Thursday, July 13, 2006
Business Legislation Notes - Prof. Bijoy Kumar Dutta - Part 5
An Incohed instrument is an instrument in some respects. When a person signs and delivers to another a blank or incomplete stamp papers & he authorizes the other person to make or complete the NI for an amount covered by the stand, the person so singing 7 delivering is liable upon such an amount to any holder on due course for such an amount.
Eg: A bill in due course may write his own name as payee in the bill of exchange and sue upon the instrument.
Section 91 (VVV Imp)
Dishonoured by non acceptance
A deed of exchange is dishonoured by non-acceptance in any of the following ways: -
(a) If the drawee does not accept the bill within 48 hours from the time of presentment though it is duly presented for acceptance.
(b) If there are several drawees ( who are not partners) and all of them do not accept
(c) When the drawee is incompetent to contract
(d) When the drawee gives a qualified acceptance
(e) When the drawee is a fictitious person.
Dishonoured by non payment
A promissory note, bill of exchange or a cheque is said to be dishonoured if the maker of the promissory note, acceptor of the bill of exchange, or the drawee of a check, makes a default in payment upon being duly required to pay, the same.
Notice of dishonour
A deed of exchange may be dishonoured by non-acceptance since only being is required acceptance since only being is required acceptance on non-payment.
A promissory note of a check are dishonoured by nonpayment only. When a negotiable instrument is dishonoured by non-acceptance or non-payment, the holder must give notice of dishonour to all the prior parties to make them liable on the instrument.
Negotiation of an instrument is a process by which the ownership of the instrument is transformed from one person to another.
Under the Negotiable Instrument Act only deed of exchange must be accepted. A deed of exchange is said to be accepted when the drawee puts his signature on it, thereby acknowledging his liability under the deed of exchange.
The usual mode of acceptance is writing the word “accepted” across the deed & signing under it.
S. R. Khan
BOUNCING OF CHECK
Chapter XVII (Roman 17) of Negotiable Instrument Act was inserted by Act 66 of 1988, effective from 1st April 1989 prescribing penalties in case of dishonour of certain cheques for insufficiency of funds.
Section 138 of Negotiable Instrument Act states that any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for discharge in whole or in part of any legally enforceable debt or other liability, is returned by the bank, unpaid, either because of the amount of money standing within credit of that account, is insufficient to honour the cheque or that it exceeds the mount arranged to be paid from that account by an agreement made with the bank, such person shall be deemed and have committed an offence and should be punishable with imprisonment for a term which extend to twice the amount of the cheque or both. But the above provision will not apply unless,
(a) the cheque has been presented to the bank within a period of 6 months from the date on which it was drawn or within the period of its validity whichever is earlier.
(b) the payee or the holder in due course of cheque as the case may be, makes a demand for the payment of the said money by giving within 30 days of the receipt of the information by him from the bank regarding the return of the cheques as unpaid, and
(c) drawer of such cheque fails to make payment of the said amount to the payee or as the case may be to the holder in due course within 15 days of the receipt of the said notice.
DIRECTOR (VVVV Imp)
A company being an artificial person cannot act by itself, it has neither a mind nor a body of its own. It must Act through some human agency. The persons by whom or through whom, the business of the company is carried on are termed as directors.
They are in charge of the management of the affairs of the company. The directors are called The board of directors.
States that the director includes any person occupying position of a director by whatever name called an important factor to determine, whether a person is or is not a director, is to refer to the nature of the office & its duties.
Thus function is everything. Name matters nothing. The director is in fact a director or controller of the affairs of the company. He is not a servant of the company.
Nobody corporate, association or firm shall be appointed director of a company. Only an individual shall be appointed. (Section 253)
Number of Directors
The number of directors to be appointed to the board of director of a company is determined by the Articles of Association. The Company’s Act provides that there must be at least 3 directors in the case of a Public Limited Company & at least 2 directors in other companies by an amendment of the section. It has been provided that a public company having a paid up share capital of Rs 5 crore or more thus 1000 or more shareholders, should have a director elected by small shareholders. A small shareholder means having shares of the nominal value of Rs 25,000 or less is a Public Ltd Company.
Who can be a Director?
A director must be capable of entering into a contract i.e. be
(a) He must have attained the age of majority
(b) Must be of sound mind
(c) Must not be disqualified from contract by any law for which he is subject.
(d) Director must be a natural person
(e) Director must have the requisite qualification
POSITION OF DIRECTORS (VVVV Imp)
They have been described sometimes, as trustees of the company & sometimes as agents but of neither view are wholly correct.
DIRECTOR AS A TRUSTEE (VVVV Imp)
A trustee is a person who is the owner of a property & deals with it as principle but the director is not the owner of the company. Director’s position is similar to that of a trustee because the directors are bound to exercise their powers in the interest of the company & are liable misuse of power if any.
DIRECTOR AS AN AGENT
It is more accurate to describe the directors as agents of the company. They are agents as the company acts through them.
Directors are in the eyes of the law agents of the company for which they act & the general principle of the law of principle & agent regulate in most respects, the relationship between the company and the directors.
He is a director who is entrusted with substantial powers of management. He is the whole time director. He is the chief executive of the company.
WHOLE TIME DIRECTORS
Whole time Directors who is entrusted with certain duties & responsibilities. The ambit of jurisdiction is defined to its contract of employment.
NOTE: - Learn appointment of Directors
PREVENTION OD OPPRESSION & MISMANAGEMENT
The basic principle relating to the administration of the affairs of a company is that court will not in general intervene at the instance of shareholders in matters of internal administration 7 will not interfere with the management of the company by its directors, so long as they are acting within the powers conferred on them under AOA (Articles of Association)
The principle that the will of the majority should prevail & bind the minority is known as principle of majority rule. It was established in the case of Foss v/s Harbattle in 1843.
The case: -
2 minority shareholders in a company alleged that the directors were guilty buying their own land for the company’s use & paying a price greater than its value which resulted in a loss to the company.
The minority shareholders decided to take an action against the direction. The shareholders in a general meeting by majority resolved not to take any action. The court dismissed the suite on the ground that the acts of the directors were capable of conformation by the majority.
The majority should be basic but not prevail under all circumstances. There are certain acts which no majority shareholders can approve or affirm.
1) Where the act, done is illegal of ultravires (beyond power)
2) Where the majorities are perpetrating a fraud on the minority.
3) Where a company is doing an act, which is in consistent with AOA.
4) Where an act can only be done a special resolution but in fact has been done by a simple majority.
5) Where there is a breach of duty.
18th July, 2006 – Bijoy Kumar Dutta – Business Legislation
OPPRESSION (definition) (VVVV Imp)
Lord Cooper in Elder v/s Elder observed, “The essence of the matter seems to be that the conduct concurred of should at the low and involve a visible departure from the standards of fair dealing and violation of the condition of fair play on which every shareholder who entrusts his money to the company is entitled to rely”.
PREVENTION OF OPPRESSION (concept) (VVVV Imp)
Whenever the affairs of a company are being conducted in a manner oppressive to any member or members or prejudicial to public interest, an application can be made under section 397 of the Act.
The Requisite number of members who must sign the application is given in section 399, (100 or 1/10th of the total no of members) must sign the application.
PREVENTION OF MISMANAGEMENT (concept) (VVVV Imp)
Section 398 provides that a requisite no of members has lain down in section 399 of a company may apply to the tribunal for appropriate relief on grounds of mismanagement.
The tribunal may give relief if it is of the opinion
(a) the affairs of the company are being conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interest of the company.
(b) by the affairs of material change in the management or control of the company. The affairs of the company is likely to be conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interest of the company.
Under section 397 & 398 the tribunal has all the necessary powers to end oppression as well as prevent mismanagement.
POWERS OF THE TRIBUNAL (VV Imp)
(a) A regulation of the conduct of the company’s affairs in future.
(b) The purchase of the shares of any member of a company by other members or by the company
(c) In case of purchase of shares by the company, the consequent reduction of the share capital of the company
(d) Termination, setting aside or modification of any agreement of the company & its management
(e) The termination setting aside or modification of any agreement between company & third party
COMPROMISE & ARRANGEMENT
Compromise means an amicable settlement of differences by mutual concessions by the parties to dispute or differences by agreeing not to try it out.
Arrangement is of wider import than compromise & includes a reorganization of the share capital of the company by the consolidation of share of different classes or by the division of shares into shares of different classes by both these methods.
An arrangement may also involve the preference shareholders giving up the right to arrears of dividends further agreeing to accept a reduced rate of dividend in future.
RECONSTRUCTION & AMALGAMATION
The term indicates the process, which involves: -
1) Transfer of undertakings of an existing company to another company, usually a company incorporated for the purpose.
2) The ld company ceases to exist
3) The carrying on of substantially the same business by the same person.
4) The rights of the shareholders in the old company being satisfied by their being allotted shares in the new company. A reconstruction is made to extend the operation of the company also if the company wants to do business, which is totally unrelated to its objects, it may resolve to reconstruction, in fact it is like putting old wine in a new bottle.
It is a blending of two or more undertakings into one undertaking. The shareholders of each blending company becoming substantially the shareholders of the other companies which hold blended undertakings.
The differences between amalgamation & reconstruction are that amalgamation involves the blending of two or more concerns and nearly the constituents of one concern.
Reconstruction implies the carrying of an existing business in same altered forms.
1) Differences between Compromise and Arrangement
2) Distinction between the above 4 concepts. (VVVV Imp)
STATUTORY DUTIES OF AUDITOR
Section 227(2) provides the following statutory duties of an auditor
The auditor shall make a report to the members of the company on the account examined by him and / or every balance sheet & profit or loss account and every other document declared by the Company’s Act to be a part of or annexed to the balance sheet or profit & loss account which are laid before the company in general meeting during the tenure of the office & report shall also state whether in his opinion to the best of his information & according to the explanation given to him, said accounts keep the information required by the Company’s Act in the manner so required & give a true & fair view.
1) In the case of balance sheet of the state of the company’s affairs as at the end of the financial year & in the case of profit & loss account of the profit & loss for its financial year.
The auditors report shall also state: -
a) Whether he has obtained all the information and explanation, which to the best of his knowledge & belief were necessary for the purpose of his audit.
b) Whether in his opinion proper books of accounts as required by law have been kept by the company & bb (added later) whether the report of the accounts or any branch office audited under section 228 by a person other than a company’s auditor has been forwarded to him when required.
c) Whether the company’s balance sheet & profit or loss account tell to it by the report are any agreement with the books of account & returns.
The auditor must sign the auditors report.
DUTIES & RESPONSIBILITES OF THE AUDITOR
1) Must have knowledge of MOA and AOA.
2) Should know the terms of the agreement.
3) Should be cautious and careful
4) Must examine the affairs of the company.
5) The auditor holds a position of trust & it is his duty to tell the shareholders frankly & fully everything with regard the affairs of the company.
6) Must satisfy himself about the valuation of the assets. The audit of a company is inherited for the protection of shareholders.
7) The auditor is liable to pay damages if on account of breach of statutory duties the company suffers loss.
8) The auditor has no criminal liability.
24th July, 2006 – Bijoy Kumar Dutta – Business Legislation
INFORMATION TECHNOLOGY ACT 2000
An act to provide legal recognition for transactions carried out by electronic data interchange and other means of electronic communication commonly referred to as electronic commerce, which involve the rules or alternatives to paper based methods of communication & storage of information to facilitate electronic piling of documents with government agencies.
The act does not apply
a) Negotiable instruments
b) Power of Attorney as defined in the Power of Attorney 1882
c) Trust Act 1882
d) A will under Indian Succession Act 1925
e) Conveyance of immovable property.
1. ACCESS - 2(1)(a)
It means gaining entry into instructing or communicating with the logical arithmetical or memory function resources of a computer, computer systems or computer network.
2. ADDRESSING SECTION - 2(1)(b)
It means a person who is intended by the originator to receive the electronic record but does not include any intermediary.
3. AFFIXING DIGITAL SIGNATURE SECTION - 2(1)(d)
Affixing digital signature with its grammatical variation & cognate expressions means the adaptation of any methodology or procedure by a person for the purpose of authenticating an electronic record by means of digital signature.
4. ASSYMETRIC CRYPTO SYSTEM - 2(1)(f)
It means a system of a secure key pair consisting of a private key or creating a digital signature & a public key to verify the digital signature.
5. CERTIFYING AUTHORITY - 2(1)(g)
Certifying Authority means a person who has been granted a license to issue digital signature certificate under Section 24.
6. COMPUTER - 2(1)(i)
It means any electronic, magnetic, optical or high-speed data processing device or system, which perform logical, arithmetic & memory function by manipulation of electronic, magnetic or optical impulses. It includes all input, output processing storage computer software or communication facilities, which are connected or related to the computer in a computer system or computer network.
7. COMPUTER NETWORK - 2(1)(j)
It means the interconnection of one or more computers through the
(i) Use of satellite microwave terrestrial line or other communication media.
(ii) Terminals or a complex consisting of 2 or more interconnected computers whether or not the interconnection is continuously maintained.
8. COMPUTER RESOURCE - 2(1)(k)
It means computer system, computer network, and computer database software.
9. COMPUTTER SYSTEM - 2(1)(l)
It means a device or collection of devices including input and output support devices and excluding calculations, which are not programmed.
10. DATA - 2(1)(o)
It means a representation of information, knowledge factor concepts or instruction which are being prepared or have been prepared in a formalized manner & is intended to be processed, is being processed or has been processed in a computer system or a computer network.
11. DIGITAL SIGNATURE - 2(1)(p)
It means authentication of any electronic records by a subscriber by means of an electronic method or procedure in accordance with provisions Section 3.
12. ELECTRONIC RECORD - 2(1)(a)
Data, Record, Data Generated, image or sound stored, received or sent in an electronic form or microfilm.
13. FUNCTION - 2(1)(u)
In relation to a computer includes logic control, arithmetical process deletion, storage & retrieval and communication from or within a computer.
14. ORIGINATOR - 2(1)(ZA)
Originator means a person who sends, generates, stores or transmits any electronic message or causes any electronic messages to be sent, generated, stored or transmitted to any other person but does not include an intermediary.
1) According to Professor Gower winding up of a company is a process where by its life is ended & its property administered for the benefits of its creditors & members.
2) An administrator called the liquidator is appointed & he takes control of the company, collects his assets pays his debts & finally distributes any surplus among the members in accordance with their rights.
3) In short it means a proceeding by which a company is dissolved.
TYPES OF WINDING UP (Section 425)
The act provides for two types of winding up: -
(i) Compulsory winding up under order of the tribunal.
(ii) Voluntary Winding Up – It is of 2 types: -
(a) Members Voluntary Winding Up
(b) Creditors Voluntary Winding Up
WINDING UP BY TRIBUNAL (VVVV Imp)
The grounds of compulsory winding up have been stated in Section 4(b)
A company may be ruled up in any of the following circumstances by the tribunal: -
(i) If the company has, by special resolution resolved that the company be wound up by the tribunal.
(ii) If default is made in delivering the statutory report to the registrar or in holding or statutory meeting - default is made.
(iii) If the company does not commence its business within a year of its incorporation or suspends business for a whole year.
(iv) If the number of members is reduced in the case of a public company below 7 & in the case of a private company below 2.
(v) If the company is unable to pay its debts.
(vi) If the tribunal is of the opinion that it is just on equitable the company should be wound up.
CIRCUMSTANCES OF WINDING UP OF A COMPANY
The tribunal may order winding up of a company under the just or an equitable clause under the following circumstances: -
The tribunal has a wise discretionary power to order winding up whenever it appears to be desirable.
(a) DEADLOCK – When there is a deadlock in the management of a company it is just & equitable to order winding up.
(b) LOSS OF SUBSTRATUM – The substratum of a company can be said to have disappeared only when the object for which it was incorporated has substantially failed or when it is impossible to carry on the business of the company except at a loss or the existing & possible assets are inefficient to meet the existing liability.
(c) It is unjust and equitable to wind up a company where principal shareholders have adopted an aggressive or oppressive or squeezing policy towards the minority shareholders.
(d) It is just an equitable to wind up a company if it has been conceived and brought for in fraud or for illegal matters.
(e) If the company has made default in filing with the registrar of companies its balance sheet & profit & loss account or annual return for any 5 consecutive financial years.
(f) It is just & equitable to wind up where the company has acted against the interest of the sovereignty & integrity of Indian, the security of the state, friendly relation with foreign states public order decency or morality.
(g) A company may be wound up if it is of the opinion that the company should be wound up under the circumstances specified in section 424(g) as a sick industrial company.
VOLUNTARY WINDING UP
A company may be wound up voluntarily in the following 2 ways: -
1. BY ORDINARY RESOLUTION – A company may be wound up by passing an ordinary resolution when the period if any fixed for the duration of the company by the Articles of Association has expired. Similarly when the event if any occurs on the occurrence of which the AOA provide that the company is to be dissolved.
2. BY SPECIAL RESOLUTION – Winding up commences at the time when the resolution was passed within 14 days of the resolution, the company shall give notice of the resolution by advertisement in official gazette & also in same newspaper.
Voluntary Winding Up is of 2 kinds namely: -
a. Members Voluntarily Winding Up
b. Creditors Voluntarily Winding Up
(1) MEMBERS VOLUNTARILY WINDING UP
A liquidator is appointed & his remuneration is fixed by the company in general meeting of the shareholders, the liquidator is not to take charge unless his remuneration is fixed within 10 days of the appointment, the company should give a notice to the registrar on the appointment of the liquidator all the powers of the Board of Directors shall come to an end except when the company of the liquidators sanctions them to continue.
(2) CREDITORS VOLUNTARILY WINDING UP
The company calls a meeting of the creditors the Board of Directors has to lay before the meeting, the full statement of the position of the company’s affairs & the estimated amount of their claims, a copy of any resolution passes must be filed with the registrar.