In this blog post, Raghav Gautam, a Delhi-based Advocate, practising Civil Commercial Laws (General Corporate Advisory), details the legal impact of a legal notice and the steps a company or a business ought to take if they receive a legal notice. 

Legal proceedings always create an apprehension of different sorts in the minds of the management of business, which may be a Company, a Partnership Firm, a Sole proprietorship or any other form. A legal notice comes with an ultimatum of a timeline with regards to the proceedings that might be taken against a business by the sender of the notice who is the aggrieved party in this context.

Why Do Businesses Need To Consider Legal Notices Seriously?

The answer to this question is quite simple. The businesses, since the very early days of growth of economic activity have run on their “reputation,” this reputation if jeopardised in a certain manner e.g. in disputes with regards to a consumer, supplier, a bank/financial institution, government or any other stakeholder, sends a highly negative message into the market in the context of reliability of that business. Latest in the case being the predicament faced by the “Sahara” group in general and it’s Chief Subrata Roy, in particular. The questionable conduct of the group with regard to raising of investment through OFCD (Optionally Fully Convertible Debentures), through the some of its companies, having a very basic net worth which was way below the offer it had made to the market and some of the other basic flouting of rules, has landed the Organisation’s credibility and its management in a huge mess. The repercussion of such an incident is so high that in future it will be hard for the market investor to trust the organisation with its monies.

The biggest blunders start with a minor mistake of overlooking or underestimation of something important. In such cases, it is important that the Legal notices are taken seriously, and the same are dealt with utter surety and swiftness. So the next question that surfaces is;

How Do We Deal With A Legal Notice In A Swift And Precise Manner?

The Legal notice is always the first legal step taken by any party which has a disagreement/dispute with the business and till that time, it was being discussed in a non-legal platform, e.g. private discussions over letters, e-mails or meetings. Sending a legal notice marks the very beginning of legal proceedings against the business. The most important step once the business receives a legal notice is to scrutinise it from the factual and legal point of view. For doing the same, the help of a lawyer must be taken by the business, for it is the expertise of a lawyer which will set the base of further legal proceedings, depending on the recourse the business opts for. The important aspects that business needs to be aware of are:

• What is the basic dispute that has been mentioned in the notice?
• What is the legal basis for the claim that the claimant has asked for in the notice?
• What is the timeline for replying against the legal dispute in question?
• Which officer of the organisation has been named (accused) in the notice?
• What is the best possible reply against the notice, both factually and legally?

All of the points as mentioned above are relevant in forming the base for further proceedings which may or may not lead to litigation. If the Legal notice is replied to by the business in the most amicable manner, the disputes might get settled even on that very basic stage, but if litigation is inevitable, the same will help the organisation in forming a very good basis, both from a factual as well as legal point of view.

The next step is to reply to the Legal notice sent by the other party. The importance of sending an apposite reply has been explicated above. The reply has to be sent, keeping in mind the timeline stipulated by the law in the context of dispute in question, point in case being “Dishonour of Cheque,” which is one of the most prevalent disputes in the business world, due to which the businesses, both large scale manufacturing organisations as well as small scale wholesale agencies and even retailers, face a lot of frustration and at times significant market losses. Clauses (b) and (c) of Section 138 of the Negotiable Instruments Act, 1938 dictate that:

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, 30 [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

On the dishonour of the cheque issued by the business, the drawee (or the holder in due course), will have to send a Legal notice, demanding the payment of money stated in the cheque. The timeline for sending the legal notice is 30 days from the day the bank informs the drawee of dishonour of the cheque and the timeline for the business for replying against the same is 15 days from the receipt of the notice. In some cases, the business may send a reply asking for some more time to reply to the notice and the same might be entertained by the other party. Either way, the aggrieved party, can file a criminal complaint before the Court within 30 days from the time when the 15 days period lapses. The business has to be aware that it is within this period that the reply has to be sent and that the same has to be precise, both legally and factually.

While replying to the notice, the business must be very much conscious of the reasons behind not entertaining the demands of the other party. The reply has to be made in a clear language, stating all the facts from the side of the business in a lucid manner and the reasons behind the actions taken by the business with regard to the same. The reply to the notice has to be holistic and yet; it must not reveal all the legal replies that it might have in its pool.

Protection Of The Management

The reputation of the business is made by the kind of decision it takes. While some disputes against the business might be targeted simply as a pressure tactic and they might not have a sound legal or factual basis, some of the disputes might be targeted purely on commercial grounds, e.g. disagreements between the minority shareholders and the majority shareholders. The business must clearly expound the rationale considered by the management and the decision-making authorities like the CEO, CFO or the Board of Directors. Since the decisions move from top to bottom and make or break the standing of business in the market, the credibility of a business is managed by the kind of decisions its management takes, and it is the most important aspect of any organisation.

In situations where the management of the business does not have any role to play or in other words, where the management has not been involved in the decision making of the dispute in question, the same has to be clarified by the business and the allegations must be replied to vehemently. For example, in the case of a fraud committed by the resellers of an E-commerce giant, the consumer cannot claim that the wrong has been committed against him/her by the CEO or the CFO of that E-commerce company, rather, the complaint has to be filed against the reseller which is ‘associated’ with the company and is not dependent upon its management for its working, or even if its, the business has to explain as to how the higher management is not concerned with the present issues at hand.

What Details Have To Be Stated?

It is important to note that the business must always state in a detailed manner the facts and circumstances as understood by its office and the legal basis for the decisions that were taken. In reply to the notice, the business forms the basis of the stand it will take in case the dispute escalates to the point of litigation. In that case, the reply sent by the business would both be useful for being produced as evidence in court and will form the basis of the reply against the suit filed by the other party. It is imperative that the help of a legal expert in the area of dispute is taken e.g. a tax lawyer in case of a tax dispute. Some of the aspects to be kept in mind while replying to the notice are:

• The Legal faults on the part of the other party have to be analysed, and the same must be mentioned in reply to the notice, further asking for the compliance of fulfilment of the discrepancies.
• The reply will have to be against each paragraph stated in the legal notice by the other party. This will protect the business against the vulnerability of being at a position where silence can be considered as acceptance of an allegation.
• The business must also provide the alternate or best possible solution in the reply by current circumstances.
• Although the reply forms a basis towards the further legal proceedings, the management has to keep in consideration the possible vulnerabilities that the business might get exposed to in case it includes all the facts and legal basis in the reply itself.
• The notice does not have to include any explanations in the form of a judgement etc. It must be simple, precise and solution oriented.

Further Recourse

The reply against the notice can be used by the business to arrive at a point of agreement whereby both the parties can amicably resolve their disputes. The business must start planning ahead from the very point where it receives a notice from the other party and must always keep in mind the various scenarios that might come up before it. The scrutiny of all the possible circumstances requires the expertise of a professional in such cases.

A well-constructed notice is at times used by some good organisations to straightforward thwart the non-compliant vendors or distributors towards the realisation of the payments due from their side to the organisation. The analysis of all the aspects/clauses/articles stated in the relevant agreements must be scrutinised, and the same must be kept in consideration while planning the legal recourse that the business might have to take. 

In its entirety, it is imperative for the business to sincerely scrutinise the effect of any legal notice against it by taking account of facts, law and the possible recourses into consideration. At the very basic level, the organisations never want to get occupied with litigation or any non-compliance proceedings against them from the side of a regulator or a creditor or a watchdog institution or any other related or non-related party, in the light of such requirements and the effects of such legal situations, it becomes important that the businesses take note of the fact that a legal notice has to be taken seriously and the same has to be proceeded against with caution and agility.

India is the most highly legislated country in the world, and with the advent of liberalisation in early 90’s, the laws have become more compliance oriented and have put more and more options before the corporate world with regard to solutions to the disputes that might crop up. The need for the corporate sector is to have the agility in cases where there is a possibility of a legal dispute and the probable scope of any harm to the reputation and scope of the business of the organisation. Such ability to find solutions and responsiveness towards the disputes is bound to reduce the financial burden of litigation besides saving the reputation of the business and protection of its management and employee base.