one of the member , shall be a woman.
Qualifications:
The person must:
a. Be of ability, integrity and standing and have adequate knowledge or
experience of or have shown capacity in dealing with problems
relating to economics, law, commerce, accountancy, industry, public
affairs or administration.
b. Be not less than 35 years of age.
c. Possesses bachelor degree from recognised university
• Removal of the Presid ent or Member (Disqualifications):
The State Government may remove from office, the President or member
of the State Commission who:
(a) Has been adjudged an insolvent or
(b) Has been convicted of an offence which, in the opinion of the State
Government, i nvolves moral turpitude or
(c) Has become physically or mentally incapable of acting as such
president or
(d) Has acquired such financial or other interest as is or a member, as the
case may be or
(e) Has so abused his position as to render his continuance in office
prejudicial to public interest.
However the President or a member shall not be removed from his office
on the ground specified in clause (d) and (e) above, except on an inquiry
held by the State Government.
Selection Committee:
Every appointmen t made under this clause shall be made by the State
Government on the recommendation of a selection committee con sisting
of the following namely :
(i) President of the State Commission - Chairman.
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146 Business Law - II
146 (iii) Secretary and in -charge of Department dealing with consumer affairs
in the state - Member.
• Salary and Honorarium:
The salary or honorarium and other allowances payable to, and the other
terms and conditions of service of the members of the state co mmission
shall he such as may be prescribed by the State Government.
• Terms and Conditions:
Every member of the State Commission shall hold office for a term of five
years or up to the age of sixty -seven years, whichever is earlier and shall
not be eligib le for re -appointment.
• Jurisdiction of the State Commission:
The State Commission shall have jurisdiction
a. To entertain:
(i) Complaints where the value of the goods or services and
compensation, if any claimed exceeds rupees twenty lakhs but does
not e xceed rupees One Crore this is known as pecuniary jurisdiction.
(ii) Appeals against the orders of any District Forum within the State and
b. to call for the records and pass appropriate orders in any consumer
dispute which is pending before or has been de cided by any District
Forum within the State where it appears to the state commission that
such District Forum has exercised a jurisdiction not vested in it by
law, or has failed to exercise a jurisdiction so vested or has acted in
exercise of it’s jurisdi ction illegally or with material irregularity.
• Appeals:
Any person aggrieved by an order made by the State Commission may
prefer an appeal against such order to the National Commission within a
period of thirty days from the date of the order in such fo rm and manner as
may be prescribed body corporate as if it is a private company, without
however, any limit to the number of members thereof.
• Circuit Benches:
This is a new provision inserted in the Act by the Consumer Protection
(Amendment) Act, 2002. Section 17 B, provides for establishment of
Circuit Benches of State Commission. The State Commission shall
ordinarily function in the State Capital but may perform its functions at
such other place as the State Government may, in consultation with the
State Commission, notify in the Official Gazette, from time to time.

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147 Consumer Protection Redressal Agencies (Sec. 9 To 27 A) • Remedies Available:
State Commission may provide the same remedies which are available
under District Forum.
14.4 NATIONAL COMMISSION The National Commission is known as National Con sumer Dispute
Redressal Commission. It is set up at New Delhi. Such body is established
by Central Government.
Composition of the National Commission:
a. a person who is or has been a Judge of the Supreme Court, to be
appointed by the Central Government, w ho shall be its President:
b. not less than four, and not more than such number of members, as
may be prescribed, and one of whom shall be a woman, who shall
have the following qualifications, namely:
Qualifications:
The person must:
a. Be of ability, inte grity and standing and have adequate knowledge or
experience of or have shown capacity in dealing with problems
relating to economics, law, commerce, accountancy, industry, public
affairs or administration.
b. Be not less than 35 years of age.
c. Possesse s bachelor degree from recognised university
• Disqualifications:
This section laid down the following disqualifications for being
appointment:
(a) Has been adjudged an insolvent or
(b) Has been convicted of an offence which, in the opinion of the Central
Government, involves moral turpitude or
(c) Has become physically or mentally incapable of acting as such
president or
(d) Has acquired such financial or other interest as is or a member, as the
case may be or
(e) Has so abused his position as to render hi s continuance in office
prejudicial to public interest.

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148 Business Law - II
148 • Salary and Honorarium:
The salary or honorarium and other allowances payable to and the other
terms and conditions of service of the members of the National
Commission shall be such as may be pre scribed by the Central
Government.
• Terms and Conditions:
Every member of the National Commission shall hold office for a term of
five years or up to the age of seventy years, whichever is earlier and shall
not be eligible for re -appointment.
• Jurisdicti on of the State Commission:
Section 21 : of Consumer Protection Act "Jurisdiction of the National
Commission"
Section 21: Subject to the other provisions of this Act, the National
Commission shall have jurisdiction:
(a) To entertain:
1. Complaints where the value of the goods or services and
compensation, if any, claimed exceeds rupees one crore; and
2. Appeals against the orders of any State Commission; and
3. To call for the records and pass appropriate orders in any consumer
dispute which is pending befor e or has been decided by any State
Commission where it appears to the National Commission that such
State Commission has exercised a jurisdiction not vested in it by law,
or has failed to exercise a jurisdiction so vested, or has acted in the
exercise of i ts jurisdiction illegally or with material irregularity.
Administrative control:
The National Commission shall have administrative control over all the
State Commissions in the following matters, namely:
• Calling for periodical returns regarding the inst itution, disposal,
pendency of cases
• Issuance of instructions regarding adoption of uniform procedure in
the hearing of matters, prior service of copies of documents produced
by one party to the opposite parties, furnishing of English translation
of judg ments written in any language, spee dy grant of copies of
documents
• Circuit Benches :
This is a new provision inserted in the Act by the Consumer Protection
(Amendment) Act, 2002. These benches shall function other than in Delhi
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149 Consumer Protection Redressal Agencies (Sec. 9 To 27 A) 13 Penalties:
Where a trader or a person against whom a complaint is made or the
complainant fails or omits to comply with any order made by the District
Forum, the State Commission or the National Commission, as the case
may be, such trader or person or complainant shall be punishable with
imprisonment for a term which shall not be less than one month but which
may extend to three years, or with fine which shall not be less than two
thousand rupees but which may extend to ten thousand rupees, or with
both:
Functioning of Three Tire Mechanism of Consumer Protection Act: District Forum State Commission National Commission President A person who is, or has been, or is qualified to be a District Judge, who shall be its President A person who is, or has been, or is qualified to be a High Court Judge, who shall be its President A person who is, or has been, or is qualified to be a Supreme Court Judge, who shall be its President Establishment District Forum is setup by the State Government. State Commission is setup by the State Government. National Commission is setup by the Central Government. Jurisdiction It is jurisdiction extends to the whole of the district. Its jurisdiction extends to the whole of the State.  Territorial Jurisdiction  Monitory or Pecuniary Jurisdiction  Original Jurisdiction  Territorial Jurisdiction  Appellate Jurisdiction.  Revisional Jurisdiction.  Supervisory Jurisdiction  Original Jurisdiction  Territorial Jurisdiction  Appellate Jurisdiction.  Revisional Jurisdiction  Supervisory Jurisdiction. No Appellate Authority Appeal can be entertained if the consumer is aggrieved against the verdict given by District Forum Appeal can be entertained if the consumer is aggrieved against the verdict given by State Commission munotes.in

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150 Business Law - II
150 President A person who is or has been or is qualified to be District Judge may be its President. A person who is or has been a Judge of High Court may be its President. A person who is or has been Judge of Supreme Court may be its President. Number There can be more than one District Forum in a District. There can be only one State Commission in a State. There can be only one National Commission in the whole country. Complaints District forum can entertain complaints as to goods or services within the jurisdiction limits of the district. State Commission entertains all appeals against all District Forums within the State. National Commission entertain all appeals made of all the State Commission in the country. Members It consists three members one of whom shall be a woman. It consists three members one of whom shall be a woman. It consists five members one of whom shall be a woman. Monitory Jurisdiction It can entertain complaints claiming not exceeding Rs. 20 lakh. It can entertain complaints claiming more than Rs. 20lakh but not exceeding rupees one crore. It can entertain complaints claiming exceeding rupees one crore. Term of office The term of office of every member of the District Forum shall be 5 years or unto the age of 65 years, whichever is less. The term of office of every member of the State Commission shall be 5 years or up to the age of 67 years, whichever is less. The term of office of every member of the National Commission shall be 5 years or upto the age of 70 years whichever is less. Control The State Commission has administrative control over The National Commission has administrative control over all The National Commission is an independent institution. munotes.in

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151 Consumer Protection Redressal Agencies (Sec. 9 To 27 A) the all District Forum within the State. State Commission in the country. Remedies To remove the defects.  to replace the goods  To return the price  To pay compensation  To remove defect of deficiency.  To remove the defects  to replace the goods  . To return the price  To pay compensation  To remove defect of deficiency.  To remove the defects  To replace the goods  To return the price  To pay compensation  To remove defect of deficiency.
14.5 SUMMARY Introduction: To provide simple, speedy and inexpensive redressal of
consumer grievances, the Act envisages Three -tier quasi -judicial
machinery at the district, state and national level.
District Forum: Each district of the state shall have a Consumer Dispute
Redressal Forum known as ‘District Forum’ it is to be established by the
State Government by notification to be published in offi cial Gazette.
District Forum shall have jurisdiction to entertain complaints where the
value of the goods or services and the compensation, if any claimed does
not exceed rupees five lakhs.
State Commission: A consumer dispute red ressal forum at the State level
established by the State Government is known as State Commission
National Commission: The National Commission is known as National
Consumer Dispute Redressal Commission. It is set up at New Delhi. Such
body is established by Central Government.
14.6 QUESTIONS 1. State composition of district forum
2. Explain the functioning of three tier system of consumer dispute
redressal under the consumer protection act?
3. Write note on removal of the president or member of the national
commission
4. Explain b riefly the various provisions of District Forum, State
Commission and National Commission.
5. Explain the Penalties for frivolous complaint.
*****
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152 15
COMPETITION ACT - 2002
Unit Structure
15.0 Objectives
15.1 Introduction and Preamble of the Act
15.2 Preamble
15.3 Objectives of Competition Commission and Advantages of
Competition
15.4 Some Important Terms in the Act
15.5 Salient Features of the Act
15.6 Summary
15.7 Questions
15.0 OBJECTIVES After studying the unit, the students will be able to:
 Understand the Preamble of the Competition Act
 Understand the advantages of competition
 Understand the composition and Functioning of Competition
Commissio n of India.
 Understand the Salient Features of the Act.
15.1 INTRO DUCTION AND PREAMBLE OF THE ACT The Monopoly and Practices Act 1969 has become obstacle in certain
respect mainly due to globalisation and liberalisation. There is need to
shift our focus from curbing monopolies to promoting competition.
The competition Act 2002 provides for establishment of quasi -judicial
body to be called as Competition Commission of India (CCI) which shall
not only ensure fair competition but also undertake competition
advocacy for creating awareness and imparting training on competition
issues. The act also provides for investigation by the Director General for
the commission. The director General would be able to act only if so
directed by the commission but will not have any Suo motu power for
initiating investigations. The Act confers power upon CCI to levy
penalty for contravention of its orders, failure to comply with its
direction, making of false statement or omission to furnish material
information, etc. It can also order division of dominant enterprises and has
power to demerger and amalgamations that adversely affects competition.

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153 Business Law - II 15.2 PREAMBLE “An Act to provide, keeping in view of the economic development of the
country, for the establishment of a Commission t o prevent practices
having adverse effect on competition, to promote and sustain competition
in markets, to protect the interests of consumers and to ensure freedom of
trade carried on by other participants in markets, in India, and for matters
connected t herewith or incidental thereto.”
15.3 OBJECTIVES OF COMPETITION COMMISSION OF INDIA AND ADVANTAGES OF COMPETITION It is a mechanism to implement and en force competition policy and to
prevent and punish anti -competitive business practices by firms and undue
Government interference in the market. Competition laws is equally
applicable on written as well as oral agreement, it is nothing but an
arrangements between the enterprises Following are the objectives of the
Competition Commission of India:
1. Eliminate practices having adverse effect on competition.
2. Promote and sustain competition in markets.
3. Protect the interests of consumers.
4. Ensure freedom of trade in the markets of India.
5. Establish a robust competitive environment.
Following are the Adva ntages of Competition :
1. Comp etition promotes the efficiency
2. It leads to higher productivity in the Market
3. It punishes th e laggards; It enhances choices
4. It improves quality
5. It leads to Economic Welfare
6. It helps in more innovation and tec hniques in the quality of services
7. It reduces costs of products
8. Competition facilitates better governance
15.4 SOME IMPORTANT TERMS IN THE ACT Some important definition and meanings under the a ct:
Acquisition: Section 2 (a) “acquisition” means, direc tly or indirectly,
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154 Competition Act- 2002 (i) Shares, voting rights or assets of any enterprise; or
(ii) Control over management or contro l over assets of any enterprise;
Agreement : Section 2 (b) “agreement” includes any arrangement or
unde rstanding or action in concert :
(i) Whether or not, such arrangement, understanding or action is formal
or in writing; or
(ii) Whether or not such arrangement, understanding or action is intended
to be enforceable by legal proceedings;
Appellate Tribu nal: Section 2 (ba) “Appellate Tribunal” means the
National Company Law Appellate Tribunal referred to in sub -section (1)
of section 53A;]]
Cartel: Section 2 (c) “cartel” includes an association of producers, sellers,
distributors, traders or service prov iders who, by agreement amongst
themselves, limit, control or attempt to control the production,
distribution, sale or price of, or, trade in goods or provision of services;
Chairperson: Section 2(d ) “Chairperson” means the Chairperson of the
Commission a ppointed under sub -section (1) of section 8;
Commission: Section 2(e) “Commission” means the Competition
Commission of India established under sub -section (1) of section 7;
Consumer: Section 2 (f) “consumer” means any person who ;
(i) Buys any goods for a consideration which has been paid or promised
or partly paid and partly promised, or under any system of deferred
payment and includes any user of such goods other than the person
who buys such goods for consideration paid or promised or partly
paid or par tly promised, or under any system of deferred payment
when such use is made with the approval of such person, whether
such purchase of goods is for resale or for any commercial purpose or
for personal use;
(ii) Hires or avails of any services for a consid eration which has been paid
or promised or partly paid and partly promised, or under any system
of deferred payment and includes any beneficiary of such services
other than the person who hires or avails of the services for
consideration paid or promised, or partly paid and partly promised, or
under any system of deferred payment, when such services are availed
of with the approval of the first -mentioned person whether such hiring
or availing of services is for any commercial purpose or for personal
use;
Enterprise : Section 2(h) “enterprise” means a person or a department of
the Government, who or which is, or has been, engaged in any activity,
relating to the production, storage, supply, distribution, acquisition or
control of articles or goods, or the prov ision of services, of any kind, or in munotes.in

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155 Business Law - II investment, or in the business of acquiring, holding, underwriting or
dealing with shares, debentures or other securities of any other body
corporate, either directly or through one or more of its units or divisions or
subsidiaries, whether such unit or division or subsidiary is located at the
same place where the enterprise is located or at a different place or at
different places, but does not include any activity of the Government
relatable to the sovereign functions of the Government including all
activities carried on by the departments of the Central Government dealing
with atomic energy, currency, defence and space.
Explanation - For the purposes of this clause, :
(a) “Activity” includes profession or occupation;
(b) “Article” includes a new article and “service” includes a new service;
(c) “Unit” or “division”, in relation to an enterprise, includes —
(i) A plant or factory established for the production, storage, supply,
distribution, acquisition or control of any article or goods;
(ii) Any branch or office established for the provision of any service;
Person: Section 2 (l) “ person” includes :
(i) An individual;
(ii) A Hindu undivided family;
(iii) A company;
(iv) A firm;
(v) An association of persons or a body of individuals, whether
incorporated or not, in India or outside India;
(vi) Any corporation established by or under any Central, State or
Provincial Act or a Government company as defined in section 617 of
the Companies Act, 1956 (1 of 1956);
15.5 SALIENT FEATURES OF THE ACT 1. Competition Commission o f India: (Section 7 To 48):
The C ompetition Commission of India acts as the competition regulator in
India. The Commission was established in 2003, and become fully
functional onl y by 2009. An objectives of the Commission is at
establishing a competitive environment in the Indian economy through
proactive engagement with all the stakeholders, the government, and
international jurisdiction. The objectives of the Commission are as under
 To prevent practices that harms the competition.
 To promote and sustain competition in markets. munotes.in

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156 Competition Act- 2002  To protect the interests of consumers.
 To ensure freedom of trade
Composition:
 The Commission consist of one chairperson and a minimum of two
members and a maximum of ten members. (This has further been
reduced to three members and one chairperson by the Cabinet.)
 The chairperson and the members are usually full -time members.
Qualifications for an appointment:
The Chairperson and every other Member shall be a person of ability,
integrity, and who, has been, or is qualified to be a judge of a High Court,
or, has special knowledge of, and professional experience of not less than
fifteen years in international trade, economics, business, commerce, law,
finance, accountancy, managemen t, industry, public affairs, administration
or in any other matter which, in the opinion of the Central Government,
may be useful to the Commission.
Term of office of Chairperson and other Membe r:
The Chairperson and every other Member shall hold office a s such for a
term of five years from the date on which he enters upon his office or
Sixty -Five years and for members Sixty -Seven years whichever is earlier
respectively and shall be eligible for re -appointment:
Disqualifications:
Following are the disqu alifications of the Chairman and Members of the
Commission.
a. Is, or at any time has been, adjudged as an insolvent; or
b. Has engaged at any time, during his term of office, in any paid
employment; or
c. Has been convicted of an offence which, in the opi nion of the Central
Government, involves moral turpitude; or
d. Has acquired such financial or other interest as is likely to affect
prejudicially his functions as a Member; or
e. Has so abused his position as to render his continuance in office
prejudicia l to the public interest; or
f. Has become physically or mentally incapable of acting as a Member.
14Functions of Competition Commission of India :
The preamble of the Competition Act focuses on the development of the
economy and the country by avoiding un fair competition practices and 1 https://byjus.com/free -ias-prep/the -competition -commission -of-india/
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157 Business Law - II promoting constructive competition. The functions of the CCI are:
1. Considering that the welfare of the customers are maintained in the
Indian Market.
2. An enhanced and inclusive economic growth through considering fair
and healthy competition in the economic activities of the nation.
3. Ensuring the efficient utilization of the nation’s resources through the
execution of competition policies.
4. The Co mmission also undertakes competition advocacy.
5. It is also the antitrust ombudsman for small organizations.
6. The CCI will also scrutinize any foreign company that enters the
Indian market through a merger or acquisition to ensure that it abides
by Indi a’s competition laws – the Competition Act, 2002.
7. CCI also ensures interaction and cooperation with the other regulating
authorities in the economy. This will ensure that the sectoral
regulatory laws are agreeable with the competition laws.
8. It also a cts as a business facilitator, by ensuring that a few firms do
not establish dominance in the market and that there is a peaceful co -
existence between the small and the large enterprises.
Duties of the Commission:
It shall be the duty of the commission to
1. Eliminate practices having adverse effect on competition ,
2. Protecting the interest of the consumer s and ensure freedom of trade
carried on by other participants in market in India.
3. Promoting and sustaining competition in the market.
4. Commission may in order to perform its duty enter into any
memorandum or arrangement with the prior approval of Central
Government, with any agency or any foreign country
2. Competition Advocacy:
The Central Government and State Government may in formulating
policy o n competition or on any other matter, make a reference to the
commission for its or its opinion on the possible effect of such policy on
competition . The opinion given by the commission shall not be binding
upon the Central government or State government T he commission shall
take suitable measure for the promotion of competition advocacy, creating
awareness and imparting training about competition issues.
The MRTP Act, 1969 is repealed. The MRTP Commission established
under MRTP ACT, stands dissolved. The M RTP may however, continue
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158 Competition Act- 2002 two years from the date of commencement of the Competition Act in
respect of all cases or proceedings filed before the commencement of
competition Act, as if MRTP Act had not been repealed.
All cases pertaining to monopolistic trade practices or restrictive
practices including cases of unfair trade practiced, pending before the
MRTPC shall, after the expiry of aforesaid two years period stand
transferred to the Appellate Tribunal and shall be adjudicated
by the Appellate Tribunal in accordance with the provision of the repealed
act.
All the investigation or proceedings, other than those relating to unfair
trade practices pending before the Director General of Investigation and
Registration, on or before the commencement stand transferred to the
Competition Commission of India (CCI) may conduct or order for
conduct or order for such conduct of such investigation or proceeding in
the manner as it deems fit.
3. Anti-Competitive Agreement:
No enterprise or association of enterprises or persons or association of
persons shall enter into any agreements in respect of production, supply,
distribution, storage, acquisition, or control of goods or provisions of
services, which causes or is likely to cause an adverse effect on
competition within India. Any agreement which causes an adverse
effect on competition shall be void. The Act has no retrospective effect.
An anti-competitive agreement entered into before the enforcem ent of the
act will not be invalid. However, if the anti-competitive agreement
continues after the enforcement of the act, the same shall rendered invalid.
Horizontal Agreements :
Horizontal agreements are arrangements between enterprises at the same
stage of the production cycle and that is generally between two opposites
for either fixing prices or for limiting produc tion or for sharing markets
tec. In all such agreements, there is a presumption in the Act that such
agreements cause AAEC that is ( appreciab le adverse effects) Cartel is
also a one kind of horizontal agreement.
Vertical agreements :
Vertical agreements are between enterprises at different stages of the
production cycle or chain, an example of such agreements are between the
manufacturer and a distributor. The presumptive rule does not apply to
vertical agreements. The question whether the vertical agreement is
causing AAEC is (appreciable adverse effects) is determined by rule of
reason. When rule of reason is employed, both positive as well a s negative
impact of competition is seen.
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159 Business Law - II Agreements which do not cause adverse effect on
competition:
1. Any agreement entered into between enterprises or
association of enterprises or persons or association of persons or
between any person and enterpri se or practice carried on or
decision taken by any association of enterprise or associations of
persons, including cartels, engaged in identical or similar trade of
goods or provisions of services, which :
a) Directly or indirectly determines purchase or sale price.
b) Limits or controls the production , supply , markets, technical
development, invest ment or provision of services.
c) Shares the market or source of production or provision of services,
by way of allocation of geographical area of market, or type of goods
or services, or number of customers in the market or any other similar
way.
d) Directly or indirectly results in bid rigging or collusive bidding.
2. Any agreement amongst the enterprises or persons at different stages
or level of the production chain in different markets, in respect of
production, supply, distribution, storage sale or price of or trade in
goods or provision of services including .
a) Tie in arrangements;
b) Exclusive supply agreement;
c) Exclusive distribution agreement;
d) Refusa l to deal;
e) Resale price maintenance.
4. Abuse of dominant position: In the event, an enterprise or an
associated individual, it is found to indulge in practices that are unfair
or discriminatory in nature shall be considered an abuse of dominant
positio n. If a party is found to be in abuse of its position, then they
will be subjected to an investigation from the concerned authorities.
5. Combinations: As per the act a combination is defined as terms
which lead to acquisitions or mergers. But should such combinations
cross the limits as put forth by the Act, then the parties involved
would be under the scrutiny of the Competition Commission of India.
Dominant Position:
Dominant position means a position of strength, enjoyed by an
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160 Competition Act- 2002 1) Operate independently of competitive forces prevailing in
the relevant market; or
2) Effect its competitors or consumers or the relevant market in its
favour.
Relevant market means the market which may be determin ed by the
commission with reference to the relevant product market or the relevant
geographical market or with reference to both the markets.
Relevant product market mandates demand sustainability as revealed by
consumer preferences.
Relevant geographic ma rket means a market comprising the area in
which the conditions of competition for supply of goods
or provision of services or demand of goods or services are distinctly
homogeneous and can be distinguished from the conditions prevailing in
the neighboring area.
Relevant product market means a market comprising all those products or
services which are regarded as interchangeable or substitutable by the
consumer, by reason of characteristics of the product or services, their
prices and intended use.
15.6 SUM MARY Advantages of Competition: Competition promotes the efficiency; It
leads to higher productivity in the Market It punishes the laggards; It
enhances choices, It improves quality, It leads to Economic Welfare, It
helps in more innovation and techniques in quality of services It reduces
costs of products; Competition facilitates better governance .
Salient Features of Competition: Competition Commission of India, Its
Composition and Functioning, Competition Advocacy, Anti -Competitive
Agreement: Horizonta l Agreements, Vertical agreements, Abuse of
dominant position, Combinations, Dominant Position.
15.7 QUESTIONS 1. Objective of competition act, 2002
2. State prohibition of certain agreements
3. State duties, powers and functions of the commission
4. Expla in functioning of competition commission of India
5. Write Short Note:
a) Meetings of commission
b) Establishment of commission
c) Prevention of abuse of dominant position
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161 MODULE V
INTELLECTUAL PROPERTY RIGHTS
16
NATURE AND CONCEPT OF IPR
Unit Structure
16.0 Objectives
16.1 Introduction
16.2 Concept of Intellectual Property Rights
16.3 Scope of Intellectual Property
16.4 Nature of Intellectual Property Rights
16.5 Summar y
16.6 Questions
16.0 OBJECTIVES After studying the unit, the students will be able to:
• Understand the concepts of Intellectual Property Rights
• Understand the nature of Intellectual Property Rights.
16.1 INTRODUCTION Intellectual property is the product of the human intellect including
creativity concepts, inventions, industrial models, trademarks, songs,
literature, symbols, names, brands, etc. Intellectual Property Rights do not
differ from other property rights. They allow their owner to comple tely
benefit from his/her product which was initially an idea that developed
and crystallized. They also entitle him/her to prevent others from using,
dealing or tampering with his/her product without prior permission from
him/her. He/she can in fact legal ly sue them and force them to stop and
compensate for any damages.
16.2 CONCEPT OF INTELLECTUAL PROPERTY RIGHTS Intellectual property, very broadly, means the legal property which results
from intellectual activity in the industrial, scientific and artist ic fields.
Countries have laws to protect intellectual property for two main reasons.
One is to give statutory expression to the moral and economic rights of
creators in their creations and such rights of the public in access to those
creations. The second is to promote, as a deliberate act of government
policy, creativity and the dissemination and application of its results and to
encourage fair trading which would contribute to economic and social
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162 Nature and Concept of Ipr • IP law aims at safeguarding creators and ot her producers of
intellectual goods and services by granting them certain time - limited
rights to control the use made of those productions.
• IP is traditionally divided into two branches: “Industrial Property and
Copyright”.
Intellectual property shall include rights relating to:
1) Literary, artistic and scientific works:
2) Performances of performing artists, phonograms and broadcasts;
3) Inventions in all fields of human behaviour;
4) Scientific discoveries;
5) Industrial designs;
6) Trademarks, service marks, and commercial names and designations;
7) Protection against unfair competition and all other rights resulting
from intellectual activity in industrial scientific, literary or artistic
fields”.
Some of the important convention relating to t he Intellectual Property
Rights and India being a member are bound to obey to this convention,
they are as under.
• Paris Convention for the Protection of Industrial Property (1967)
• Berne Convention for the Protection of Literary and Artistic Works
(1971)
• TRIPS Agreement
• GATT and WTO Agreement
• Patent Cooperation Treaty 2001
• The Paris Convention for the Protection of Industrial property, 1967.
• The Berne Convention for the Protection of Literary and Artistic
Works, 1971.
• The Rome Convention f or the Protection of Performers, Producers of
Phonograms and Broadcasting Organisation, 1961.
16.3 SCOPE OF INTELLECTUAL PROPERTY Intellectual property rights include copyright, patent, trademark,
geographic indication of origin, industrial design, trade s ecrets, database
protection laws, publicity rights laws, laws for the protection of plant
varieties, laws for the protection of semi -conductor chips (which store
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Business Law - II
163 Patents :
A patent is a type of intellectual property ri ght which allows the holder of
the right to exclusively make use of and sale an invention when one
develops an invention. Invention is a new process, machine, manufacture,
composition of matter. It is not an obvious derivation of the prior art (It
should i nvolve an inventive step). A person who has got a patent right has
an exclusive right.
Copyright :
Copyright is a form of IPR concerned with protecting works of human
intellect. The domain of copyright is literary and artistic works, might that
be writings , musicals and works of fine arts, such as paintings and
sculptures, as well as technology -based works such as computer programs
and electronic databases.
Copyright lasts for a longer period of time. The practice is life of author
plus 50 years after his/ her life
Industrial Design Law :
It is the aesthetics and ergonomics of a product. It consists of three -
dimensional elements, such as the creation of the product’s shape, or two -
dimensional ones, such as graphics, patterns and colors.
Trademarks Rights Law :
A trademark (also written trade mark or trade -mark) is a type of
intellectual property consisting of a recognizable sign, design, or
expression which identifies products or services of a particular source
from those of others, although trademarks used to identify services are
usually called service marks.
Geographic Indication :
Geographical Indications (“G.I.s”) identify a product as originating in a
certain region or country. So for a G.I. product, it’s reputation for quality
or authenticity is intimatel y linked to its geographical origin.
For Example: Darjeeling tea is a tea grown in the Darjeeling district,
A Solapuri chadar (सोलापुरȣ चादर), also known as Solapuri Cheddar
(“Solapuri bed sheet”), is a cotton bed sheet made in the Solapur i city of
the Ind ian state of Maharashtra.[1] These chadars are popular in India
where they are manufactured using hand looms and are known for their
design and durability.[2] Solapuri chadars were the first product in
Maharashtra to obtain Geographical Indication (GI) Ra tnagiri Hapus,
Belgam – Kunda, Nagpur - Oranges
It is indications on products of the geographic origin of the goods. It
indicates the general source. The indication relates to the quality or
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164 Nature and Concept of Ipr 16.4 NATURE OF INTELLECTUAL PROPERTY RIGHTS Intellectual properties have their own peculiar features. These features of
intellectual properties may serve to identify intellectual properties from
other types of properties. Thus, we will discuss them in brief.
1. It has a territorial based :
Any intellectual property issued should be resolved by national laws.
Because intellectual property rights have one characteristic which other
national rights do not have. In ownership of intellectual property of
immovable properties, issues of cross borders are not probable. But in
intellectual properties, it is common. A film made in Hollywood can be
seen in other countries. The market is not only the local one but also
international?
2. Giving an exclusive right to the owner :
It mea ns others, who are not owners, are restricted from using the right.
Most intellectual property rights cannot be implemented in practice as
soon as the owner got exclusive rights.
3. It is assignable :
Since they are rights, they can obviously be assigned or licensed. It is
possible to put a. Intellectual property can be bought, sold, or licensed or
hired or attached.
4. Independence :
Different intellectual property rights subsist in the same kind of object.
Most intellectual property rights are likely to be embodied in objects.
5. Subject to Public Policy :
They are vulnerable to the deep embodiment of public policy. Intellectual
property attempts to preserve and find adequate reconciliation between
two competing interests. On the one hand, the intellectua l property rights
holders require adequate remuneration and on the other hand, consumers
try to consume works without much inconvenience. Is limitation unique
for intellectual property?
16.5 SUMMARY Concept of Intellectual Property Rights :
Intellectual p roperty, very broadly, means the legal property which results
from intellectual activity in the industrial, scientific and artistic fields.
Countries have laws to protect intellectual property for two main reasons.
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Business Law - II
165 Scope of Intellectual Property: Patents , Copyright, Industrial Design
Law, Trademarks Rights Law, Geographic Indication.
Nature of Intellectual Property: It has a territorial based, Giving an
exclusive right to the owner, It is assignable, Independence, Subject to
Public Policy
16.6 QUESTIONS 1. Explain the concept and nature of Intellectual Property Rights
2. What is the Scope of IPR? Explain

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166 17
COPYRIGHT
Unit Structure
17.0 Objective
17.1 Introduction
17.2 Meaning and Definition
17.3 Duration or Term of Copyright and Fair Use
17.4 Rights of Copyright Holder
17.5 Registration
17.6 Infringement of Copyright and Remedies
17.7 Summary
17.8 Questions
17.0 OBJECTIVE After studying the unit, the students will be able to:
• Understand the Rights of Copyright holder
• Understand the Procedure for Registration of work done.
• Understand the infringement of copyright and remedies availabl e
• Aware about the term of copyright and fair use.
17.1 INTRODUCTION A new Copyright law was enacted in the year 1957 Before the Act of
1957, the Act of 1914 was functional before this act has came in to
existence the same was an extension of the British Copyright Act, 1911. In
May, 2012 the Parliament of India unanimously passed a bill named
Copyright Amendment Bill, 2012. This Bill has an objective to bring
Indian copyright laws at international level and in compliance with the
World Intellectual Proper ty Organisation treaties such as the WIPO
Copyright Treaty (WCT) and the WIPO Performance and Programme
Treaty (WPPT). Further, the main highlights of the 2012 Amendment bill
are:
• Amendments in the right to artistic work such as cinematograph films
and s ound recordings.
• Amendments in the mode of grant of license and assignments
• Protection against internet piracy.
• Amendments in accordance with WCT and WPPT. munotes.in

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167 Business Law - II Copyright ownership provides the owner the exclusive right to take the
benefit or use of the w ork, with some exceptions. When a person come up
or create an original work, he or she will be the automatic owner of that
work and owns copy right to that work.
Following are the types of works are entitle for copyright protection under
this act:
• Audiovisual works, such as TV shows, movies, and online videos
• Visual works, such as paintings, posters, and advertisements
• Sound recordings and musical compositions
• Video games and computer software
• Dramatic works, such as plays and musicals
• Writt en works, such as lectures, articles, books, and musical
compositions
17.2 MEANING AND DEFINITION Copyright means the exclusive right to do or authorise the doing of any of
the following acts in respect of a work or any substantial part thereof,
namel y:
A. In case of a literary, dramatic or musical work, not being computer
programme
i. To reproduce the work in any material form including the storing of it
in any medium electronic means;
ii. To issue copies of the work to the public not being copies a lready in
circulation;
iii. To perform the work in public, or communicate to the public ;
iv. To make any cinematograph film or sound recording in respect of the
work
v. To make any translation of the work;
vi. To make any adaptation of the work;
In relat ion to a literary work or an artistic work, adaptation shall mean the
conversion of work into a dramatic work by way of performance in public
or otherwise. In relation to dramatic work, adaptation shall mean any
abridgement of the work or any version of th e work in which the story 0r
action is conveyed wholly or mainly by means of pictures in a form
suitable for reproduction in a book or in a newspaper, magazine or similar
periodicals. In relation to a musical work, adaptation shall mean any
arrangement or transcription of work.
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168 Copyright B. In the case of a computer programme:
i. To do any of the acts specified in clause (a) above;
ii. To sell or give on commercial rental or offer for sale or for
commercial rental any copy of the computer programme .
C. In case of a n artistic work :
i. To reproduce the work in any material form including the storing of it
in any electronic media.
ii. To communicate the work to the public;
iii. To issue copy of the work to the public not being copies already in
circulation
iv. To inclu de the work in any cinematograph films;
v. To make any adaptation of work.
D. In case of cinematograph films :
i. To make copy of the film including a photograph of any image
forming part there of or storing of it in any medium by electronic or
other means,
ii. To sell or give on commercial rental or offer for sale or for such
rental, any copy of the film.
iii. To sill or give on hire or offer for sale or hire, any copy of the film,
regardless of whether such copy has been sold or given on hire on
earlier oc casions.
iv. To communicate film to the public,
E. In the case of sound recording :
i. To make any other sound recording embodying it, including storing of
it in any medium by electronic or other means,
ii. To sell or give on commercial rental or offer for sale or for such rental
any copy of sound recording,
iii. To communicate the sound recording to the public
Literary works are given a safeguard from being stolen or it is protected
by copyright as they are appeared in physical for m. Such literary works
includes , newspapers, books, computer , magazines, journals, anthologies,
novels, software and programmes, letters, e -mails, poetry, lyrics of songs,
tables and compilations. Literary works are not only defined to the above -
mentioned things but also includes encyclopedia entries , abstracts,
dictionary meanings and individual poems are protected within the shield
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169 Business Law - II Copyright defined as “the legal right of the owner of intellectual property”
In simpler terms, copyright is the right to copy. This means that the
original creators of products and anyone they give authorization to are the
only ones with the exclusive right to reproduce the work.
OWNERSHIP OF COPYRIGHT: (Sec 17)
a) In the case of literary, dramatic or artistic work:
If these work made by the author in the course of his employment by the
proprietor of a newspaper, magazine, or similar periodical under a contract
of service or apprenticeship for the purpose of publication in the
newspaper, magazine or similar periodical, the said proprie tor shall be t he
first owner of the copyright . This is however in the absence of any
agreement to the contrary between the author and his employer.
b) In case of photograph, painting or portrait etc.:
In the case of a photograph taken, or a painting or a portrait drawn, or an
engraving or a cinematograph made, for valuable consideration, at the
instance of any person, such person shall, in the absence of any agreement
to the contrary, be the first owner of the copyright
c) In case of any address or speech delivered in public:
the person who has delivered such address or speech or if such person has
delivered such address or speech on behalf of another person, such other
person shall be the first owner of the copyright therein even if the person
who deliver s or on whose behalf such address or speech is delivered, is
employed by any other person who arranges such address or speech or on
whose behalf such address or speech is delivered.
d) Government work:
Government shall, in the absence of any agreement to the contrary, the
first owner of the copyright therein.
e) Work of international organisation:
The international organisation concerned shall be the first owner of the
copyright therein.
WORK IN WHICH COPYRIGHT SUBSISTS: -
Work means any of the following w orks, namely;
• Literary work: it includes computer programmes, tables including
computer databases.
• Musical work: this means a work consisting of music and includes
any graphical notation of such work. It does not include words or
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170 Copyright • Artistic work: it means a painting, a sculpture, a drawing or a
photograph, whether or not any such work which possesses artistic
quality.
• Cinematograph film: Cinematograph film means any work of visual
recording and inclu des a sound recording accompanying such visual
recording. A ‘producer’ in relation with this means a 5) Sound
recording: this means a recording of sounds from which sounds may
be produced regardless of the medium on which such recording is
made.
• Broadcas t: broadcast means communication to the public by any
means of wireless diffusion or in form of signs or sounds.

• person who looks after making the work.
• Literary/dramatic = Who creates
• Musical work = The composer
• Sound recordin g = The producer
• Photograph = The photographer
• Computer generated work = person who causes the work to be
created.
17.3 DURATION OR TERM OF COPYRIGHT AND FAIR USE a) Work published during the life time of the author the term of a copy
right is for the lifetime of the author + 60 years.
b) Cinematographic films, records, posthumous publication, anonymous
publication, works of government and International agencies, the term
is 60 years from the beginning of the calendar year foll owing the
year in which the work was published.
c) Broadcasting = 25 years
FAIR USE:
Fair use is a legal theory that says “you can reuse copyright -protected
material under certain circumstances without getting the copyright
owner’s permission.”
Copyri ght Act, 1957, section 52 describes that certain acts or works that
cannot be treated as an infringement of copyright like fair dealing with a
literary, dramatic, musical or artistic work which is not a computer
program for the purposes of -
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171 Business Law - II (ii) Criticism or review, irrespective of that work ;
(iii) The reporting of current events and current affairs, lectures delivered
etc.
17.4 RIGHTS OF COPYRIGHT HOLDER The Copyright Act, 1957 provides copyright pro tection in India. It confers
copyright protection in the following two ways:
(A) Economic rights of the author, and
(B) Moral Rights of the author.
1. Right of Reproduction :
This is the most important right which is attained after the copyright
protecti on. This particular right gives the authority the person having such
copyright to make copies of the same protected work in any format. For
example: Copying, a song on a Compact Device or any sound and visual
recording can be considered as a reproduction of the content.
2. Right to Distribute :
This right is belongs to the right of reproduction or they are in the same
group. A person with whom the copyright of a particular work can
distribute his work in any manner. For example: He may take a print and
distribute to the general public at no cost or transfer some of right or all
the rights of holding to any one of his choice.
3. Right to make Derivative Works :
The copyright has the right to use his work in number of ways, for
example making translations in any form. For example a adaptation as
making a Bollywood Movie Novel. Right to Publicly Perform
4. Right to Follow :
5. Right of Paternity :
The ordinary copyright law some time fails to protect the computer
software and other data related information as the essential element of
creation is not appeared in such databases. Therefore, there was a need for
new law to protect such software and databases. A database is an
arrangement of information which may not be creative; it may still require
protection from unauthorized copying. Such database right are conferred
for a fifteen year period.
6. Private Copying :
This right is an exception to the reproduction rights which are
accomplished by the owner. According to this right, any person can make
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172 Copyright for educational purpose and that there is no commercial intention behind
such copies being made.
17.5 REGISTRATION Copyright Registration Process :
1. Filing of Application :
This is the fi rst step under the procedure for the Copyright registration.
The author of the original work / his agent/ or any representative on his
behalf can to file an application that is FORM IV along with requisite fees
either through portal available on the offic ial website of Copyright or
physically at the copyright office. Separate application to be filed along
for registration of each work with Registrar.
2. Examination :
Once the application is submitted is the examination of the copyright
application. An exa miner takes minimum 30 days to make a review of the
said application. If there is no objection is carried or raised by others then
the examiners shall continue to make further scrutineer of the application
where no discrepancy found
3. Registration :
This is the final stage for registration. When the Registrar is satisfied with
the document supplied along with an application form in support of the
clam made, he shall enter the details in the register of copyright and
further issues the Registration Certif icate.
17.6 INFRINGEMENT OF COPYRIGHT AND REMEDIES • When copyright is infringed?
• Copyright in a work shall be deemed to be infringed -
a) By a person without a license granted by the owner of the copyright
or in contravention of the conditions of a li cense so granted -
i) Does anything, the exclusive right to do which is conferred upon the
owner of copyright; or
ii) Permits for profit any place to be used for communication.
Where any person :
i) Makes for sale or hire or by way of trade displays for s ale or hire any
infringing copies of the work;
ii) By way trade exhibits in public any infringing copies of the work.
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173 Business Law - II When copyright not infringed? The following acts shall not constitute
an infri ngement of copyright:
1) A fair dealing with any work, not being a computer programme for
private or personal use.
2) Making of copies or adaptation of a computer programme by lawful
possessor of a copy of such programme.
3) The reproduction of any work in a certified copy made or supplied in
accordance with any law for the time being in force
4) The reading or recitation in public of reasonable extracts from a
published literacy or dramatic work
5) The reconstruction of a building or structure in accordan ce with the
architectural drawings to which building was constructed.
6) The making of ephemeral recording by a broadcasting organization
using its own facilities for its own broadcast.
CIVIL REMEDIES [secs . 55, 57, 58 & 62 ] :
• Where copyright in any wo rk has been infringed, the owner of the
copyright shall be entitled to all such remedies by way of injunction,
damages, accounts and otherwise as may be conferred by law for the
infringement of a right.
• The author shall also have a right to claim authors hip of work or
claim damages in respect of any distortion, mutilation, modification in
relation to the said work which is prejudicial to his reputation.
• Protection of separate rights: - where the several rights comprising
the copyright in any work owned by different persons the owner of
such right shall be entitled to the remedies {sec 56}
• Author’s special rights: - after the assignment of the said copyright,
wholly or partially, the author of a work shall have the right -
a) To claim authorship of the w ork
b) To restrain or claim damages in respect of distortion, mutilation, if
such acts would be prejudicial to his reputation {sec 57}.
c) Jurisdiction: every suit or other civil proceeding in respect of the
infringement of copyright in any work shall be i nstituted in District
court having jurisdiction. {sec 62}.
17.7 SUMMARY INTRODUCTION: Copyright ownership provides the owner the
exclusive right to take the benefit or use of the work, with some
exceptions. works are entitled for copyright protection unde r this act:
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174 Copyright works, such as paintings, posters, and advertisements, Sound recordings
and musical compositions, Video games and computer software, etc
Work in which Copyright subsists: Literary work: Musical work:
Artistic work: Cinematograph film: Broadcast:
Duration of Copyright and Fair use: Work published during the life
time of the author the term of a copy right is for the lifetime of the author
+ 60 years. Broadcasting 25 years. Fair use is a legal theory that says
“you can reuse copyright -protected material under certain circumstances
without getting the copyright owner’s permission.”
Rights of Copyright holder : Right of Reproduction, Right to Distribute,
Right to make Derivati ve Works, Right to Follow, Right of Paternity,
Private Copying.
Copyright Registration Process: Filing of Application, Examination,
Registration Copyright Infringement and remedy. Makes for sale or hire or
by way of trade displays for sale or hire any infr inging copies of the work;
by way trade exhibits in public any infringing copies of the work. Civil
Remedy
17.8 QUESTIONS 1. What is Copyright?
2. What work does copyright subsists?
3. What are the rights of copyright holder?
4. Discuss the issues of c opyright infringement and the applicable
remedies to it.
5. Write Short Note on: -
a. Fair use
b. Procedure for registration of work


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175 18
PATENT
Unit Structure
18.0 Objectives
18.1 Introduction
18.2 Meaning and Definition
18.3 Term of Patent
18.4 Requisites for Grant of Patent
18.5 Procedure for Obtaining Patent
18.6 Patent Infringement and Remedies
18.7 Summary
18.8 Questions
18.0 OBJECTIVES After studying the unit, the students will be able to: -
 Understand the Meaning and definition of patent
 Understand the Procedure obtaining patent
 Understand the infringement of Patent Rights and remedies available
 Aware about the term of c opyright and fair use.
18.1 INTRODUCTION A patent is a Monopoly and legal rights granted by a government or the
head of the state in return for invention. A granted patent gives the
proprietor the right to prevent others using the invention in the terri tory to
which the patent relates. A patent does not, give a positive right to use an
invention.
18.2 MEANING AND DEFINITION Patent is an exclusive right granted by a government for an invention that
is new, involves inventive step and is capable of indu strial application.
Section 2(1)(m) of the Indian Patent Act, 1970 defines patent as: “patent”
means a patent for any invention granted under this Act.
Patent means a patent for any invention granted under the Act. By grant of
patent, protection by way of a monopoly is extended to the inventor for a
limited period for
a. inventing a new product; or
b. inventing a new process; and munotes.in

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176 Patent c. new invented product or process is capable of industrial application.
When a patent is granted and is in force in respect of e ither the article or
the process it is called patented article and patented process respectively.
The person in whose favour the patent is granted and who is entered in the
register of the patent is called patentee. Patentee includes an exclusive
license. Exclusive licensee means a licence from a patentee which confers
on the licensee any right in respect of the patented invention.
18.3 TERM OF PATENT Section 53 of the Patents Act, 1970 deals with the determination of term of
patent in India. Subsection 1 of section 53 provides that the term of every
patent granted shall be 20 years. The term of patent can be expired on the
expiry of 20 years a fixed term. Secondly if the patentee is unable to pay
or ignored to pay the annual renewal fees. Governor at an y time can
impose the restriction on using this monopoly rights to the patent holder.
18.4 REQUISITES FOR GRANT OF PATENT A patent is a type of intellectual property that gives its owner the legal
right to exclude others from making, using, or selling a n invention for a
limited period of time in exchange for publishing an enabling disclosure of
the invention.
Section 2(1)(j) of the Patent Act, 2005, defines the “invention” as a new
product or as process involving an inventive step and capable of industri al
application.
1. The innovation must be new and not have prior use:
The invention must be new and not been used prior. It should be genuine
and not known to others before. It should not published earlier anywhere.
2. The innovation is useful:
This requirement does not relate to whether the new product, process or
invention is ‘useful’ in terms of whether or not someone would buy it.
Instead, it relates to whether the invention is capable of being made in
accordance with the claims and information in the patent.
From April 2013, there has been a requirement to disclose a specific,
substantial and credible use for the invention in the patent specification
3. It should have Industrial Applicability:
Only those inventions ae patentable, wherein havin g industrial
applicability.

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177 Business Law - II 4. The innovation is inventive :
This requirement of an inventive step relates to the ‘obviousness’ of the
new product, process or invention. If it is ‘obvious’ to a skilled person, it
is not patentable. It must have a featur e of inventiveness.
PATENTABLE INVENTION AND NON - PATENTABLE
INVENTION:
Patentable Inventions:
a) New products such as toys, appliances, tools, medical devices,
pharmaceutical drugs
b) New process, such as a manufacturing process or an industrial method
or process
c) Software
d) Business methods
e) Some types of biological materials
Not patentable Inventions:
a) Artistic creations
b) Mathematical algorithms or models
c) Abstract intellectual or mental concepts or processes
d) Plans or schemes
e) Principle s or theories
f) The mere discovery of a scientific principle or the formulation of an
abstract theory
g) Methods of agriculture or horticulture.
h) Inventions relating to atomic energy are not patentable.
i) The mere arrangement or re -arrangement or dupl ication of known
devices
j) An invention which is frivolous and obvious
k) Any process for medicinal, surgical, curative, prophylactic or other
treatment of human being.
18.5 PROCEDURE FOR OBTAINING PATENT A patent, granted by the government or by the hea d of the State, it confers
an exclusive right to an inventor to make, use, and sell his invention. This
exclusive right available for 20 years from the date of filing. The
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178 Patent therefore, enc ourage more noble developments. Let us look into the steps
involved in a patent filing in India. Following are the procedures for
obtaining the Patent.
1. Drafting a patent application:
An application in Form -I may be filed and submitted. It can be f iled by
the owner or the legal representative of the inventor.
2. Filing the Patent Application :
This is where the actual process starts. After drafting the patent
application, this can be filed in the government patent office as per the
application form in Form 1. A receipt would be generated with the patent
application number. One can also file a provisional patent application, in
case; the invention is at an early stage under Form 2.
3. Publication of the Application :
After filing the complete specifi cation, the application is published after
18 months from the date of filing. There is no need for any special
requirement from the applicant for publication. In this process an
objection also can be demanded.
4. Respond to the Objections :
By way of first examination report the applicant need to respond the
objection received from the patent office. The applicant is expected to file
a written response to the objection raised in the examination report. Such
hearing of an objection can be called for by physi cal hearing or video
conferencing.
5. Grant of Patent :
After responding all objections, the application would be placed for a
grant once it is found to be meeting all patentability requirements, and
finally, the patent will be granted to the applicant. The grant of a patent is
notified in the patent journal which is published from time to time.
18.6 PATENT INFRINGEMENT A ND REMEDIES Patent Infringement:
Patent infringement is the commission of a prohibited act with respect to a
patented invention without permission from the patent holder. It occurs
when someone violates the patent rights an inventor has in his invention
by making, using or selling the invention without the patent owner’s
permission.


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179 Business Law - II Remedies Available :
RELIEFS THAT MAY BE GRANTED: S - 108
The reliefs available to a successful plaintiff in a suit for infringement
include -(i)an injuction;(ii)damages;(iii)an account of profits;(iv)an order
for deliver -up or destruction(v)certificate of validity; (vi)costs. Injunction:
Injunction is a prev entive civil remedy.
Injunction is of two kinds:
(i) Interlocutory /temporary injunction and
(ii) Permanent injunction.
Temporary injunction is limited to a specific period or till the time the
case is finally decided on merit. The permanent injunctio n is granted after
hearing the parties on the merits of the case. The permanent injunction is
limited to the duration of the patent.
DAMAGES OR ACCOUNT OF PROFITS: The plaintiff is entitled to the
remedy of either damages or an account of profits. The pla intiff is given
the option to elect one of them.
SEIZURE OR FORFEITURE OF INFRINGING GOODS AND
IMPLEMENTS: Apart from the other reliefs which a court may order that
the goods which are found to be infringing and materials and implements
which are predomin antly used in the creation of infringing goods shall be
seized, forfeited or destroyed, as the court deems fit under the
circumstances of the case without payment of any compensation.
The usual criminal remedies are punishment by imprisonment or by a fine
or both.
18.7 SUMMARY Introduction: Patent is an exclusive right granted by a government for an
invention that is new, involves inventive step and is capable of industrial
application.
Term of Patent: Term of every patent granted shall be 20 years. The
term of patent can be expired on the expiry of 20 years a fixed term.
Requisites for Grant of Patent:
The innovation must be new and not have prior use, The innovation is
useful: It should have Industrial Applicability, The innovation is inventive:
Proc edure for obtaining Patent : Drafting a patent application: Filing the
Patent Application, Publication of the Application, Respond to the
Objections,
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180 Patent Grant of Patent :
Patent Infringement: Patent infringement is the commission of a
prohibited act with res pect to a patented invention without permission
from the patent holder. It occurs when someone violates the patent rights
an inventor has in his invention by making, using or selling the invention
without the patent owner’s permission. Remedies Available : Interlocutory
/temporary injunction and permanent injunction.
18.8 QUESTIONS 1. Explain the Concept of Patent and its applicability
2. What is Patentable and What things are not Patentable?
3. What are the procedure for obtaining Patent?
4. Write Short Note
a. Infringement of Patent Rights and Remedies available
b. Term of Patent
c. Requisites for grant of patent.



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181 19
TRADEMARK
Unit Structure
19.0 Objectives
19.1 Introduction
19.2 Meaning and Definition
19.3 Registration of Trademark
19.4 Types of Trademarks
19.5 Functions of Trademark
19.6 Trademark Which Cannot Be Registered.
19.7 Passing off
19.8 Trademark Infringement
19.9 Remedies Available
19.10 Summary
19.11 Questions
19.12 References: Webliography
19.0 OBJECTIVES After studying the unit, the students will be able to:
• Understand the Meaning and definition of Patent
• Understand the Proc edure for registration of Trademark
• Understand the functions of Trademark and meaning of ‘Passing off’
• Understand the infringement of Trademark and Remedies available
19.1 INTRODUCTION Trademark is a type of intellectual property rights. Intellectual property
rights allow public to maintain ownership rights of their innovative
product and creative mind. The intellectual property came to light because
of the efforts of human efforts, so it is limited by a number of charges for
the registration and char ges for infringement. Types of intellectual
property are Trademarks, Copyright Act, Patent Act, and Designs Act.
19.2 MEANING AND DEFINITION A trademark includes a name, word, or sign that differentiates goods from
the goods of other enterprises. Marketi ng of goods or services by the
procedure becomes easier with a trademark because identification of
product with the trademark is the essence of this act. The owner can
prevent the use of his mark or sign by another user. A trademark can be a
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182 Trademark According to Section 2(1) (zb) of the Trade Marks Act, 1999, a
'trademark' “means a mark which is capable of being represented
graphically and capable of distinguishing the goods or services of one
person from those of others, and may include the shape of goods or their
packaging and combinations of colours.”
19.3 REGISTRATION OF TRADEMARK 1. Filing Trademark Application
The first step is to file a trademark application at the Trademark Registrar
in India. Nowadays, filing is mostly done online. Once the application is
filed, an official receipt is immediately issued for future correspondence.
2. Examination
On filing of trademark application , the same is examined by the examiner
to find out whether any anomalies of discrep ancies are there. This process
may take around one year. An examiner may accept the trademark
without any reservation or with condition.
If the application form is accepted the trademark is published in the
Trademark Journal.
3. Publication :
The step o f publication is incorporated in the trademark registration
process so that anyone who objects to the registering of the trademark has
the opportunity to oppose the same. If, after 3 -4 months from publication
there is no opposition, the trademark proceeds for registration. In case
there is opposition; there is a fair hearing and decision are given by the
Registrar.
4. Registration Certificate :
Once the application proceeds for trademark registration, following
publication in Trademark Journal, a registrati on certificate under the seal
of the Trademark Office is issued.
5. Renewal :
The trademark can be renewed perpetually after every 10 years. Hence,
logo or brand name registration can be protected perpetually.
19.4 TYPES OF TRADEMARKS The Trademarks Act, 1999, allows the registration of various types of
trademarks such as word marks, service marks, collective marks,
certification marks, series marks logos/symbols and many other.

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183 Business Law - II Following are the types of Trademarks in India
1. Word Marks. Word Marks ar e the most common types of trademarks
that are registered in India. ...
2. Service Marks. Service Marks represent the service which a company
or business deals in.
3. Logos and Symbols.
4. Shape of Goods.
5. Series Marks.
6. Collective Trademarks.
7. Certification Mark.
8. Geographical Indicators.
1.Word Marks:
Word Marks are the most common types of trademarks that are registered
in India. These refer to any marks that are used to identify the products
and services of a trading company or service -providing company. If the
name of your product or service is text - based (contains text only) it will
be registered under Word Marks
For Example - The word Nestle® is a registered as a Word -Mark.
2. Service Marks :
Service Marks represent the service which a c ompany or business deals in.
They distinguish different services available in the market .
For example - FedEx is a registered courier delivery service provider.
3. Logos and Symbols :
A logo is a printed/painted figure/design/character and do not consist of
any letters/words/numerals. For word marks that are also used as a logo,
the trademark needs to be registered both as a word mark and a device
marks. In India, the registration for both these aspects can be made in a
single application.
For example - Apple has a registered logo which is used on each of their
products.
4. Shape of Goods
The shape of goods are categorized in Trade Dress (appearance of a
product) wherein, other than a logo or label a product can also be
distinguished based on its packagi ng.
For example - The bottle of Coca -Cola is distinguished from other brands
on the basis of its bottle's shape. munotes.in

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184 Trademark 5. Series Marks :
Service marks are trademarks which have a common syllable, prefix or
suffix, thus denoting as a family of marks sharing a 'c ommon name.' They
should differ only as to matters of non -distinctive characters(goods, price,
quality or size).
For example - McDonald's have a series of 'Mc' registered as word mark
which represents their different product range such as Mc Chicken, Mc
Veggie etc.
6. Collective Trademarks
These marks are linked with a group of people and not one single product
or service. These trademarks are primarily owned by an organization,
institutes or any association. They can be used by members of the
organizatio n to represent them as one the part.
They are "Badges of origin" which indicates the specific source of the
individual, his/her products and services.
For Example - A chartered accountant can use the “CA" device as he is a
registered member of the Institut e of Chartered Accountants.
7. Certification Mark
The certification mark is created to show a specific quality standard that
the company has met. This means that the public will be aware that the
trader's goods or services are certified as it has met a pa rticular standard,
as defined by the certifying body that owns the certification mark.
Certification marks are used to define "Standard" of goods and services.
For Example - FSSAI - Certification for the quality of packaged food
products.
8. Geographical Indicators: A geographical indication is used on
products to show the unique nature, reputation and quality the products
possess based on the place of origin
The Geographical Indicators are awarded by the GI Registry and is
granted to natural, agricultural , manufactured and handicraft products that
come from a specific geographical origin.
For Example -Darjeeling Tea is a GI under the Intellectual Property
Rights.
19.5 FUNCTIONS OF TRADEMARK A trademark serves the purpose of identifying the source or the o rigin of
goods. Trademark performs the following four functions.
1. It helps in identifying the product and it’s origin. munotes.in

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185 Business Law - II 2. It proposes to give the guarantee its quality.
3. It advertises the product. The trademark represents the product.
4. It creates an image of the product in the minds of the public
particularly the consumers or the prospective consumers of such
goods.
5. It helps the genuine buyer to protect themselves from the spurious
goods. etc.
19.6 TRADEMARK WHICH CANNOT BE REGISTERED. a) The use of which would be likely to deceive or defraud or cause
confusion in the minds of users.
b) A mark the use of which would be contrary to any law for the time
being in force;
c) A mark containing scandalous or obscene matter;
d) A mark comprising any matte r likely to hurt the religious
susceptibilities of any class or section of the community;
e) A mark which would be not allowed to protection in court of law
f) A mark which is simile with a trademark already registered in respect
of the same goods or goo ds of the same description
g) A word which is the accepted name of any single chemical name or
chemical compound in respect of chemical substances.
h) A geographical name or a surname or a personal name or any
common abbreviation thereof or the name of a s ect, caste or tribe in
India.
19.7 PASSING OFF ‘Passing off’ which can be used to enforce unregistered trademark rights.
The law of passing off prevents one person from misrepresenting his
goods or services as that of another.
The concept of passing off h as gone changes in the near course of time. At
first it was sticked to the representation of one person's goods as those of
another. Afterwards it was extended to business and services.
Subsequently it was further extended to professions and non -trading
activities. Today it is applied to many forms of unfair trading and unfair
competition where the activities of one person cause damage or injury to
the goodwill associated with the activities of another person or group of
persons. munotes.in

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186 Trademark In British Diabetic Associa tion V Diabetic Society , both the parties were
charitable societies. Their names were deceptively similar. The words
'Association' and 'Society' were too close since they were similar in
derivation and meaning and were not wholly dissimilar in form.
Perma nent injunction granted.
19.8 TRADEMARK INFRINGEMENT Section 29 of the Trade Marks Act prescribes the infringement of a
trademark. In simple words, when the exclusive rights of the owner of the
registered Trademark are violated, it is said to be an infring ement of
Trademark. The trademark registration provides the exclusive rights to the
brand name to the proprietor i.e. the applicant. The certificate of trademark
registration provides exclusive rights to the proprietor to use the brand
name for their busin ess activity falling under the class in which it is
registered. In case, a third party uses the brand name in course of trade
without permission of the owner, it is the violation of owner’s right and is
called as the infringement of Trademark.
Most common cases of trademark infringement include using closely or
deceptively similar brand names or logos for associated goods and
services; and using a mark that cerates false impression or confusion with
the registered trademark. For proving trademark infringeme nt, the
intention of creating confusion or commercial use is ground for support.
Certain situations under the law are also prescribed which are not
considered as the infringement of trademark.
19.9 REMEDIES AVAILABLE Civil Remedies for Trademark Infringe ment are available in following
heads:
1. In the form of Injunction:
The action of an injunction is referred as stopping one person from doing
particular activity or task through the judicial process. With respect to
trademark infringement, it is restrain ing a person from unauthorised use of
the trademark. Through a temporary or permanent stay, the Court grants
protection to the trademark owner.
2. In the form of Damages:
Damages refer to the recovery of loss faced by the trademark owner
through the trade mark infringement. The monetary value of financial loss
or brand impairment is recovered under this head. The amount of damages
will be granted by the court after considering the actual and anticipated
loss of owner due to infringement.
The damages in Trad emark law as a relief has increasingly assumed
importance and the main aim of the damages is to monetarily compensate. munotes.in

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187 Business Law - II 3.Custody of infringing materials:
This remedy suggests that the Court may ask the infringer to deliver all the
goods or products that a re labelled with the brand name. Here, the Court
may direct the authorities to withhold the related materials accounts and
destruct all such goods. Where the trademark relates to services, i.e. a
Service Mark is infringed; the order may be passed to stop t he provision of
the services immediately by the infringer.
19.10 SUMMARY Meaning: A trademark includes a name, word, or sign that differentiates
goods from the goods of other enterprises. a 'trademark' “means a mark
which is capable of being represented g raphically and capable of
distinguishing the goods or services of one person from those of others,
and may include the shape of goods or their packaging and combinations
of colours.”
Registration of Trademark: Filing Trademark Application, Publication,
Registration Certificate, Renewal
Types of Trademarks: Word Marks. Service Marks. Logos and Symbols,
Shape of Goods, Series Marks. Collective Trademarks. Certification Mark.
Geographical Indicators.
Functions of Trademarks: It helps in identifying the product and it’s
origin. It proposes to give the guarantee its quality. It advertises the
product. The trademark represents the product. It creates an image of the
product in the minds of the public particularly the consumers or the
prospective consumers of such goods.
Passing off: ‘Passing off’ which can be used to enforce unregistered
trademark rights. The law of passing off prevents one person from
misrepresenting his goods or services as that of another.
Trademark Infringement: Most common cases of trademark
infringement include using closely or deceptively similar brand names or
logos for associated goods and services; and using a mark that cerates
false impression or confusion with the registered trademark.
Civil Remedies: In the form of Injunction: In the form of Damages:
Custody of infringing materials:
19.11 QUESTIONS 1. Explain the concept of Trade Mark?
2. What are the functions of trademarks?
3. Explain various types of Trademarks
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188 Trademark 4. Write Short Note:
a. Passing off
b. Trademark infringement
c. Rem edies available for infringement of trademark
19.12 REFERENCES: WEBLIOGRAPHY 1. https://www.writinglaw.com/characteristics -of-company/
2. https://taxguru.in/company -law/person -
company.html#:~:text=One%20person%20company%20(OPC)%20m
eans,having%20at%20least %
3. https://www.toppr.com/guides/principles -and-practices -of-
accounting/intro -to-company -accounts/types -of-companies/
4. https://www.yourarticle library.com/company/companies -types -5-
types -of-companies -discussed/46810 .



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