Why Trademark Infringement In India Matters?

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June 8, 2016

In this blog post, Soumya Deshawar, a student of University of Petroleum and Energy Studies, Dehradun, analyzes on Trademark Infringement in India. This blog post consists of the importance of trademark registration, and emphasizes mainly on the infringement of Trademarks in India, the available remedies, and the relief available for the same. It also provides the exception of Fair use doctrine and the penalties for the obvious infringement of trademark.

Introduction

A trademark is referred to a sign, design, or expression which is recognizable and identifies products or services that are of a particular source. The trademarks used to identify services are usually called service marks. A trademark owner may be an individual, business organization, or any other legal entity. It may be located on a package, a label, voucher, or on the product itself. Trademarks are being displayed on company buildings for the sake of corporate identity.

Importance Of Trademarks:

Trademarks play an essential role in protecting consumers and in promoting global economic growth.
Trademarks enable consumers to make quick, confident and safe purchasing decisions.
Trademarks promote freedom of choice.
Trademarks and related intellectual property encourage vibrant competition for the benefit of consumers, workers, brand owners and society at large.

A trademark is quite different from a copyright, patent or a geographical indication. Where copyright helps protecting an artistic or literary work which is original in nature, a patent helps protecting an invention, and a geographical indication is used for identifying goods having special characteristics originating from a definitive territory.

The registration of a trademark is not compulsory, but still it offers a better legal protection for infringement. Before making an application for registration it is advisable to make an inspection of the trademarks that have already been registered to ensure that such application of registration may not be denied due to the resemblance of a proposed mark to any existing mark or a prohibited one.

Reasons for the refusal of registration are as follows:

Marks, which are descriptive in nature, in relation to the applicant’s goods or services, or a part or feature of the same, may also be denied registration.
Marks comprising of geographic terms or common surnames may also be refused.
Marks may be refused for other relevant reasons as well.

The term of a trademark registration is ten years. The renewal of the same is possible for further period of 10 years. Unlike the rights granted in the case of patents, copyrights or industrial designs, the trademark rights can last indefinitely if the owner of a trademark continues to use the mark. However, if a registered trademark is not renewed after the period of ten years, it is liable to be removed from the register of trademarks, which is maintained by the registrar. Anyone who claims rights in a mark by registration can use the trademark or the service mark may use such designation to alert the public of his/her claim. The need to have a registration or a pending application is not necessary to use these designations. The registration symbol, ®, designates that the mark is registered. It cannot be used if the mark has not been registered.

Section 135 of the Trade Marks Act provides for both infringement as well as an action of passing off.

Trademark Infringement and Remedies

To know more about Trademark infringement please visit

The infringement of a trademark involves violation of the exclusive rights that are attached to a registered trademark without any due permission of the trademark owner or the involved licensees, provided that such permission was granted within the scope of the license.

Infringement may occur when:

the infringer, uses a trademark that is identical to a registered trademark owned by another person
the infringer uses a trademark that is confusingly similar to such mark.

The owner of such a registered trademark may initiate legal proceedings against such an infringer.

No infringement proceedings can be brought for a mark which is not registered, as it can’t be infringed as such. The owner can instead commence proceedings under common law for an action of passing off or misrepresentation, or under the legislation that prohibits unfair business practices. The infringement of trade dress may also be actionable in some jurisdictions. To establish the infringement of a registered trademark, the establishment that the infringing mark is identical or deceptively similar to the registered mark is enough and there is no need of any further proof.

The following remedies are available to the owner of a trademark for an unauthorized use of its imitation by a third party:

An action for passing off in the case of an unregistered trademark and
An action for infringement in case of a registered trademark.

Both the above actions are quite different from each other. An infringement action is a statutory remedy, whereas an action for passing off is a remedy provided by the common law.

Note: In case of infringement / passing off of a trademark, even a criminal complaint can be filed. The offences under the Under the Provisions of the Trade Marks Act, 1999 Cognizable, and hence, the police has the power to register an FIR and prosecute the offenders directly.

Following are some of the civil remedies in Trademark:

Injunction/ stay against the use of the trademark
Damages can be claimed
Accounts and handing over of profits
Appointment of local commissioner by the court for custody/ sealing of infringing material / accounts
Application under order 39 rule 1 & 2 of the CPC for grant of temporary / ad interim ex-parte injunction

The Courts may grant injunction and also, may direct the relevant authorities to hold back the infringing material or its shipment, or it may suppress its disposal in any other manner so as to protect the interest of the owners of the relevant intellectual property rights.

The court may grant relief in the form of:

Permanent injunction
Temporary injunction
Interim injunction
Damages
Account of profits
Delivery of the infringing goods for destruction
Cost of the legal proceedings.

An ex parte decree may be passed in case of interim injunction, or it may also be passed after notice.

The Interim reliefs in the suit may also include order for:

Appointment of a local commissioner, which is akin to an “Anton Pillar Order”, for search, seizure and preservation of infringing goods, account books and preparation of inventory, etc.
Restraining the infringer from disposing of or dealing with the assets in a manner which may adversely affect plaintiff’s ability to recover damages, costs or other pecuniary remedies which may be finally awarded to the plaintiff.

Passing Off

Passing off is a system of rights that has been derived from the UK common law. It is based on a simple common sense logic that it should be offensive for a trader to misrepresent his services or goods as those of another, and as a result, deceive the customers for purchasing such goods or services when by drawing the image I their minds that they were purchasing the same those of another.

The system of passing off has been applied broadly to cover things of a great diversity such as the similarities between packaging of products; to protect product “trade dress”; and the unsanctioned use of a racing driver’s name to approve a radio newscast. It is totally discrete to, but often sits together with, the law of registered trademarks. Thus it is not mandatory for a trademark to be registered for a passing off action.

Usually, for passing off, there are three necessary elements.

Firstly, it is essential to show that a trademark, trade dress or whatsoever thing has a status, or at least goodwill. This is why, passing off cannot be used to safeguard a mark which is new, with little status, or where no trade has taken place.
Secondly, it is mandatory to show that a misrepresentation has arisen or is likely to arise. This necessitates that the trademark complained of must be adequately similar to the trademark of the applicant for a customer to be misled.
Thirdly, there must be a probability of damage as a result of such deception.

The presence of these three elements must be proved by proof, so that an action of passing off carries a high evidential burden, but it nevertheless provides a possible remedy when, for example, there has been obvious copying of a trade-dress, when or a trademark has not been registered but has considerable use and a standard.

The practical consequences of the law of passing off

Just because a mark isn’t registered, doesn’t mean that a person won’t infringe it by using a similar mark.
If a person has not registered his/her trade mark and finds a challenger using a suspiciously similar mark, then, he/she may have the rights on which he/she can take action.

Fair Use

There are, circumstances when someone other than the trademark owner may use another party’s trademark as long as the use is considered a “fair use” and does not violate or infringe the rights of a trademark owner. In fact, most jurisdictions throughout the world recognize some type of “fair use” exception to trademark infringement.

Generally, the use of another person’s trademark is allow. That is, any use of a mark, that does not infringe a trademark right is considered as “fair use”. There are two types of situations for this condition:

Descriptive fair use and
Nominative fair use.

What common situations are considered fair use?

Using a geographical name relating to the user’s business location, even if that name is the same as or similar to another’s mark, generally is considered fair use. Under the fair use exception, a user generally is permitted to use descriptive indications concerning the kind, quality, quantity, intended purpose, value, geographical origin, and time of production of the goods or of rendering of the service, main raw materials, functions, weight, or other characteristics of the goods or services. Of course, this type of fair use typically is subject to such use’s being in accordance with honest commercial practices that do not suggest association with the trademark owner and that do not depreciate the value of the goodwill in the mark.

Penalty for infringement of a trademark

The practice of applying for a false trademark, and then selling and providing services under the same is a punishable offense. Any policy officer can seize the objects/articles bearing deceptive trademarks or labels without any warrant. The Trademarks Act has elevated the penalty of such offenses; now the offenders are subject to a term of not less than six months up to a maximum of three years and are also liable to pay a fine of not less than fifty thousand which can extend to two lakhs.

Severe Penalties

In the case of severe violations — for example when a violator is using a trademark to sell counterfeit goods or blatantly violating trademark law — courts may issue criminal and civil penalties. Civil penalties may include compensating the trademark holder for lost profits or paying the trademark holder all profits obtained by the infringement. At the discretion of the court, the damages awarded to trademark holders can be tripled. Finally, counterfeiting trademarked goods can carry a felony charge under the United States Anti-counterfeiting Consumer Protection Act of 1996.

Procedure for the Buy-Back of Shares and Other Securities by an Unlisted Company

By

Sylvine

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June 8, 2016

3

3^rd June 2016 By Varun Chauhan

Assistant Associate

Anil Grover and Associates, New Delhi

Buy-Back of shares or other specified securities is a process by which a company re-purchases its securities as such from its shareholders or security-holders as the case may be. It is one of the corporate financial strategies to enhance capital return by optimising the capital structure to suit the current market environment.

The concept of Buy-Back was forbidden under The Companies Act, 1956 until its amendment in 1999. Section 77A, 77AA and 77B were introduced to help companies plan their capital requirements by cancelling their share capital accordingly. New statute, i.e. The Companies Act, 2013 also carried forward the concept of Buy-Back with minor changes in the rules and procedure to be followed.

Section 68, 69, and 70 of The Companies Act, 2013 along with Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014, governs the procedure of Buy-Back of shares and other specified securities by Unlisted Companies. Unlisted companies are those companies whose shares are not listed on a recognised stock exchange and therefore not available for trading by the general public. An unlisted company can be a Private or Public company.

For a clear understanding of the Buy-Back procedure to be followed in case of an unlisted company, a detailed tabular presentation has been created. The following table shows the step-by-step procedure in a comprehensive manner:

Step No.		Description	Time Limit	Observation/Explanation
	1.	(a) Buy-Back by Board of Directors without Special Resolution.	At least 7 days’ notice to Directors.	· Only when Buy-Back is ten percent (10%) or less of the total paid up equity capital and free reserves of the company. · Buy-Back shall be authorized by the Board by a general resolution at its meeting. · No special resolution needs to be passed
	1.	(b) Buy-Back approved in General Shareholders’ Meeting with Special Resolution	At least 7 days’ notice to Directors.	· When Buy-Back is more than ten percent (10%) and up to twenty-five percent (25%) of the aggregate of paid up capital and free reserves of the company. · In respect of Buy-Back of Equity Shares the reference to 25% in this clause shall be construed with respect to total paid-up Equity Capital in that Financial Year. · Convene a Board Meeting as above and decide details of proposed Buy-Back and fix date, time, place and agenda for convening a general meeting to pass a special resolution. · A special resolution needs to be passed at the forthcoming general meeting of the company authorizing Buy-Back.
	*Note: Steps no. 2 and 3 are required only in case of Buy Back with a special resolution in 1(b) above.*
	2.	Notice of General Meeting accompanied by Explanatory Statement for passing a special resolution as in 1(b) above.	At least 21 Days’ Notice to shareholders	Information that needs to be annexed with the Explanatory Statement and notice of GM: · The date of Board meeting at which the proposal for buyback was approved by the Board of Director of the Company; · Necessity for the Buy Back; · Class of security intended to be purchased under the buy back; · The number of securities that the company proposes to Buy-Back; · Method to be adopted for the Buy-Back; · The price at which the Buy-Back of shares or other securities shall be made · The basis of arriving at the Buy-Back price; · The maximum amount to be paid for the Buy-Back and the sources of funds from which the Buy-Back would be financed; · The time limit for the completion of Buy-Back; · The aggregate of shareholding of promoter and the director as on the date of the notice convening the General Meeting; · Aggregate number of equity shares purchased or sold by persons including promoter and director during a period of twelve (12) months preceding the date of Board Meeting at which Buy-Back was approved till the date of the notice convening the General Meeting; · The maximum and minimum price at which purchase and sales referred to above made along with the relevant date; · Intention of the promoter and person in control of the Company to tender shares for Buy-Back: (i) indicating the number of shares, details of acquisition with date and price; (ii) Details of their transactions and their holdings for the last twelve (12) months prior to the date of board meeting at which Buy-Back was approved. · A confirmation that there is no default subsisting in repayment of deposits, redemption of debenture or preference shares or repayment of term loan to any financial institution or banks; · A confirmation that the Board of Directors has made full enquiry into the affairs and prospects of the Company. And there are no grounds on which the company could be found unable to pay its debts; · In the view of Board of Directors company shall be able to meet its liabilities as and when they fall due and shall not be rendered insolvent within a period of one year from that date; · The directors have taken into account the liabilities(including prospective and contingent liabilities), as if the company were being wound up under the provisions of the Companies Act, 2013; · A report to the Board of Directors by the Company’s auditors stating that: (i) They have inquired into the Company’s state of affairs; (ii) The amount of permissible capital payment for the securities in question is, in their view, properly determined; (iii) The audited accounts on which calculation with reference to Buy-Back is done not more than six (6) months old from the date of offer document. (iv) The Board of directors have formed the opinion on reasonable grounds and that the company, having regard to its state of affairs, shall not be rendered insolvent within a period of one year from that date.
	3.	Filing Special Resolution with ROC in form No. MGT-14	Within 30 days of passing of special resolution	· Must be filed with a copy of the special resolution and explanatory statement. · Must be certified by a CA, CS or any Cost Accountant of the company with digital signatures.
	4.	File Letter of Offer in Form No. SH 8 with ROC		· Dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director, with the following attachments: (i) Details of the promoters of the company; (ii) Declaration by auditor(s); (iii) Copy of the board resolution; (iv) Copy of the notice issued under section 68(3) along with the explanatory Statement thereto; (v) Audited financial statements of last three years; (vi) Buy back details of last three years; (vii) List of holding and subsidiary companies of the company; (viii) Unaudited financial statement (if applicable); (ix) Statutory approvals received (if any); (x) Details of the auditor, legal advisors, bankers and trustees (if any); (xi) Confirmation of opening of Separate Bank Account.
	5.	Declaration of Solvency in Form No. SH-9 to be filed along with Letter of Offer mentioned under step no. 4, with ROC		· Signed by at least two directors of the company, one of whom shall be the managing director, if any, and verified by an affidavit as specified in the said Form.
	6.	Dispatch copy of Letter of Offer to Shareholders/ Security holders	Not later than 21 days from the date of filing with ROC	· The offer for Buy-Back shall remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer.
	7.	Deposit of money in the Separate Bank Account for Buy Back payments	Immediately after closure of offer of Buy Back	· Deposit such sum, as would make up the entire sum due and payable as consideration for the shares tendered for Buy-Back.
	8.	Verification, Acceptance and Rejection of Shares/ Securities	Within 15 days from the date of closure of offer	· Acceptance of buy back shall be on pro rata basis if number of shares offered for Buy-Back is more than the total number of shares so approved to be bought back. · The shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within twenty one days from the date of closure of the offer.
	9.	Payment of Consideration Amount	Within 7 days of verification/ acceptance	· Payment in cash only, to those shareholders whose shares/securities have been accepted.
	10.	Return of share certificates where shares/ securities not accepted for Buy-Back.	Within 7 days of Rejection	· Return share certificates to the shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance on pro rata basis.
	11.	Extinguish and physically destroy shares/ securities bought back	Within 7 days from the last date of completion of Buy-Back
	12.	Maintain Register of shares/securities bought back		· The register of shares or securities bought-back shall be maintained at the registered office of the company and shall be kept in the custody of the secretary of the company or any other person authorized by the board in this behalf. · The entries in the register shall be authenticated by the secretary of the company or by any other person authorized by the Board for the purpose. · Register shall contain all the particulars as mentioned under Form No. SH-10.
	13.	Filing Return of Buy-Back with ROC	Within 30 days of Completion of Buy-Back	· After the completion of the Buy-Back, file with the Registrar, a return in Form No. SH.11 with the following attachments: (i) Description of shares or other specified securities bought back; (ii) Particulars relating to holders of securities before Buy-Back; (iii) Copy of the special resolution passed at the general meeting; (iv) Copy of the board resolution and Balance sheet of the company.
	14.	Filing of Compliance Certificate with ROC along with the Return	Within 30 days of Completion of Buy-Back(annexed with Form NO. SH-11)	· Annexed to the return filed with the Registrar in Form No. SH.11, a certificate in Form No. SH.15 signed by two directors of the company including the managing director, if any, certifying that the Buy-Back of securities has been made in compliance with the provisions of the Companies Act and the Companies (Share Capital and Debentures) Rules.

*Please note that provisions of Section 115QA, Income Tax Act, 1961 applies to the Buy-Back of shares by an unlisted company. Accordingly, the company needs to pay distribution tax @ 20% on the amount of Distributed Income** within fourteen (14) days of payment of consideration to shareholders.

**Distributed Income means the consideration amount paid for Buy-Back less (-) sum received at the time of issue of such shares.

About the Author: Varun Chauhan is a graduate from Amity Law School, Noida. He did his PG Diploma in Corporate Laws and Management from Indian Law Institute, New Delhi. He presently works for the Additional Advocate General, Haryana as Assistant Associate in his New Delhi office. He works in the drafting department and mainly handles corporate and environment matters. The present research work was done during his internship at Trilegal, New Delhi where he assisted Senior Associates in the Private Equity Team.

Disclaimer: Due care has been taken by the author while making the above mentioned submissions. However, any averment or information should not be relied upon as the sole source of information. Prior consultation with an expert for his opinion is advised in matters where any reader plans to act on behalf of such information.

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Everything You Need To Know About Company Law

By

Sylvine

-

June 7, 2016

2

Why Do We Need Company Law?

When we think of a company, we think of business. Business is nothing but a systemized series of transactions. There needn’t be a specific law that tells people how to get together and carry out transactions. Even if we needed a law to bind us to our word and perform our part of the promise, the law of contracts exists to provide legal backing to our claims and those of the other parties to a transaction.

The law of companies serves a function beyond merely ensuring that contracts are performed, and that people are benefitted from commerce. But once a company is incorporated, it acquires a number of features that give it a distinct identity.

A company needs people to believe in it by investing in it and by availing of its products or services. Thus, the people’s interests figure largely in the functioning of a company.

To ensure that there are no defaults that may disrupt the smooth functioning of a business enterprise, and to uphold transparency and accountability, we need company laws that provide an outline of the way in which a company must do business and be managed.

What Is A Company?

A company is a body or an entity that has a separate legal existence from the members who comprise of it. It is a legal fiction that has been created by the Companies Act, 1956. This independent corporate personality that’s conferred upon a company on its creation is very unique in its features. For instance, a partnership has no existence apart from its members.

There are different people who contribute in various ways to the working of the company.

Who looks out for the company when the directors have not yet been appointed?

Promoters exist to provide the financial and fiduciary aid in the setting up of a company and they are the individuals who constitute the yet unformed company at the time of submitting documents and registration.

The other important parts are played by the directors and shareholders. The board of directors take care of the business and management of the company, and the shareholders help keep the company afloat. Even the directors are appointed after the formation and registration of the company.

The business is done in the name of the company and all the profits accrue to it, out of which dividends are paid to the shareholders – who are the investors in the company.

What Are The Features Of A Company?

When a company is being incorporated, the individual(s) setting up the company, will have an idea of what they want out of the incorporation, and they can choose from choices that vary according to identity, ownership, liability etc.

Perpetual Existence: After a company is set up, it may continue to exist and function until it is wound up or the object for which it was set up is achieved. Therefore, even if all the members currently comprising a company pass away or leave the company, it continues to exist. This is done so that the identity of the company is not limited to its directors or members. The identity of a company remains as long as it continues to conduct business under the same name and terms.

The only way a company will cease to exist is if it is wound up. This shall be dealt with in detail later. Until there is any reason to wind-up, it will continue to run. In fact, even if the company has no funds and is not doing any business for a while, the company continues to exist until an order for winding up has been passed.

–> Example: A and B set up a company known as FunFirst, but they have some disputes about the way the company is supposed to work. After the company has been incorporated, but before it begins business, A leaves the company and starts another company called Fundays. B is disillusioned and FunFirst does not start work. Even now, FunFirst is still in existence because it took birth upon its incorporation and has not been put to death as yet.

Capacity to sue and be sued: Deriving from the notion of separate legal identity, it follows that a company has the capacity to sue against a wrongdoer and has the capacity of being sued for civil wrongs.

When there is improper conduct of business by the company, or there is a need to specifically enforce a contract, or for any other civil remedy, the company is a legal entity that may sue and be sued. The company may not be held criminally liable as a criminal act requires mens rea, or a guilty mind, which cannot be proved in the case of a company.

Try being a Judge!

In India, defaming someone by publishing falsehood about them is a crime. If a company broadcasts an advertisement openly mocking a rival product, can the person who commissioned the advertisement be held criminally liable?

Limiting Liability: Business always involves an element of risk; sometimes the risk leads to high returns and sometimes to losses. Monetary liabilities are bound to occur in the course of conduct of any business.

An individual may incur unlimited liability which could ruin a company and defeat the goal of perpetual existence. The law allows a company to put a cap beforehand on the extent to which it will be liable in the event of default. Any liabilities arising out of business conducted in the name of the company, with the sanction of its shareholders, will be limited to the extent specified by the company.

Also, although a company is a legal person, it cannot be held criminally liable because of the absence of the critical concept known as mens rea, or a guilty mind. However, there is a concept known as ‘piercing the corporate veil’ through which the people behind the company, the directors who owe a fiduciary duty to the company may be indicted for criminal offences committed by them in the name of the company.

Corporate Veil: Imagine that all the people working for the company, in the name of the company, are standing under one all-encompassing blanket of identity. Let us call this the corporate veil. To pierce or lift this veil is (usually for the courts) to “see through” the company and let its members directly be liable for (or benefit from) the company’s legal position.

Some of the situations in which the corporate veil may be pierced are: (1) Fraud (2) Group of Enterprises (3) Agency (4) Trust (5) Tax

–> Example: A man leaves a company to start his own business, but his contract had mandated that he should not solicit the clients of the company if he leaves. He set up a company in his wife’s name and began to solicit clients. The Court here will elect to pierce the corporate veil to reveal the fraud.

–> Example: Under the law, if a person issues a cheque that does not clear due to lack of funds, it is a criminal offence. A director makes a payment with a cheque on behalf of the company, which later bounces. In such an instance, the corporate veil will be pierced and the director will be held personally liable for issuing a bad cheque.

–> Example: There exist a group of companies owned by the same set of people. If any accounting discrepancies arise, the Courts may elect to pierce the corporate veil to see the financial accounts of the group of enterprises together, as one.

–> Example: To decide whether an entity must be charged liable to pay tax, the Courts may have to lift the veil on the identity and ownership of the company.
Transferable Shares: Anyone who contributes financially towards the working of the company by buying a share of the company owns that much of the company. Every shareholder, is thus a partial owner of a company. In a private company, there cannot be more than 50 shareholders, which is a restriction on the transferability of shares. A public company’s shares, on the other hand, may be traded freely on the stock market. One of the primary attributes of a public company, in fact, is the free transferability of shares.

–> Example: When the stock market news says that the shares of ‘A’ company have fallen by ‘x’ points, they mean that the value at which the shares are being traded is lower than the value at which they were first released.
Separate Property: A company is a legal person and may thus own property in its own right. The legal personhood of the company gives it certain inalienable attributes, such as that it can enter into contracts, it has liabilities, it is liable to be taxed etc. This personhood separates the actions of the people acting on the company’s behalf and the liability of the company itself.

–> Example: The director of a company cannot buy land in the name of the company and then build a residential house on that plot.

–> Example: If any company buildings are built over disputed property, the claim must be made against the company and not against the director(s).

Private and Public Company: A private company is one where the stakeholders of the company – whoever has a stake in the company – are not members of the general public. They are members to whom shares have been offered, or they may be the promoters or directors of the company.

People who set up private companies do so with the intention of keeping the business decisions and profits within the desired community. As more people begin to contribute towards the company, their stake in the company increases and so do their rights as to the working of the company.

A public company is one where the stakeholders may include members of the public. A company may do this by dividing its capital into many small parts and offering these parts to the public, so that each member of the general public who has an interest in the business and the growth of the company may buy as many of these parts, known as shares, as they want.

There are a few other differences between a private and a public company. In a private company, the minimum number of members required to start a company is 2, whereas for a public company the minimum of 7 members are required to start a company.

There is a restriction on the maximum number of members for a private company, and that is 50, but there exists no such upper limit for a public company.

Point of Interest!

A private company may be transformed into a public company, or vice versa, if the necessary amendments are made in all the documents that refer to such status of the company and the Registrar is notified. A public company’s activities are far more regulated than a private company, because of the number of stakeholders.

Registrar of Companies: When a company is set up and commences business, it affects not only the employers and employees within the company, it affects the industry and market as a whole, affects the consumers and the various stakeholders in the company and it also affects the government.

The inter-relationships between these various entities require supervision and regulation. The Registrar’s Office is the place where a company is registered, along with the name and the necessary documents. The documents required to register a company will be discussed soon.

Point of Interest!

National Company Law Tribunal

The Supreme Court recently validated the setting up of an overarching corporate law tribunal that will take up the company law disputes pending with the Company Law Board, the Board for Industrial and Financial Reconstruction and various high courts.

Amendments were made to the Companies Act made in 2002, and paved the way for the establishment of the National Company Law Tribunal (NCLT).

Chapter Two: How does a Company Work?

Incorporation of a Company

For a company to be registered and legally recognized, it needs to be incorporated. A body of individuals or entities may possess all the attributes that indicate the existence and working of a company, but the incorporation of a company gives it the required legal status.

This incorporation is done when a company is registered and the certificate of incorporation is given. The company is registered when it has submitted the Memorandum of Association and the Articles of Association to the Registrar of Companies. These documents give a basic outline of the scope of business of the company, define its objectives, and try to lay down the various roles to be essayed by the different individuals and entities working within the company’s framework.

Some of the documents needed for registration are:

Memorandum of Association
Articles of Association

Memorandum of Association: The memorandum of association is one of the most important documents of a company as it sets out the distinct aspects of the company and provides requisite information about the company to outsiders – such as the name of the company in the name clause; the state in which the registered office is situated, in the registered office clause; the main objective and the other ancillary objects that the company was set up with, in the objects clause; the nature and extent of the company’s liability in the event of default or bankruptcy and the capital clause sets out the total amount of share capital, and provides for the number of shares.

What does a memorandum of association contain?

Name Clause
Registered Office Clause
Objects Clause

The memorandum provides the structure within which the company expects to function. It also lays down some boundaries as to the operation of the company. For instance, the objects clause provides for the main area of business and also ancillary areas, but a company cannot conduct business in any other areas than those specified in that clause.

However, the memorandum is not the only document through which the powers of a company may be ascertained. If the memorandum provides for something that is not legal under the Companies Act, the provision is void.

The last part of the memorandum is the subscription where the subscribers declare that they are intent on forming a company and they agree to take up the shares that have been set against their names.

–> Example: The Companies Act says that a company cannot have any illegal objects for setting up a company. If I set up a company to build warships to overthrow the government, it would be an illegal company.

–> Example: Omar sets up a company with the purpose of conducting research into cloning cows to increase dairy productivity. Since cloning is illegal, the company will be illegal.
Articles of Association: The Articles of Association of the company lays down the rules for its administration. All the rules and regulations that outline the relations between the company and its members, among the members themselves are given in the Articles. The However, in case of an inconsistency between the Articles and the Memorandum, the Articles must give way.

–> Example: There is a provision in the Memorandum of Association of a company that violates the Articles of Association of the Company. It is found that the provision also violates the Companies Act.

If the Memorandum violates any provision of the Companies Act, it is void. Therefore, in cases where the Articles of Association conforms with the Companies Act, and the Memorandum is in disagreement with both, the provision of the Companies Act will prevail.

Try being a judge

A director of a company does something that is not authorized by the Articles of Association, but he tells the client that there is no restriction on his doing so. Later, the client finds out that the act had never been authorized by the company. Can the client cannot claim compensation from the company?

Through development of case law in other common law countries and elsewhere in the world, the law of companies comes with a few legal principles that may be used in cases involving companies.

Let us start with the doctrine of Constructive Notice:

Constructive Notice: The memorandum and the articles of association of every company are registered with the Registrar of Companies. It is a public office and all the documents filed with the Registrar therefore become public documents, open and accessible to all the members of the public. A person intending to deal with the company, who wishes to do business with the company can easily access these documents and get to know about the framework within which the company operates and the manner in which business is done. The doctrine of Constructive Notice, in fact, presumes that any person intending to enter into a contract with the company would have read the Memorandum and Articles of the company, and has acted on the basis of that knowledge.

–> Example: An intern at a company enters into a deal with a client by saying that he was authorized to make the deal. The client later finds out that the intern was given no such power or authorization, and so, the deal was never valid. The client cannot take action against the company, because he should have verified beforehand with the Articles of Association of the company.

The filing of these public documents with the Registrar is to be construed as constructive notice for anyone intending to enter into a contract and do business with the company.
Indoor Management: You must have understood that the doctrine of Constructive Notice exists in order to protect the company against the outsider and any needless legal action that may arise in the absence of the doctrine.

The doctrine of Indoor Management says that any person entering into a contract with any member of the company is entitled to presume that the contract is legal and valid. That means that all the rules and regulations relating to the conduct of that business have been complied with and unless there is reason for the outsider to believe otherwise, the contract is legal.
–> Example: Suppose the directors of a company do not have the power or the authority to enter into certain contracts without holding a meeting, the contracting party has a right to presume that the directors have held that meeting and have received the requisite power or the authority to enter into those contracts.

Now, we have an idea of some of the legal principles under which a company may operate. Let us move on to the composition of a company. Typically, a company is established by the promoters, managed by the directors and kept afloat by investors. The Companies Act does not contain the word promoters and the role they play is not governed by the Act. Thus, we will move on to understand the directors of a company.
Directors

The directors are the living beings through which the company, an artificial legal entity conducts its business. As you may have learned in contracts, when a person enters into contracts and does business on another person’s behalf, he is called an agent; an agent of the principal. In this case, the company is the principal and the directors are agents of the company. It is an important distinction to realize that the directors are not each other’s agents but the agents of the company.

–> Example: Anil, who is the director of ABC & Co., has taken a personal loan and he defaults on the loan. The recovery cannot be made against the other directors of the board ABC & Co.

–> Example: Anil, a director on the board of ABC & Co., has taken a loan on behalf of the company and fails to repay it by the maturity date. The creditors may proceed against the other directors of the company.

Trustee: A director is also a trustee of the company, as he is responsible for the conduct of business on behalf of the company and uses the company’s property and wealth to conduct that business.
Directors of a company are expected to look after the interests of the company, and to work in the interest of the company. While it is not expected of them to forego their own interests, what is required is a disclosure by the director in relation to the transaction that he has an interest in. There are no regulations cast in stone that lay down the rights and duties of the directors of a company.
Regarding duties, he is required to take care of the Company, nurture it in a sense and help it grow and prosper. And in the proper context, a director’s duties in equity are his duties in law, meaning that anything he may be expected to do as a responsible person with fiduciary duties towards the company, will be the standard he will be evaluated against. While equity is merely a set of principles that are applied instead of strict legal principles, it is necessary in cases such as these. This is so because it is not possible to list out the various responsibilities that may arise in the course of business by the directors.

However, some duties are necessary for the smooth everyday functioning of the company. For instance, a director is expected to attend most of the board meetings and if he fails to attend 3 meetings in a row, he will have automatically vacated his position as director.

He is also required to acknowledge and attest the financial statement of the company that is presented at the annual general meeting.

A director need not exhibit more skill than may be reasonably expected from a person of his knowledge and experience.

–> Example: If a director of a company is also qualified as a Chartered Accountant, he is expected to be able to analyse a balance sheet and declare whether the company is making profits or undergoing losses.

–> Example: A director of a company is not required – in terms of skill – to be able to motivate his employees and workers daily to make them work 12 hours every day.

A director is not bound to give continuous attention of the affairs of his company, his duties being of a managerial nature, to be performed at periodical Board Meetings. He is not bound to attend all Board meetings, though he ought to attend all such meetings as he is able to.
If the director has entrusted someone with a responsibility, in the course of his business – then, in the absence of grounds for suspicion, the director is justified in trusting that person to perform such duties honestly.
Though all books of account and other documents of the company are open to inspection by him, he is not bound to examine individual entries in the books.
While a director will be liable if he causes loss to the company due to his negligence, he is not expected to take all possible care. His duty to the company extends only to the taking of such care as an ordinary man is expected to take in his own affairs.

–> Example: If a director entrusts his secretary with filing the company’s tax returns, he is required to take only as much care as he would if he had entrusted his secretary with filing his individual tax returns.

Directors should ensure that the company’s fund are properly invested and not indulge in dangerous speculation.

This just means that in terms of the investments they make with the company’s money, the directors must exercise caution and act wisely.

In discharging their duties, directors must act honestly and must exercise such degree of skill and diligence as would amount to reasonable care which an ordinary man might be expected to take.

Shareholders

The next important role in the running of a company is played by the members or the shareholders. Every shareholder is a member of the company. And each share that a member holds represents his ownership of that fraction of the company.

There may be different kinds of shareholders, like, preference shareholders and equity shareholders. Equity shares are also called ordinary shares. It depends on the kind of share you have bought. The kind of share you buy will be based on the difference in features, in rights and liabilities that arise from owning them.

The Stock Market

Companies need capital to do business, to grow and flourish. In a bid to do so, they may decide to raise capital from the public. Ordinary shares are exactly what the name signifies — they are shares that are bought and sold in the stock market.

Preference shares, on the other hand, are a little more special. To understand preference shares, we will have to first understand what dividends are. When you buy shares, you invest in the company. That makes you a shareholder or part-owner in the company.

The good news is that, since you own part of the assets of the company, you are entitled to a share in the profits these assets generate.

If you sell the shares for more money than you bought them for, the profit you make is called capital appreciation.

You could also make money with dividends.

Usually, a company distributes a part of the profit it earns as dividend.

–> Example: A company may have earned a profit of Rs. 1 crore in 2003-04. It keeps half that amount within itself. This will be utilised to buy new machinery or more raw material or to reduce its loan with the bank. It distributes the other half as dividend.

Meetings

Meetings are essential for the proper functioning of the company. Through these periodically scheduled meetings, the investors and the managers of a company can get together and perform the duties required to ensure such proper functioning.
Meetings: A meeting must be periodically called by the company’s directors to review the workings of the company, to announce the financial statement, to appoint directors and auditors, to decide on a future course of action or any of the important functions that a company has to undertake with the approval of the shareholders.

There are different types of meetings that are convened for different purposes. They are:

Statutory Meeting
Annual General Meeting
Extraordinary General Meeting

Point to be noted, milord!

Quorum: A requirement of a valid meeting is that there must be a minimum number of members present to pass any resolution. If the minimum requirement is not fulfilled, it will not be a valid meeting.

Statutory Meeting: This meeting is so called because it is required by the Company Law statute. It is the first meeting that is held by the company after it is incorporated and must be held any time before 6 months elapse, but after a minimum of 30 days have passed since its incorporation. It is known as a statutory meeting because the statute, the Companies Act, necessitates the holding of such meetings. All the shareholders are required to be present at this meeting. Here they appoint the board of directors, discuss the direction of the company etc.

If a meeting is not held within this period, the directors of the company may be liable to pay a fine. Another possible outcome of this default is that the court can order the winding up of the company.

Annual General Meeting: An annual general meeting is a meeting of the shareholders of the company and one such meeting must be held every year. The first of these meetings must be held within 18 months of the incorporation of the company, which is 1.5 years. The company need not have another one for that year and the year after that. Thereafter, one meeting must be held every year and the gap between two meetings should not be more than 15 months.

This is the most important meeting for every shareholder of the company. At this meeting, the members will review the working of the company and discuss the accounts. They will also be able to appoint new directors to take the place of any retiring directors. In this meeting, they also appoint the auditor for the company. All of these decisions are made at the meeting by taking votes and passing resolutions based on those votes. Each shareholder gets one vote for each share he holds. Depending on the nature of the issue to be decided, the members resolve the issue either by ordinary or by special resolution.

There are two types of Resolutions:

Ordinary Resolution: Ordinary resolutions are those that are passed by a simple majority, when the total number of people for the motion are greater than the total number of people against the motion.
Special Resolution: Special resolutions are required for issues that are more important and therefore need the consent of a greater number of members. 75% of the members present and voting must vote in favour of the issue for it to be resolved.

Extraordinary General Meeting: Any meeting of a company that is not held as an annual general meeting and does not fall within such a scope is known as an extraordinary general meeting. The board of directors may call such a meeting whenever it thinks fit and any resolution passed at such a meeting is a special resolution. This means any resolution that is passed requires the assent of ¾ of the members present and voting.

Chapter Three: What happens when things go wrong?

Prevention of Oppression and Mismanagement

As in a democracy, where the decisions are made on the basis of number of votes, the decisions of the company usually reflect the voice of the majority. Although this is the intent of setting up the vote system, so that most people are satisfied with the decisions, there is a need to protect the interests of the minority as well.

Point to be noted, milord!

There was an English case, Foss v. Harbottle, where the court held that it would not interfere in the management and administration of the company upon a shareholder’s complaint if the directors were acting within the ambit of their powers. This basically upheld the sanctity of the majority rule.

The Court also said that in case a detriment is caused to the company, then the proper plaintiff would be the company itself, as it is a legal person with capacity to sue. This was done to prevent undue interference of the courts in the working of the company.

However, the very need for the court’s interference may arise because of improper working of the company by the Management or the majority.

These situations are exceptional and are noted in the Companies Act where the Court must take notice in case the minority speaks up against certain acts by the majority or managerial misconduct. They are:

Acts ultra vires the Articles of Association or beyond the scope of the Articles of Association
Fraud on Minority
Acts requiring Special Majority
Wrongdoers in Control
Oppression and Mismanagement

Acts ultra vires the Articles of Association

The Articles of Association, as we know, provides for the internal administration of the company and contains information about the nature and extent of the interrelationship of the various entities within the company.

–> Example: The Articles state that the remuneration of the directors of a company will not exceed a certain amount. But it is found later that they have been taking home salaries greatly exceeding that amount. This would be to an Act ultra vires the Articles of Association.

Fraud on Minority

This phrase is generally used to mean ‘a discriminatory action’ by which the majority gets something that the minority is deprived of. The point is, even if the decision taken is that of the majority, but the powers should be exercised in good faith and for the benefit of the company as a whole.

–> Example: In a particular case, the majority shareholders procured a contract in their own names in place of the company’s name. This was seen as a fraudulent action on the minority.

Acts requiring Special Majority

We have discussed the distinction between Ordinary and Special Resolutions. There is a reason why certain decisions require a greater number of people within the company to give their assent. If these decisions are taken without the requisite number of votes, it would be an improper resolution.

Therefore, the Courts have made it actionable where Ordinary Resolutions are passed where Special Resolutions are required.

–> Example: If the Board of Directors of a company wish to alter the Memorandum of Association of a company, a Special Resolution will have to be passed at the shareholder’s meeting.

–> Example: If the Board of Directors of a company wish to appoint an additional member to the Board, an Ordinary Resolution will have to be passed at the shareholder’s meeting.

Wrongdoers in Control

If an obvious wrong has been done to the company by the majority shareholders, then the minority or even a single shareholder can sue on behalf of the company for the obvious violations of fiduciary duty.

–> Example: if the majority sells the company’s assets to some of their own members at a loss to the company, then they are committing an obvious wrong to which the minority has no solution except to sue on behalf of the company.

Oppression and Mismanagement

Although the general rule exists to uphold the sanctity of the majority powers, there need to be some safeguard provisions in place that protect the interests of the investors and also the public interest.

A shareholder entrusts his money to the company and is entitled to fair dealings and fair play from the other members of the company. If he does not receive the fairness he is entitled to, he may make an application for oppression by the majority.

The Companies Act itself, in Section 399 provides for a remedy to the shareholders in case of oppression by the majority or any instances of mismanagement affecting the company.

It must be noted that under this section, the Company itself cannot apply for any relief. It has to be a case of oppression within the company adversely affecting minority shareholder interest.

The section provides that a particular proportion of the member strength must make the application to the Company Law Board, but the Central Government may, on application, allow any member or members to sue if ‘it is just and equitable to do so.’

The conditions under which relief will be given to the complainant shareholder are:

The company’s affairs are being conducted in a manner,
Prejudicial to public interest or oppressive to any member or members,
Which would make it just and equitable to wind up the company,
But winding up would unfairly prejudice such member or members.

Thus, a combination of these conditions must exist which would make it justifiable for the Company Law Board to provide relief under this section.

Mismanagement: For a petition of mismanagement to succeed, the shareholders must apply to the Company Law Board and show that the company’s affairs are being conducted by the directors in a manner which runs against the company’s interest.

The Company Law Board has wide powers to provide relief under this section, and upon scrutiny may provide for:

Regulation of the company’s affairs in future
Purchase of shares or interest of any member(s) by other member(s).
Termination or setting aside of any agreement between members of the company.
Termination or setting aside of any agreement between the company and a third party (with due notice and consent).
Any other matter for which it is just and equitable to do so.

Winding Up

We had earlier mentioned that companies have perpetual existence. But this runs counter to our knowledge of many companies that have ‘gone bust’ or ‘wound up’ or become ‘sick’. So there are certain situations when a company will cease to exist. This can happen due to many reasons. These reasons are well laid out in the Companies Act.

The process through which the company may be wound up, and the manner in which its rights and liabilities should be taken care of, are also provided for in the Act.

Point to be noted, milord!

The term ‘winding-up’ bears a similar meaning of ‘liquidation’. It generally means that all the assets of the company would be realized (sold off and converted to cash) through a legal process in order to repay its debts. Winding-up brings a company to an end.

Compulsory Winding Up – Winding up a Registered Company

The Companies Act provides for two modes of winding up a registered company.

Grounds for Compulsory Winding Up or Winding up by the Tribunal

If the company has, by a Special Resolution, resolved that the company be wound up by the Tribunal.
If the company makes defaults, such as
In delivering the statutory report to the Registrar or in holding the statutory meeting. The Tribunal may, instead of winding up, order the holding of statutory meeting or the delivery of statutory report.
Failing to commence its business within one year of its incorporation, or suspends its business for a whole year. The Tribunal’s power in this situation is discretionary.
The company being unable to pay its debts, resulting in insolvency.
If the company has defaulted in any other way or has acted against the State in any manner.

The petition for winding up to the Tribunal may be made by:

The company, in case of passing a special resolution for winding up.
A creditor, in case of a company’s inability to pay debts.
A contributory or contributories, in case of a failure to hold a statutory meeting or to file a statutory report or in case of reduction of members below the statutory minimum.
The Registrar, on any ground provided prior approval of the Central Government has been obtained.
A person authorised by the Central Government.
The Central or State Government, if the company has acted against the sovereignty, integrity or security of India or against public order, decency, morality, etc.

Voluntary Winding Up

If a company has been set up for a specific purpose or a fixed duration and that is provided for in the Articles of Association of the company, then, when the purpose is achieved or the duration is up, the company may be wound up by passing an ordinary resolution at a meeting.

(i) Members’ voluntary winding up: A company may pass a special resolution providing that a company be wound up voluntarily. A declaration must be made by the directors that the company is solvent. If such a declaration is not made, it becomes a creditor’s voluntary winding up.

A liquidator is appointed to go over the statement of assets and liabilities of the company to dispose of the company’s liabilities and to sell the assets. The Company is bound to have a number of outstanding debts and liabilities accrued over the course of business. Here, the liquidator will rank the various claims by various parties against the company, and shall enlist the parties who must be repaid on priority followed by the others.

When the affairs of the company are finally wound up, the liquidator makes an account of the winding up and calls a general meeting of the company.

(ii) Creditors’ winding up: The Company will call a meeting of the creditors and a liquidator is appointed by nomination of the members and creditors.

The liquidator has wide powers in tying up the affairs of the company:

The power of settling the list of contributories: A contributory is anyone who is liable to contribute to the assets of the company in case of winding up, and includes shareholders with fully paid up shares.
The power of making calls: The liquidator can make calls for payment on unpaid shares held by shareholders.
The power of calling general meetings: The liquidator needs to keep the members of the Company informed and abreast of the different actions he has undertaken in the course of winding up.

The Act also provides for cases where the liquidator defaults in his duties. The nature of his liability arises out of his position as an agent of the company. He is not a trustee for the shareholders or the creditors. He must act in the best interest of the company.

Exercises

Principle: A director’s duty is not legally defined, but is equitably definable. It is to be deduced from the circumstances surrounding the alleged default committed by the director.

On the eve of the annual meeting of the company’s shareholders, a director received a tip-off from his auditor that something seemed to be amiss with the accounts. He brushed off the comment and asked the auditor to prepare the account statement without any errors. Later, it was found that fraud had been committed with the company’s assets, and the director was held guilty of negligence although he had not been responsible for the fraud. Is the punishment too harsh?

(a) The punishment is not harsh because the director has to tell the truth to the shareholders who deserve to have the business conducted in a fair and just manner.

(b) The punishment is harsh because the director was not the person involved in the fraud, and he was not even aware of how exactly the accounts had been misrepresented.

(c) The punishment is not harsh because the director’s duty is to ensure that the account statement is right and free from any errors before its presentation at the AGM, and he did not undertake due diligence to ensure that.

(d) The punishment is harsh because the director is not responsible to the shareholders, but he is responsible to the company.

Ans: (c)

While it may be true that the director is not responsible to the shareholders, the investments of the shareholders are an integral part of the company, to which the director is responsible. It was the director’s duty to ensure that the accounts were proper, and he did not do so.

Principle 1: When a company is wound up, the liabilities of the creditors are first paid off, followed by preference shareholders. Equity shareholders receive their money, if any, only in the end.

Principle 2: The liability of the directors of a public limited company is limited unless provided for in the memorandum of association.

During the winding up of a public limited company, it was found that 2 of the directors were actually wealthy individuals with a lot of personal wealth. As the company’s liabilities were being paid off, a class of shareholders realised that they would not be paid anything. They sued the directors and asked them to pay off the company’s liabilities with their personal wealth. Is this a valid litigation?

(a) No, it is not as there was nothing provided as to the unlimited liability of the directors in the memorandum of association. Therefore, the directors’ liability was up to their investment in the company.

(b) Yes, it is a valid litigation as the limited liability of the company is as for the liability of the shareholders and not the liability of the directors. The directors’ liability is always unlimited.

(c) No, the litigation is not valid as the shareholders should proceed against the company, and demand that the directors pay up the company’s liability.

(d) Yes, the litigation is valid as the shareholders have a right to recover their investment in the company.

Ans: (a)

Principle 1: If a meeting does not possess the quorum required to conduct it, the meeting must be adjourned.

Principle 2: In a meeting that had been previously adjourned on grounds of lack of quorum, and still lacks in requisite number of members for a proper quorum when they reconvene, the quorum will be the number of members present.

At a shareholders meeting where the proper quorum was not present, the agenda was to pass a resolution on the winding up of the company. The issues were presented, the vote was taken but not counted and then the meeting was adjourned; when they reconvened, the proper quorum was present, and the vote was counted to wind up the company. Is it a valid resolution?

(a) It is a valid resolution as it was passed when there was a proper quorum present.

(b) It is not a valid resolution because the first meeting was invalid. Any resolution passed during an invalid meeting is invalid.

(c) It is a valid resolution as the proper quorum had been present at the second meeting.

(d) None of the above

Ans: (b)

The first meeting had not been adjourned, as per the law, at the lack of a quorum. Thus, the first meeting was invalid. Whether there were enough members in the second meeting or not, the resolution would be invalid.

Principle: The rule in Foss v. Harbottle was that the Court would not interfere in the management and administration of the company upon a shareholder’s complaint if the directors were acting within the ambit of their powers. There are certain exceptions to this rule.

In which of the following situations can a shareholder have a right against the company for mismanagement?

(a) When a director commits fraud

(b) When the company undergoes losses

(c) When the directors exceed their appointed term

(d) When there is a violation of the Memorandum of Association or the Articles of Association.

Ans: (c) & (d). When the director commits fraud, the company (which is a legal person having capacity to sue) is the proper applicant. Simply because the company undergoes losses – which is part of the business cycle – there cannot be a motion for mismanagement.

Principle: Anything provided in the Memorandum of Association or the Articles of Association that violates the provisions of the Companies Act, or the Companies Rules, will be void.

The Memorandum of Association of Vidya Inc., stated that the matters of shareholding would be as per what was laid down in the Articles of Association. The Articles gave wide powers to the directors to have controlling interest without equivalent shareholding. This was not valid under the Companies Act. What would you as a shareholder do?

(a) Sue the company for fraudulent activities.

(b) Approach the court for relief under writ of quo warranto.

(c) Notify the Registrar of Companies and have the relevant clauses amended.

(d) Call a shareholders’ meeting and discuss ways to usurp the directors’ powers.

Ans: (c)

No fraudulent activities were being perpetrated in the name of the company. The court could not be approached under a writ petition of quo warranto because the company was not an agency of the State. Option (d) is clearly wrong on the face of it.

Logical Reasoning

Follow the logical progression and solve:

Preference shares resemble bonds in that they are fixed income instruments with assured returns and have a fixed value.
All shares that are not preference shares are equity shares.

Therefore, anything that is not an equity share is a bond.

Is the above syllogism valid?

In the following 3 questions, there will be an assertion and a reason provided. You have to decide whether the assertion is right, and then decide whether the reason provided for it is valid.

Assertion: A shareholders’ meeting must be held annually to discuss the business of the company.

Reasoning: Many provisions of the Companies Act do not apply to private companies.

(a) Both assertion and reason are right, but the assertion is not an effect of the reason.

(b) The assertion is not valid, but the reason provided is a valid statement.

(c) The assertion and reason are both false and invalid.

(d) The assertion and reason are both right, and the assertion is a natural consequence of the reason.

Ans: (a)

The fact that provisions of the Companies Act do not apply to private companies has very little to do with the necessity of holding an annual shareholders’ meeting.

Assertion: Promoters are not members of the company.

Reasoning: Promoters do not necessarily subscribe to the memorandum and become shareholders.

(a) Both assertion and reason are right, but the assertion is not an effect of the reason.

(b) The assertion is not valid, but the reason provided is a valid statement.

(c) The assertion and reason are both false and invalid.

(d) The assertion and reason are both right, and the assertion is a natural consequence of the reason.

Ans: (b)

The assertion is flawed because there are certain situations where promoters are members of the company and certain situations when they are not. It is determined by whether they have a shareholding in the company or not. The Reasoning is a valid statement. Thus, the answer is (b).

Solve:

If in winding up a company, ordinary shareholders have been paid & preference shareholders have been paid,

Is it possible that the creditors have been paid?
Is it necessary that the creditors would have been paid at this stage?

Ans: (ii)

The creditors receive first priority of payment upon liquidation of the company’s assets in the process of winding up.

The doctrine of indoor management states that a third party may presume that the business being conducted on behalf of the company is legitimate, authorised and valid as far as the documents and authorisations etc. are concerned.

There are two aspects to a transaction, substantive and procedural. The third party may get to know the substantive aspects, but may not know whether the procedure has been followed or not.

(a) A customer bought some bonds, or secured debt instruments from a company’s directors. The director had the authorisation to sell these bonds only after a resolution had been passed by the shareholders. It was found later that the resolution had not been passed.

(b) Company A was lending money to Company B, and the companies had 2 directors in common. It was found that the lending of money from Company A could be done only after the Company had resolved to do so in a meeting, but that resolution had not been taken. The shareholders of Company B are enraged with the actions of its directors.

(c) The accountant of a company signed certain documents of a transaction that company to a third party although he was not authorised to do so. The company later contended, when the third party tried to get returns from the company that he should have taken due care to ensure that the accountant did indeed have the authority.

In which of the above situations will the doctrine of indoor management be a valid defence for the third party?

Ans: (a) and (b)

The Rights of Illegitimate Children under Christian law

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Guest Post

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June 3, 2016

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This article is written by Nimisha Srivastava, a student of GNLU.

The Christian law of inheritance in India is regulated by the Indian Succession Act, 1925. The Indian Succession Act (ISA) only recognizes kinship, therefore adopted and illegitimate children are excluded from the ambit of the act. Christian law provides for equal inheritance rights to sons and daughters only if they are born from a valid marriage. ’Child’ under ISA does not include illegitimate child. [1]

Indian Christian marriage act defines void marriages as following:

Section 4 says if either the bride or bridegroom is Christian and the marriage is not solemnized and registered according the provisions of this Act, the marriage is void.
As per Section 26 and 52 if the Marriage is not solemnized within two months after the notice is given, the marriage is void.

Section 60 says that If the persons intending to be married has a wife or husband still living than marriage is void;

Marriages solemnized in contravention of mandatory provisions of the Act.

Since Indian Divorce Act is applicable to divorce under Christian law, Section 18 and 19 provides in what situations marriage soleminized under Christian religion may be declared null and void:

the respondent was impotent at the time of marriage and at the time of institution of

the suit;

the parties are within prohibited degree of consanguinity or affinity;
either party was lunatic or idiot at the time of marriage;
the former husband or wife of either party was living at the time of marriage and the

earlier marriage was subsisting; or

if the consent of either party was obtained by force or fraud.

Under section 21 of the Indian Divorce Act, 1869 only annulment of the marriage in two situations can confer the status of legitimacy to children born of the marriage, viz., (a) a second marriage during the subsistence of the first marriage in good faith that the former spouse was not

alive, and (b) insanity.

Thus illegitimate children born out of all kinds of void marriage are not debarred from inheriting the estate of their parents and child is disqualified only if born out of prohibited degree or when the other party is impotent.

In Christian law, we see discrimination exists between children born out of different grounds of void marriages.

Maintenance:

The personal law of Christian does not also confer any obligation on the parents to maintain their illegitimate child though such child can claim maintenance under the secular law provisions of Code of Criminal Procedure, 1973. A minor child whether legitimate or illegitimate has no right to claim separate maintenance as per the decision of the court in Chacko v.Daniel[2]. On issues relating to succession only the lawfully wedded wife and legitimate children have the claim.

Guardianship:

In accordance to the changing needs and nature of the society, the Supreme Court ruled that an unwed mother can be appointed as the sole legal guardian of her child without the consent of the father. India is changing, and many single parent families are emerging. The Court refused to involve father in the petition who was even unaware of the existence of the child.

The legal recognition by father is irrelevant in situation when the mother is the sole care giver of the child. Welfare of child has paramount importance and taking into account the law in countries like UK, USA, Newzealand, Philippines and South Africa, ruled that unwed mother has primary custodial and guardianship rights over the child.

The main issue that arose in this case was with respect to procedural requirement as per the Guardians and Wards Act, according to which the notice is required to be sent to father to obtain his consent, as petitioner has applied for guardianship. The bench gave a liberal interpretation to Section 11 of the Guardians and Wards Act, ruling that in the case of illegitimate children whose sole caregiver is one of his or her parents, the term “parent” would mean principally mean that parent alone.

The bench also decided not to be swayed by the tenets of Christian law, and said: “India is a secular nation and it is a cardinal necessity that religion be distanced from law. Therefore, the task before us is to interpret the law of the land, not in light of the tenets of the parties’ religion but in keeping with legislative intent and prevailing case law.”

It further noted that unwed Christian mothers in India are disadvantaged when compared to their Hindu counterparts who are the natural guardians of their illegitimate children by virtue of their maternity alone. “It would be apposite for us to underscore that our Directive Principles envision the existence of a uniform civil code, but this remains an unaddressed constitutional expectation,” the bench stated.[3]

Indian Succession Act, 1925:

The ISA is based on Statue of Distribution which used to govern the succession of the personal property in England. The Act provided no discrimination in inheritance on the basis of sex. Rights of both half blood and full blood were recognized.

In Smith v. Massey[4], it was held that where there were two sisters born of unmarried parents the son of one of them was not the nephew of the other. It was also said for the applicability of Indian Succession Act:

No doubt the Act is applicable to others than persons, of exclusively English descent, but these sections are not extended to Hindus, and for my own part I cannot conceive that such an Act as this, which defines certain relations simpliciter, intended any other relations than those flowing from lawful wedlock. If the argument were conceded, a bastard would share equally with a son-i.e. a legitimate son, he being the only son known to our law-and this result appears to me wholly repugnant and impossible.[5]

There is no difference between agnates and cognates.

Testamentary succession:

The Act expressly discriminates illegitimate children in matters of testamentary succession when it says that if the intention of the testator to give the property to the illegitimate children is not clearly mentioned in the will, then the term child will refer only to legitimate child.

Conclusion:

The Indian Society is evolving in nature but we are still ruled by archaic laws which need to be changed. Transformation is needed particularly in statutory laws so that stigma attached to illegitimacy in personal laws can be removed. We need to adopt a rational and liberal outlook towards illegitimate child, giving them an equal status as given to a legitimate child. We cannot put blame on child for the acts of their parents. Denial of inheritance rights to adopted and illegitimate children causes social and economic deprivations.[6]

There have been amendments in various statutes governing personal laws, which were made in accordance with the need of changing society. We need more laws that are not discriminatory towards illegitimate children. Section 125 of Code of Criminal Procedure and Section 112 of Evidence Act are secular piece of legislation which apply to all the religions equally. Section 125 of Code of Criminal Procedure gives rights to every person regardless of religion to claim maintenance. Section 112 says that birth during marriage is a conclusive proof of legitimacy of child.

Personal laws still govern the nature of rights and obligations of individual in a family. The Indian Succession Act a codified piece of legislation also does not provide any equality between legitimate and illegitimate. We need a Uniform Civil Code, governing all aspects of personal law from property to inheritance to maintenance etc. that ensures that rights of illegitimate children are at par with that of legitimate children. In Jane Antony v. V.M. Siyath[7], the Kerala High Court said that all the children both legitimate and illegitimate are entitled to the maintenance under Section 125 of the Code of Criminal Procedure, there is no reason or logic in denying them their right of inheritance to succeed to the properties of their parents in cases of intestacy. It also suggested the Central Government to enact a legislation to confer right of succession on all illegitimate children irrespective of their religion in tune with Section 125 of the Code of Criminal Procedure[8] which is for all purposes a secular legislation.

The Law Commission of India in its 110th Report had already suggested for two alternatives in the year 1985 which are (i) addition of a suitable Explanation to section 37 so as to include illegitimate children within the expression “child” or (ii) inserting a definition of expression “child” as including illegitimate children in s. 2, the general definition section, to settle the point in regard to all provisions of the Act. But the IS(A) Bill, 1994 incorporating these suggestions lapsed.

As Supreme Court noted, in case of ABC v. State of Delhi[9], that our Directive Principles of State Policy envisioned a Uniform Civil Code but it remains an unaddressed constitutional expectation. We cannot let personal laws that are discriminatory not only against illegitimate child, but also against females (widows, mothers, daughters, wives), govern our society. The patriarchal nature of our society was responsible for developmental of such laws at that time but today when we are aiming for gender equality, we should look at the bigger picture.

[1] In Re: Sarah Ezra v. Unknown AIR 1931 Cal 560.

[2] Chacko Daniel v. Daniel Joshua, 1952 KLT 595

[3] ABC v. The State of Delhi (2015) 10 SCC 1

[4] [1906] 30 Bom. 500

[5] Emma Agnes Smith vs Thomas Massey (1906) 8 BOMLR 322

[6]Archana Mishra, Adopted And Illegitimate Child Under Indian Christian Law: Revisiting Inheritance Rights, (2015) 29 Australian Journal of Family Law 43. Available at SSRN: http://ssrn.com/abstract=2551287

[7] 2008 (4) KLT 1002

[8] Savitaben Somabhai Bhatia v. State of Gujarat (2005) 3 SCC 636, word children n section 125 of CrPC includes illegitimate children, Dukhtar Jahan v. Mohd. Farooq (1987) 1 SCC 624, Sumitra Devi v. Bhikan Chaudhary (1985) 1 SCC 637(an illegitimate child who is a minor is entitled to maintanence)

[9] (2015) 10 SCC1

Constitution of National Company Law Tribunal (NCLT)

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June 2, 2016

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In this blog post, Pramit Bhattacharya, Student Damodaram Sanjivayya National Law University writes about the newly constituted National Company Law Tribunal (NCLT). In fact, the NCLT was constituted just a day back with the Government providing the notification. This post looks into the notifications which has been provided by the Government. The post also highlight how the Apex Court upheld the constitutional validity of the NCLT and NCLAT.

On 1^st June 2016, the National Company Law Tribunal and its appellate body was set up by the government, which implemented some of the provisions of the Companies Act, 2013, and will also help in implementing the bankruptcy code. Retired Judge S. J. Mukhopadhaya will act as the Chairman of the National Company Law Appellate Tribunal and retired Judge M. M. Kumar would act as the president of the National Company Law Tribunal. All the pending cases before Company Law Board will get transferred to NCLT. According to the notification released, the NCLT will have 11 benches initially. Two benches will be at New Delhi and one each at Allahabad, Ahmedabad, Bengaluru, Chennai, Chandigarh, Guwahati, Hyderabad, Kolkata and Mumbai. According to the provisions stated under the Companies Act, 2013, the NCLT will not only replace the Company Law Board, but it’ll also handle various matters relating to companies which are presently pending in the High Courts across the country, the Appellate Authority for Industrial and Financial Reconstruction and the Board for Financial and Industrial Reconstruction. In total, the NCLT will have 21 benches and 63 members.

The Debt Recovery Tribunal (DRT) and the National Company Law Tribunal will be the two adjudicating bodies which will look into the matters of debt recovery and will govern the Bankruptcy Code. The powers of the two Tribunal have been separated so that they do not overlap. The DRT will look into the cases of individual bankruptcy while the NCLT will look into matters of the insolvency of limited liability partnerships, companies, and corporates.

NCLT gets a nod from the Supreme Court

The constitutional validity of the NCLT was upheld by the Apex Court in May 2015, which paved the way for setting up of the NCLT. With the NCLT coming into existence, a lot of reforms will tale place with regards to the framework for resolving insolvency matters in the corporate field. In the judicial pronouncement of Madras Bar Association v The Union of India,[1] the issue was decided by the Supreme Court. The Madras Bar Association filed a writ petition challenging the constitutional validity of the NCLT and the NCLAT. The petitioners stated that the provisions of the Act, which were related to NCLT and NCLAT were violative of Article 14 of the Constitution. The Apex Court rejected the contention of the petitioners and stated that the legislature has the power to enact a law which transfers the jurisdiction exercised by a court in regards to a specific issue to any tribunal, set up for that specific purpose. The Court also opined that all courts are tribunals, and any tribunal to which the jurisdictional power is transferred should be a judicial tribunal. Therefore, the tribunals should be governed by members who are equal in capacity, status, and rank with the members of a court. The tribunal should also have a secured tenure and independence.

Effect of the Judgment

The decision of the Apex Court will have certain positive effects. The setting up of the Tribunal may improve India’s ranking in World Bank’s list of doing business. The setting up of the Tribunal will also open up a lot of opportunities for various professional like CS, CWA and CAs as they would also be now eligible to appear before the Tribunal.

The Apex Court asked the governments to make certain amendments to the provisions relating to the NCLT. The Court stated that only those members who are not below the level or rank of additional secretary are eligible to be appointed in NCLT branches. With the NCLT being constituted the powers of four different tribunals, namely the Company Law Board (CLB), Board for Industrial and Financial Reconstruction (BIFR), Appellate Authority for Industrial and Financial Reconstruction (AAIFR), and Official Liquidator (OL) will be merged and given to the NCLT.

Recent Notification

With the constitution of the NCLT some provisions of the Companies Act, 2013 came into force. They are-

Sub-section 7 of Section 7 except clause (c) and (d) which talks about the power of the Tribunal in case the company was incorporated by furnishing any incorrect or false information and suppressing some material fact.
Second proviso to sub-section 14 of the Act. It talks about the situation where a public company is converted into a private company, and it further states that such conversion would not take place without the approval of the Tribunal.
Sub-section (3) of Section 55 of the Act talks about the approval of the Tribunal in case a company is not able to redeem its preference shares or pay dividend, and in place of redemption or dividend wants to issue further preference shares which are equal to the due amount.
Clause (b) of sub-section (1) of section 61 which talks about approval of the Tribunal in case the company wants to consolidate and divide its existing share capital.
Sub-section (4) to (6) of section 62.
Sub-section (7) to (9) of section 71 which talks about right of debenture trustees and debenture holders to approach the tribunals in certain situations.
Section 75 of the Act.
Section 97 of the Act which states the power of the Tribunal to call an Annual General Meeting in certain situations.
Section 98 of the Act which talks about the power of the Tribunal to call any other meeting of a company other than the annual general meeting.
Section 99 of the Act, which states the penalties to be sanctioned in the case the directions of the Tribunal, is not complied with.
Sub-section (4) of section 119 which talks about the power of the Tribunal to inspect the minute books of the company.
Section 130 of the Act which talks about the reopening of books of accounts of a company on the order of a Court or the Tribunal.
Section 131 of the Act which talks about the approval of the Tribunal in case of voluntary revision of the financial statements of the company or the Board’s Report.
Sub-section (4) and (5) of section 140 of the Act.
Sub-section (4) of section 169 which gives the power to the Tribunal to sanction costs in case the right conferred under this provision is abused.
Section 213 which authorizes the Tribunal to carry out investigation into the company’s affairs in certain cases.
Section 218 which talks about protection of employees during the investigation and the role of the tribunal in it.
Section 221 of the Act which talks about freezing of assets of the company on inquiry and investigation and Section 222 which talks about imposition of restriction upon issue of securities. These two sections also state the penalty in the case of contravention of the directions of the Tribunal. The minimum penalty under both the section are one lac rupees and may extend up to the amount of twenty five lac rupees. There are other penalties also which have been mention under the provisions.
Sub-section (5) of section 224 which talks about role of the Tribunal in the case of report of any kind of fraud which has taken place in a company.
Section 241 which talks about application to Tribunal for relief in cases of oppression.
Section 242 which grants the Tribunal with its powers.
Section 243, 244 and Section 245 of the Act.
Sub-section (2) of section 399.
The NCLT will have all the powers of the High Courts in matters of demergers, mergers, winding up, amalgamation, etc.
NCLT will have the power to entertain all the proceedings which will be transferred to it by the Company Law Board or the High Courts or any other tribunal or court as provided in Section 434 of the Companies Act, 2013.
Under Section 441 of the Companies Act, 2013, the Tribunal will also have the power to compound certain offenses.
Section 466 of the Companies Act, 2013 states that the NCLT will replace the CLB and on constitution of the NCLT the CLB will stand dissolved.
Section 415 to 433 of the Companies Act, 2013 talks about the governing of the NCLT.

Concluding Remarks

The constitution of the National Company Law Tribunal with its functions, powers, and wide reach due to the number of benches will have a great impact in the field of Company Law. This is because it is not just a revamped version of the conventional Company Law Board. It is an alternative to the CLB and three other Tribunal as mentioned earlier. The functions and powers of the NCLT are also very different from the functions and powers of the conventional CLB. At this moment, it cannot be ascertained that how efficient this alternative will prove because at this stage the NCLT is just in the infancy phase. But if implemented properly, the NCLT would have many benefits. First of all, it’ll remove a lot of burden from the shoulder of the Courts and other institutions. The procedure will also become more streamlined. The power of the Tribunal of exercising original jurisdiction over matters will also be beneficial as it’ll ensure that there is speedy conveyance of justice and smooth working of the justice system. Last but not the least, to make the idea a success, the independence of the NCLT must be preserved.

Rules related to NCLT

http://nclt.gov.in/orders/Rules_NCLT_latest.pdf

NCLT Website

http://www.nclt.gov.in

http://www.nclat.gov.in

References Used-

[1] WRIT PETITION (C) NO. 1072 OF 2013

National IPR Policy 2016: A Quick Look

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May 31, 2016

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This article is written by Mitali Yadav, Managing Partner, Alba Law Offices, a Delhi based full service law firm.

In India there are multiple laws, rules, regulations and governing bodies, which administer various forms of Intellectual Property Rights (“IPR”). It is imperative that all the legal provisions are interpreted and implemented in harmony so as to avoid any conflict or inconsistency. Further, it is also required for the administrative bodies to work in coordination to ensure efficient administration.

The National Intellectual Property Right Policy (the “Policy”)1, drafted by the Department of Industrial Policy & Promotion (DIPP), aims to build a comprehensive framework for the protection of IPR, by creating a relationship between the multiple statutes and the various governing bodies, concerning IPR.

As per the Policy, DIPP shall be the nodal point to coordinate, guide and oversee implementation and future development of IPR in India. The responsibility for actual implementation of the plans will remain with the Ministries/ Departments concerned in their assigned sphere of work.

The Policy has broadly enlisted 7 objectives and the steps to be undertaken therein by the department.

IPR Awareness – Despite having creativity and innovation in abundance, India suffers from lack of knowledge and awareness about IPR. This Policy aims to create awareness amongst general public regarding the benefits and importance of

Generation of IPR – In furtherance to creating wide spread awareness about the relevance of IPR, the Policy aims to enhance the overall intellectual property filings made in the

Legal and Legislative Framework – The Policy aims to review/ revise/ update the laws, rules, regulations, pertaining to IPR, so as to ensure that the same are in consonance with the national needs and priorities.

Administration and Management – In order to effectively implement the laws/ rules/ regulations governing IPR, it is imperative to have an efficient administrative/ governing body. This Policy aims to ensure that operations at the IPR offices are more efficient, streamlined and cost effective.

Commercialization of IPR – The owners of IPR tend to face the challenge of being unable to effectively capitalize the value and reward of the IPR. Thus, the Policy aims to create a public platform to function as a common database of IPRs. Such a platform can help creators and innovators connect to potential users, buyers and funding

Enforcement and Adjudication – It is the responsibility of the owner of an IPR to protect the IPR against any infringement/ misuse/ abuse etc. The Policy aims to build respect for IPR among the general public and to sensitize inventors and creators of IPR on measures for protection and enforcement of their rights. Additionally, the Policy also aims at building greater capacity of the enforcement agencies at various levels to ensure better enforcement of the

Human Capital Development – The Policy envisages developing a pool of IPR professionals and experts so that the country is able to build a national capacity for providing thought leadership in the field of

1 Received approval from the Union Cabinet on May 12, 2016.

Disclaimer – This article is a copyright of Alba Law Offices. Whilst every care has been taken during the compilation of this article, to providing up-to-date and accurate information, however, neither Alba Law Offices nor the author of this article will be liable to be held responsible for any claim, loss, damage or inconvenience which might be caused as a result of any information contained in this article.

Analysis Of Marine Insurance- Excluded Insurance

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May 30, 2016

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In this blogpost, Pramit Bhattacharya, Student, DamodaramSanjivayya Natioanl Law University, writes about the concept of excluded losses in the case of Marine Insurance. Section 55 of the Marine Insurance Act, 1963, which deals with the concept of excluded losses and also the important elements of the provisions are dealt with, in this post.

Maritime law is one of the oldest and the most established law. There are a lot of nodal laws like marine contracts, marine torts, shipping, worker compensation, and any other dispute that may arise on the navigable waters of the world. Maritime law is also known as admiralty law, and it regulates maritime offenses and issues.[1] Maritime laws comprise of both domestic laws of a state and private international laws. Maritime law also governs the relationship between the private entities who operate their vessel in the oceans of the world. Issues like marine navigation and marine commerce also fall under the purview of the maritime law. Numerous commercial activities are also covered by the maritime law. Even though some of these activities may be land based, but they still come under the ambit of maritime law. One of the oldest insurance contract which has been authenticated, i.e. a contract which truly envisaged the characteristics of a contract in the sense that risk of loss was transferred due to an uncertain event and in lieu of which consideration was made, was a marine insurance contract.[2] The origin of marine insurance is not a recent development. The concept of marine insurance has been existent for several centuries. One of the most comprehensive and definite law regarding marine insurance was introduced by the English when they formulated the Marine Insurance Act, 1906.[3]

Excluded losses

Under the English Marine Insurance Act, 1906 Section 55 (1)[4] provides all the framework in relation to excluded and included losses under the maritime law. Under the Indian Marine Insurance Act, 1963 also, the same provision, i.e. Section 55 governs the issue of excluded and included losses. The principle of proximate cause is applied to determine the liability of the insurer. Section 55 of the Marine Insurance Act, 1963 states that there are certain situations in which the insurer is not liable for the loss which has been insured against. Section 55 (1) states that the insurer is not liable for any loss which is not proximately caused by a peril insured against. Section 55 (2) (a) states that the insurer is not liable for any loss which has been suffered by the assured if the loss occurred due to the willful misconduct or negligence of the assured party. But if the loss occurred due to proximate cause, and the wilful negligence of the assured also contributed in happening of the loss, the insurer would be liable. Clause (b) states that the insurer wouldn’t be liable for any loss which has been proximately caused due to any delay, even though the delay due to a peril was insured against. Clause (c) talks about normal wear and tear in normal course of business. The clause states that the insurer is not liable for the ordinary wear and tear, ordinary breakage and leakage, some inherent defect which was present from the start, on the thing which has been insured, any loss to machinery or product which haven’t been caused by maritime peril, or any loss caused by vermin or rats. The reliance has been placed on the Act to provide a necessary defense to the insurer.

Proximate cause

The interpretation of the Act makes it clear that the party who has insured the subject matter of the insurance is liable only for the losses which have been proximately caused by peril. The question of proximate cause has been discussed over and over, to understand what actually can be considered a proximate cause. The English law on marine insurance is very clear on the point of the proximate cause, though. And Since the Indian Law is based on the English Law, the stand taken by them can act as an authority for the Indian Law also. According to the English authorities, it is the cause proximate in effect which must be considered instead of the proximity of time. In simple words proximate cause can be defined as the dominant cause of the loss or damage.[5] In the judicial pronouncement of Reischer v Borwich[6], it was observed by the Court that the tugboat was insured against the risk of collision or collision with any object. The tug boat was although not insured against the perils of the sea. The tugboat had a collision, and it was damaged. The Court was of the opinion that the assured was entitled to recover the loss from the insurer since the proximate cause of the loss was a collision and it was a proximate cause in effect and not in time.

Burden of proof

Now the question arises that which party should prove whether the cause of the damage was proximate or not. Under almost all the legal system, the party who is making the claim or the assertion that the cause was proximate has the burden of proof. The assured, in order to discharge his burden of proof does not have to exclude all the possibilities as to how a particular damage to the subject matter take place, but the assured has to satisfy the Court that according to the balance of probabilities, the loss was proximately caused by a peril which he has insured against. In a situation where there is an equal probability that the loss or damaged was caused by a peril which was not covered by the insurance policy, the assured will fail in discharging his burden of proof. In such a case the insurer will not be liable for the loss, and the assured wouldn’t be able to sustain his claim. Once the assured has discharged his burden of proof (discharging the burden of proof in a prima facie manner will suffice), then the burden of proof shifts to the other party. In such a case the insurer will have to set up a counter argument, and satisfy the Court that the damage occurred due to a peril which hasn’t been insured. The insurer can also prove that the damage occurred due to the wilful misconduct of the assured party, or assured’ privity to wilful misconduct, or a breach of warranty.

Wilful misconduct

Section 55 (2) states that if the damaged is caused by the wilful misconduct of the assured, then the insurer wouldn’t be liable. The willful misconduct can range from negligence to gross disregard. It is of vital importance to identify the quality of the act of the assured to check whether the act fell under the category of wilful misconduct or not. One more point which is to be considered is that if the ship sent to sail was unworthy of sailing or not. If yes, then also it will constitute willful misconduct on the part of the assured. One more question which arises here is that can complete indifference, disregard and inaction can also be considered as wilful misconduct. The stand has been made clear by the Court that taking no action and showing indifference will also constitute wilful misconduct.

Loss caused by delay

Section 55 (2) (b) very clearly states that the insurer wouldn’t be liable for any loss due to any kind of delay even if the assured has taken insurance against the peril due to which the delay was caused. There can be many causes for a delay, but the most apt cause of the delay will be considered.

Ordinary wear and tear

As per section 55 (2) (c) states that the insurer is not liable for any ordinary wear and tear in the ordinary course of operations, for instance, wear and tear caused to a ship due to the effect of waves and wind. A little depreciation is always there, and the law also recognizes this fact. The insurer is liable only for losses which are beyond the regular wear and tear. Ordinary leakage and breakdown also fall within the scope of normal wear and tear.

Inherent defect

If there is any inherent vice in the subject matter and the damage is caused due to such inherent vice, then to the insurer wouldn’t be liable. The point here to note is that since the insurer is alleging or claiming that the subject matter had some inherent defect or vice, the burden of proof lies on him that it is indeed so. Damage which happens in the regular course of business without any externalities can be due to inherent vice and such losses would also be excluded from the liability of the insurer.

Concluding remarks

Marine insurance plays a very vital role in securing loses of the buyers, sellers, and ship owners and it helps them to conduct their business on or through the seas and the oceans. The risks at the high seas are much unexpected, and it is important that at least some of the risk is financially covered through the insurance. Marine insurance generally fulfills the overseas transportation requirements. Excluded loses are also an important part of the marine insurance law so that the insurers are not made liable for the loss which happened due to the misconduct of the assured party or due to any event which was inevitable.

[1]http://www.pfri.uniri.hr/~bopri/documents/02_MaritimeLaw.pdf

[2]http://www.nos.org/media/documents/vocinsservices/m4-2f.pdf

[3]http://www.legislation.gov.uk/ukpga/Edw7/6/41/contents

[4]http://www.legislation.gov.uk/ukpga/Edw7/6/41/section/55

[5]file:///C:/Users/Administrator/Downloads/fulltext_stamped.pdf

[6] [1894] 2 QB 548 at p.550 http://caselawquotes.net/P/ProximateCause.html

Brief Analysis Of The Protection of Children from Sexual Offences Act, 2012

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May 30, 2016

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In this blogpost, Abhishek Khandelwal, Student, Nirma University, briefly analysis the Protection Of Children From Sexual Offences Act, 2012.

Introduction

In a survey by Ministry of Child and Women Welfare, it was found that more than 53% of children are the victims of sexual abuse. It is to be noted that it is a crime the extent of which ( in any society) can’t be determined with accuracy because the plethora of cases goes unnoticed or unreported. The Protection of Children from Sexual Offences (POCSO) Act, 2012, is an initiative of our legislature to provide regulations to gradually mitigate this crime.

In this blogpost, an effort is made by the author to give a brief analysis of the act by discussing its contents, jurisprudence and the major problem in its implementation.

Brief introduction of Protection of Children from Sexual Offences (POCSO) Act, 2012

This bill is a ‘specific’ legislation for the protection of the child from the sexual offences because previously such offences were dealt by various provisions of Indian Penal Code, which were not proving to be effective. This act is a fine work in its drafting but still there are some things which can be relooked, and the same will be discussed in this blogpost later on.

The unique features of this act are as follows:

Firstly, setting up of Special Juvenile Courts and appointment of Special Public Prosecutor. In the past, it has been observed that the trials took unnecessarily long time to dispose of the matter , but the new bill suggests disposing the case within one year. The essence of the bill lies in the fact that it is more child-friendly while recording of evidence, reporting and during investigation and trial.

Secondly, a support system from Police administration. Under this act, the statement of the girl child is to be recorded by a woman police officer who is not below the rank of sub- inspector. The presence of parents and other relatives during medical examination of the victim is allowed under the act. In the case of a victim girl, a medical examination is to be conducted by women doctor.

Thirdly, this act provides an arrangement for victim child for their special protection and care.

Fourthly, the act has an implication of the point that the person who has attempted to commit the crime(s) under the act, is liable for punishment. Just like in rape cases where the burden of proof is on the accused, here also the burden of proof of his innocence is on the accused. It should be noted that the act provides punishment for false accusation as well.

POCSO Act and jurisprudence

According to the author, applicable school of thought for “ Prevention of Children from Sexual Offences Act 2012” is Positivist School of Law. The main thinkers of positivistic school law are Jeremy Benthem (The father of English Positivism), John Austin, H L A Hart and Kelsen.

Jeremy Benthem defines law as an assemblage of signs declarative of a volition conceived or adopted by the sovereign in a state. He gave the concept of utilitarian individualism based on pleasure and pain in which he stated that any act which increases the overall quantum of pleasure or happiness is justified. If we take into consideration “ Prevention of Children from Sexual Offences Act 2012”, then the concept of utilitarianism of Bentham can’t be justified because the act itself can’t be justified because of its nature, no matter what is the quantum of happiness that the act is responsible for.

Under the scheme of Austin, the law is the rule of guidance laid down for one intelligent being by another intelligent being who has power over the former being. POCSO Act 2012 can be explained under Austin’s scheme as Austin has described the positive law as “aggregate of rules set by man politically superior for men who are politically inferior.” ‘Sanctions’ under the scheme of Austin can easily be compared to some of the punishments mentioned in the POCSO Act 2012. However, Austin’s view that Positive law includes rules set by those who are not political superiors is an undue extension.

In Hart’s view, there is no necessary logical connection between the content of law and morality. He asserts that the existence of legal rights and duties may be devoid of any moral justification. According to the author, Hart was correct in stating that there is no logical connection between law and morality, and if there is any connection, it is very difficult to identify that connection because the concept of “morality” in itself is very vague and don’t appeal to reason.

POCSO Act – not the ultimate solution

The objective of the present criminal justice system as understood by the author is to punish the wrong-doer, and there is a very little aspect of reformation in today’s laws. The nature of violation in criminal justice system is of public rights and duties. These types of crimes are called crimes of misdemeanors. There are five theories of punishment under criminal justice system which are Preventive theory, Deterrent theory, Reformative theory, Retributive theory and Expiatory theory. After having a look at all these theories of punishment, the one that appeals most to ‘logic’ and ‘reason’ is the reformative theory of punishment. As already discussed, the objective of the POCSO is also to reduce the crime rate by punishing the offenders and it has very little to offer for the reformation of offenders.

Conclusion

Even though the parliament passed the POCSO Act, 2012 which came into force on 14^th November 2012, this special law to prevent children from sexual offences remains an unimplemented law, unknown to most. Author has to say that this law is beyond knowledge or information of those who need to apply it. One would be surprised to know that in the unfortunate rape case of Delhi, the Delhi Police included the provisions of POCSO to the FIR reportedly after two days of the filing of FIR on 15^th April 2013.

It is now for the Centre and State Governments to improvise (by adding reformative measures) and implement this law by creating effective machinery to check heinous crimes of gross sexual abuse against children by enlightening all the concerned about it.

References

Ministry of Women and Child Development, Government of India. “Report of the Working Group on Child Rights for the 12th Five year Plan (2012-2017).
BREAKING THE SILENCE Child Sexual Abuse in India” published by Human Rights Watch.

What Is The Procedure To Convert A Company Into Limited Liability Partnership

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May 29, 2016

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In this blogpost, Harsha Asnani, student, NIRMA University, Ahmedabad, writes about the process of conversion of a company into a limited liability partnership. The article also covers costs and benefits that a business enterprise will have to cover in order to undertake such conversion.

In the year of 2008, a very new form of business organisation was introduced in India called the Limited Liability Partnership by way of Limited Liability Partnership Act, 2008. It is a unique combination of two different forms of business organisation i.e. partnership and company. It has proved to be a very suitable form of business organisation for enterprises whose scale of operation ranges from micro to small to medium form. The reasons behind suitability of this form of business organisation is that it brings lot of benefits for the partners, provides flexibility to the partnership, bearing certain elements of company form of business organisation, it acquires a legal status and one of the most important benefit that it makes the liability of a partner limited to the extent of contribution made by him or her.

As far as the company form of business organisations are concerned, there are a lot of compliances that need to be followed. Such compliances are sometimes so complex in nature that they bear a tremendous cost. These compliances are not just limited to establishing the company but also extend to overhead expenses for managing affairs including board meetings, maintaining statutory records, filling e – forms etc. In such a case, it becomes very difficult for the small or medium scale companies to manage their state of affairs. The absence of the requirement of fulfilment of all such compliances in the LLP form of business organisation persuades the small and medium scale companies to convert themselves into LLP.

Benefits of Converting a Company into LLP

One of the major benefits of converting the company into LLP is that in a company there are a lot of forms that need to be filled while the company is being incorporated for example Regular – MGT – 14, 23AC, 23ACA, 20B, GNL – 2 etc. Whereas, in the case of establishing an LLP, only two forms need to be filled i.e. Regular-E-Form 8 and E-Form 11.

In the company form of business organisation, members can transfer their shares only through court order once it is decided that the company is to be wound up whereas, in an LLP, transfer of shares is possible.

In companies, it is essential that during the stage of incorporation, the minimum capital contribution is Rs. 1,00,000 in the case of private companies and Rs. 5,00,000 in the case of public companies. Whereas, in the case of LLP, there is no minimum capital requirement for incorporating a limited partnership.

According to the Companies Act, 2013 companies are bound by the obligation of maintaining a statutory record. There is no such obligation or requirement of maintenance of statutory records. Moreover, at the end of financial periods, it is compulsory to conduct audits. Whereas LLPs have to conduct audits only if their contribution exceeds 40 lakhs or their contribution is above 25 lakhs.

Other benefits in the Income tax include no payment of taxes like dividend distribution tax, MAT tax and income tax which is due to interests and remuneration payable to partners as salary payable to directors.

Cost to be incurred in case the company gets converted into an LLP

In case if a company gets converted into an LLP, then following are the cost that the company shall have to bear:

If any of the conditions mentioned under (i) to (vi) of clause (xiiib) of section 47 are not met then the Unabsorbed Depreciation and Accumulated Loss will not be carried over;
Payment of stamp duty, if any, in case of transfer of immovable assets;
Cost related to transfer of brand name, patent, trademark;
Cost of formation of LLP;
Since LLPs do not have a concept of MAT, therefore, the amount of the credit of MAT will have to be given up. The succeeding LLP shall not be entitled to hold the preceding company’s credit of MAT.

Points to be ensured before getting converted into LLP

The company that wishes to be converted into an LLP shall have its shareholders as its partners and no one else.
Income tax returns have to be up to date as per the provisions of Income Tax Act, 1961
Every designated partner shall have to obtain a DIN from the Central Government.
Since all the forms that need to be filled up for the purpose of establishing an LLP are to be filled electronically, it becomes impossible to sign them manually. In such a case, the designated partners are required to obtain a Digital Signature Certificate from government recognised DSAs
There should be no proceeding against the company in any court or tribunal;
In cases where the company has certain creditors, then obtaining an NOC from all unsecured creditors;
Subsistence of any conviction, rule or order by a court or tribunal should be checked.

Process of Conversion of a Company into an LLP

Following are the steps that need to be followed for converting a company into LLP:

Obtain DIN – DIN acronyms for Director Identification number. Earlier instead of DIN, DPIN was to be obtained. Nowadays DIN is required to be obtained by those designated partners who do not possess one.
Board Meeting – The second step for conversion of a company into LLP is that a meeting of all board of directors is to be called for. In the meeting, a resolution for the conversion of the company into LLP is to be passed. Apart from this, another resolution that needs to be passed is for authorising any director to apply for the name of LLP. After passing of such a resolution, an application for name availability is to be filled i.e. e-form LLP- 1 with the Registrar of Companies. Along with such application, the board resolution regarding conversion also needs to be attached.
After submission of such an application, the approval certificate needs to be obtained from the Registrar of Companies.
Drafting the LLP agreement – An LLP agreement needs to be drafted. A basis contents in each LLP agreement contain Name of the LLP, Name of the partners and designated partners, form of contribution, profit sharing ratio, rights, duties and liability of each of the partners, proposed business activity that the partners would carry on and the rules that the shall govern the LLP. All these details need to be filled in e-form 3 within 30 days of incorporation. It is desirable that all the partners sign this agreement in order to avoid disputes.
Filling of Incorporation Documents – For the purposes of incorporation, e-form 2 is to be filled up by attaching documents like proof of address of registered office of LLP, subscription sheet signed by the partners, notice of consent and appointment of designated partners along with their personal details and the detail of LLP.
Filling of application for Conversion – E-Form 18 needs to be filled with the registrar of companies. Following attachments need to be put with this form:

Statement of shareholders.
Incorporation Documents & Subscribers Statements in Form 2 filed electronically.
Statement of Assets and Liabilities of the company duly certified as true and correct by the auditor.
List of all the Secured creditors along with their consent to the conversion.
Approval of the governing council (In case of professional private limited companies)
NOC from Income Tax authorities and Copy of acknowledgement of latest income tax return.
Approval from any other body/authority as may be required.
Particulars of pending proceedings from any court/Tribunal etc

After filling of all the above documents and approval of the same from the registrar and ministry, the registrar would issue a certificate of registration in form no. 19 for the conversion. This certificate shall be the conclusive evidence of conversion into LLP.
Filling of e-form 14 – After receiving the certificate of conversion, within 15 days of the date of registration, the partners need to intimate the registrar of companies about the acceptance. The attachments to be made with e- form 14 are a copy of the certificate of incorporation of formation of LLP and copy of incorporation.

Overview Of The Doctrine Of Lis Pendens

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Guest Post

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May 28, 2016

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In this blogpost, Harsha Asnani, student, NIRMA University, Ahmedabad writes about the overview of the doctrine of lis pendens in India. The article also covers various case laws that govern this principle by way of Section 52 of Transfer of Property Act, 1882.

In general parlance, lis pendens refers to a pending legal action or a formal notice of a legal action. The doctrine of Lis Pendens has been inscribed in the Indian Legislative regime by way of Section 52 of The Transfer of Property Act, 1882. The section states that
“Transfer of property pending suit relating thereto.— During the pendency in any Court having authority within the limits of India excluding the State of Jammu and Kashmir or established beyond such limits by the Central Government of any suit or proceedings which is not collusive and in which any right to immoveable property is directly and specifically in question, the property cannot be transferred or otherwise dealt with by any party to the suit or proceeding so as to affect the rights of any other party thereto under any decree or order which may be made therein, except under the authority of the Court and on such terms as it may impose.
Explanation.—For the purposes of this section, the pendency of a suit or proceeding shall be deemed to commence from the date of the presentation of the plaint or the institution of the proceeding in a Court of competent jurisdiction, and to continue until the suit or proceeding has been disposed of by a final decree or order and complete satisfaction or discharge of such decree or order has been obtained, or has become unobtainable by reason of the expiration of any period of limitation prescribed for the execution thereof by any law for the time being in force”
The major idea lying behind Section 52 is that in a suit, which is still pending in terms of its determination, the status quo should be maintained and therefore it should remain unaffected by the act of any of the parties to the suit. It makes it expressly clear that in a case where the dispute between any of the parties is with regard to the right of any immovable property, such property cannot be transferred by any of the parties to the suit which as a result may affect the rights of the other party involved in the dispute. This principle does not get eliminated after the dismissal of the suit. After the dismissal of the suit and before filling of the appeal, the ‘lis’ continues to exist and hence the defendant can be prevented from transferring the property to the prejudice of the plaintiff. The explanation to the said section makes it clear that the lis shall be deemed to have commenced from the date when the plaint shall be presented in the court and shall continue to exist till the time such suit or proceeding has been decided and a final order or decree has been obtained accompanied with complete satisfaction or discharge of such degree or order.

In order to constitute Lis pendens the following conditions must be satisfied:-

1) There should be a pending suit or proceeding;
2) The suit or proceeding must not be collusive one;
3) The suit or proceeding must be pending in a Court of competent Jurisdiction;
4) The suit or proceeding must be one in which a right to immovable property is directly and specifically in question;
5) The property directly and specifically in question must be transferred during such pendency;
6) The transfer by any party to the suit must affect the right of other parties till the time the case is finally disposed of.
Confirming to this principle, The Supreme Court in the case of Jayaram Mudaliar vs. Ayyaswami has held that the objective of this section is not to deprive the parties of any just or equitable claim but to ensure that the parties subject themselves to the jurisdiction and authority of the court which shall decide the claims that are put before it. In another case of Hardev Singh v. Gurmail Singh, it was held that the Section 52 does not render any transfer of a disputed property void or illegal, but instead brings the purchaser within the binding limit of the judgement that shall be pronounced on the disposal of dispute. In any case where a transfer is made during the pendency of the suit, if the suit is disposed off in favour of the transferor then the transferee rights shall prevail whereas on the other hand if the rights of the transferor are recognised only to a certain extent or part of the property then the transferee’s right shall also extend up to the limit till which the right of transferor exists.
The preliminary assumption behind the doctrine of lis pendes is that if the parties to a dispute are not prohibited from transferring any of the property then successive alienations shall take place. In such a situation it would become impossible that the action or suit be successfully terminated. With this as a consequence, the court would be unable to dispense its function of protecting the suitors from future injuries. The principle imbibed in this section finds its genesis in the Common Law maxim of ut lite pendent nihil innovator i.e. during the pendency of litigation; no new rights shall be introduced. As a rule of justice equity and good conscience, this principle gets applied even in those laws where the Act is not applied.

Non – applicability of the lis pendens doctrine

Lis pendens does not necessarily get applied in every case. Following are Certain instances where this doctrine does not get applied:
• A sale made by the mortgagee in the exercise of the power as conferred by the mortgage deed. The principle of lis pendens shall not be applied in this case and therefore the sale remains valid, though made during the pendency of a suit filed by the mortgagor.
• In matters of review;
• In cases where the transferor is the only party affected;
• In cases of friendly suits;
• In cases where the proceedings are collusive;
• In cases of execution proceedings where the order is passed against the intervener. In such matters, an appropriate remedy shall be a suit filed under order 2, rule 63 of the Code of Civil Procedure, 1908;
• In case of suits involving pending transfers by a person who is not a party to the suit;
• In cases where the property has not been properly described in the plaint;
• In cases where the subject matter of rights concerned in the suit and that which are alienated by transfer are different.

The language used in this section in no way prohibits any of the parties from making a transfer of the property. The only indication that it makes in lieu of such transfers is that the new purchasing party shall also be subject to the final order that shall be pronounced by the court of competent jurisdiction. The transferee shall be only entitled to the title so transferred.
The doctrine of lis pendens is applied to a case to prevent the right of a third party and not for the person or party to the suit making such transfer. This statutory right is made for the third party in order to set aside the alienation with the ultimate aim of protection of his own rights.
However, there is one exception that lies to this rule if Lie Pendens i.e. the Court if it deems fit can permit any of the parties to the suit to transfer the property on such terms that are fit and proper to impose.

Recommendations by the Law Commission in its 157th report

The Law Commission has recommended that there are certain changes that should be brought in the section so as to protect the interest of the person making the purchase. There is a lot of anxiety, loss and hardship faced by such people in lack of adequate means of knowing that whether a suit or proceeding is lying in lieu of that property or not. If the state of affairs is known to the purchaser after the deal is settled, it comes to him as a big shock. All these inconveniences, risk and misery, should be reduced. Some satisfactory and reliable recourse should be enacted so that all the details regarding pendency of a suit can be made known to every prospective purchaser for example title verification and due deligent procedures etc.

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What Is The Procedure To Convert A Company Into Limited Liability Partnership

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Cost to be incurred in case the company gets converted into an LLP

Points to be ensured before getting converted into LLP

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Overview Of The Doctrine Of Lis Pendens

In order to constitute Lis pendens the following conditions must be satisfied:-

Non – applicability of the lis pendens doctrine

Recommendations by the Law Commission in its 157th report

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