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GM06 Business Law

Assignment No.I
Assignment Code: 2013GM06A1 Last Date of Submission: 15th April 2013 Maximum Marks:100

Attempt all the questions. All the questions are compulsory and carry equal marks.

Section-A Ques.1 Ques.2 Ques.3 Define and differentiate between Contract of Guarantee and Indemnity. What are the rights and duties of a surety? What are the sources of Indian law? Discuss any one important source of law and justify why it is important. What do you understand by negotiable instruments? Explain the meaning of negotiability and name the instruments which are recognized as negotiable instrument by NI Act, 1881. How is an offer made? Explain an implied offer, a specific offer, a general offer, a counter-offer? Section-B Case Study C agreed to sell a colour TV set to P under a hire-purchase agreement on guarantee of S and a pledge of Ps furniture. The terms were: hire-purchase price Rs 24,000 payable in 12 monthly installments of Rs. 2,000 each, ownership to be transferred on the payment of last installment. State whether S is discharged in each of the following alternative cases: (i) If after seven months, P stopped paying the installments. C sued P for the payment of arrears and S then gave a notice revoking his guarantee for the remaining months. (ii) If after seven months, S died. (iii) If C without the knowledge of S transferred the ownership to P before the payment of last installment. (iv) If C without the knowledge of S agreed to increase the number of monthly installment from 12 to 24 of Rs 1,000 each.


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Indemnity vs Guarantee

Indemnity and guarantee are two important ways to safeguard ones interests when entering into a contract. There are many similarities between the two concepts though they differ a lot also. This article will highlight the differences between Indemnity and guarantee to enable readers to choose one of the two depending upon circumstances and requirements. Indemnity When you agree to an indemnity agreement, you agree to assume all responsibility and liability for any injuries or damages to someone else. Whenever there is an indemnity contract and one party suffers any losses, the other has the liability to indemnify for the consequences. The common phrases that are included in indemnity contracts say that the person agrees to indemnify and hold harmless or to defend, indemnify and hold harmless. If there is a clause or obligation to defend, you should also get a clause included requiring the person who is being indemnified to tender the defense to you. At least you should get the clause of right to control defense. In the absence of these provisions, the party that you are indemnifying can cost you dearly by raking up huge attorney fees and other sundry expenses. But if you are controlling the defense, you can have a say in the selection of attorney thereby minimizing litigation costs. In general indemnity agreement covers damages, loss, costs, expenses and fees of attorneys. If there is no mention of attorney fees, the court may not require the person promising to indemnify to pay attorney fees. Guarantee In sharp contrast to an indemnity, a guarantee is a promise to answer for debt, default or other financial liability of another. You promise to pay for any damages or default in the event of the principal person refusing to do so or when he cannot do so. If you are a guarantor, once you have paid the principal obligation, your obligation is terminated. Guarantee clause is not the main agreement and is generally collateral to some other obligation or debt. You are held accountable or liable for this debt or obligation after you have fulfilled your obligation as a guarantor. It is therefore prudent to study all clauses or underlying contract before signing any guarantee contract.

Contracts of Indemnity

Simply put, a contract of indemnity is any agreement whereby one party agrees to indemnify, or pay, the other party for certain types of loss. Depending on the contract, those losses could be caused by the party promising to pay or by any other individual. The most common type of contracts of indemnity are insurance contracts. For instance, in an automobile insurance contract, the insurance company promises to indemnify (or pay) the insured for any losses he suffers as a result of automobile accidents.

Contracts of Guarantee

In a contract of guarantee, or contract of guaranty, one party agrees to act on behalf of another should that second party default. In plain terms, this means that if an individual fails to pay her guaranteed debt or to perform some other duty or obligation, the guarantor -- the party who has agreed to act on behalf of another -- will step in to pay or perform the obligation. Common contracts of guarantee include a loan with a co-signer and a student loan, where the government guarantees payment if the student should default.

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Right of Subrogation: (Sec 140) Right of a surety against principal debtor: Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all he is liable for, is invested with all the rights which the creditor had against the principal debtor. A surety is thus, upon the payment of the guaranteed sum or on performance of a guaranteed duty, subrogated or invested with all the rights which the creditor had against the principal debtor. This arises on payment of the whole sum due or performance of the entire duty. Surety steps into the shoes of the creditor. Surety may now sue the principal debtor in as much as the creditor had the right to sue the principal debtor. Section 140 embodies the general rule of equity expounded by Sir Samuel Romilly as counsel and accepted by the Court of Chancery. The surety will be entitled to every remedy which the creditor has against the principal debtor, to enforce every security and all means of payment, to stand in the place of the creditor; not only through the medium of contract, but even by means of securities entered into without the knowledge of the surety having a right to have those securities transferred to him, though there was no stipulation for that; and to avail himself of all those securities against the debtor. This right of a surety also stands, not upon a principle of natural justice. Right to benefit of creditors securities (Sec 141) Right of surety against the creditor: A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of surety ship is entered into, whether the surety knows of the existence of such security or not. We have seen above while discussing discharge of surety that if the creditor loses or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. This right of surety arises on payment by him of the whole of the debt due to the creditor. Surety is entitled to be subrogated to all the rights and benefits of securities with the creditor which he has against the principal debtor. His right extends to securities of which he is not aware. He is also entitled to securities received by the creditor before or after the contract of surety ship. If the creditor loses, or without the consent of the surety, parts with such security the surety is discharged to the extent of the value of the security. If the securities are burdened with further advances, if will not affect the rights of the surety. Rights to indemnity (Sec 145) Right of surety against the principal debtor: In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. The surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.

2) ANS: sources of Indian law

Many renowned jurists have attempted to give a precise definition of Law. Law, in the broadest and most complete sense means a set of regulations and rules and a set of prototype of deeds to which every individual of the society has to be conventional to. Another often quoted, although not widely believed, definition of Law is of that given by Austin according to which Law is the command of the sovereign. Sources of Indian law may be categorized into Legal and Historical sources in addition to Formal and Non-formal sources. Legal sources are those which are accepted as such by law itself. Historical sources are those sources missing formal recognition by law. The legal sources of law are commanding and are permissible by the law courts as of right. The historical sources of law are unauthoritative. They persuade comparatively comprehensive course of legal advancement. All rules of law have historical sources but not all of them have legal sources. Page No. 3 of 11

Formal Sources of law are 1. Legislation 2. Precedents 3. Treaties Non-Formal Sources of law are 1. Customs 2. Equity

elating to the law of precedents, the concept of stare decisis relates to the binding nature of an earlier decision over a subsequent court called upon to decide over a similar issue. Stare Decisis operates at two levels: 1. Binding precedent (or mandatory authority); and 2. Persuasive precedent Binding precedent is when a similar matter has been decided upon by a superior court, a junior or subordinate court is required to follow the ruling. Persuasive precedent is when a similar matter has been decided by a different bench of the same court, or a court of the same rank or junior / subordinate court.

Negotiable instruments are of great importance in the business world and by extension in banking. They are instruments for making payments and discharging business obligations What is a Negotiable Instrument? The Negotiable Instruments Act does not define a negotiable instrument but merely states, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer. (Section 13). This section does not prohibit any other instrument that satisfies the essential features of portability. Justice K. C. Willis defines these as, one the property in which is acquired by anyone who takes it bonafide and for value notwithstanding any defect in title in the person from whom he took it. Thomas defines it in his book Commerce, Its theory and Practice A negotiable instrument is one which is, by a legally recognized custom of trade or by law, transferable by delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bona-fide transferee for value, notwithstanding any defect in the title of the transferor. It : (1) entitles a person to a sum of money (2) is transferable (by customs of trade) by delivery, like cash, or by Endorsement and delivery and delivery, and (3) is capable of being used upon by the person holding for the time being i.e. the person to whom it is transferred becomes entitled to money and also a right to further transfer it.

Characteristics of negotiable instruments

The important characteristics are as follows (1) Free Transferability : A negotiable instrument may be transferred by delivery if it is a bearer instrument or by endorsement and delivery if it is an instrument payable to order. Page No. 4 of 11

Thus, a Fixed Deposit Receipt, which is marked as not transferableis not a negotiable instrument. On the other hand all instruments which are transferable are not negotiable instruments e.g. share certificate. An instrument to be negotiable must possess other features also. Further, a negotiable instrument may be transferred any number of times till it is discharged. (2) Title to transferee : The transferee, who takes the instrument bona fide and for valuable consideration, obtains a good title despite any defects in the title of the transferor. To this extent, it constitutes an exception to the general rule that no once can give a better title then he himself has. (3) Entitlement to sue : The holder can sue in his own name. (4) Presumptions : Every negotiable instrument is subject to certain presumptions which are as under

Rules of estopped applicable to negotiable instruments

Certain rules of estoppel are applicable to negotiable instruments . These are as follows : (1) Estoppel against denying original validity of instrument : The maker of the note and drawer of the bill of exchange or cheque are directly responsible for the bringing into existence of the instrument and, thus, cannot be allowed afterwards to deny the validity of the instrument. (Section 120) (2) Estoppel against denying capacity of the payee to endorse : The maker of a promissory note or an acceptor of a bill shall not, in a suit by holder in due course, be allowed to deny the capacity of the payee to endorse the bill. (Section 121) (3) Estoppel against denying signature or capacity of prior party : An endorser of a negotiable instrument shall, in a suit thereon by the subsequent holder, be allowed to deny the signature or capacity to contract of any prior party to the instrument. Payee in a negotiable instrument All three kinds of negotiable instruments mentioned under section 13 of the Act could be made payable in any of the following ways Payable to bearer; or Payable to order. Payable to bearer : The expression bearer instrument signifies an instrument, be it promissory note, bill of exchange or a cheque, which is expressed to be so payable or on which the last endorsement is in blank. This character of the instrument can be altered subsequently e.g. an endorsee can convert an Endorsement in blank into an Endorsement in full. In such a case, the holder of the instrument would not be able to negotiate the instrument by mere delivery. He will be required to endorse the instrument before delivering it. Payable to order : An instrument is payable to order when it is payable to: (i) the order of a specified person, or (ii) a specified person or his order, or (iii) a specified person without the addition of the words or his order and does not contain words prohibiting transfer or indicating an intention that it should not be transferable. When an instrument is not payable to bearer, the payee must be indicated with reasonable certainty Promissory Note The term Promissory note has been defined under Section 4 of the Negotiable Instruments Act, as under : A promissory note is an instrument (not being a bank note or a currency-note) in writing containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to, or to the order of a, certain person, or to the bearer of the instrument

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Offer in Business Law

Offer It is a part of contract without, it can not made agreement Offer is willingness to do something or not to do something which is shown to another person to obtain his consent (views) is called offer. Essentials (To make an offer) The offer may be express or applied Offer must be a legal relationship Offer must be clear in terms Offer is different from initiation to offer Offer may be specific or general The offer must be communicated to the offeree An acceptance of offer, ignorance of it is not the valid acceptance Offer should not contain the negative condition. Such condition not fulfillment of which not be considered as acceptance. There will be not contract unless all the conditions are fulfill Offer must not contain cross offer Cross both parties offering some things (contract never made through cross offer)

GM06 Business Law

Assignment No.II
Assignment Code: 2013GM06A2 Last Date of Submission: 15th May 2013 Maximum Marks:100

Attempt all the questions. All the questions are compulsory and carry equal marks.

Section-A Ques.1 Ques.2 Ques.3 What do you mean by Winding up of a company? What are the different modes of winding up ? What is the difference between Memorandum of Article and Article of Association? Is the issuing of a prospectus compulsory on the part of a company? Under what situations, can the directors avoid their liabilities for a false statement in the prospectus? What is corporate governance and discuss its role in India in the light of clause 49 of the listing agreement? Section-B Case Study


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The articles of a company incorporated in 1988 provided that a director should hold 200 shares of the value of Rs 10 each a qualification. At the annual general meeting of the company held in September 1998 an ordinary resolution was passed increasing the qualification share to be held by the director to 600 shares. The company then issued notice to the directors who did not hold 600 shares to acquire additional shares within one month. M a director, who received the notice and was asked to acquire the additional qualification shares, seeks your advice. What advice you will give him?

Winding up of a company is a process of putting an end to the life of a company. It is a proceeding by means of which a company is dissolved and in the course of such a dissolution its assets are collected, its debts are paid off out of the assets of the company or from contributions by its members, if necessary. If any surplus is left, it is distributed among the members in accordance with their rights.

Modes of Winding Up
There are three modes of winding up of a company. These are: (a) Compulsory winding up by the court. (b) Voluntary winding up, which is itself of two kinds: i. Members voluntary winding up. ii. Creditors voluntary winding up. (c) Winding up under the supervision of the court. Winding up by court: A company may be wound up by an order of the court. This is called compulsory winding up. Section 433 lays down the following grounds for the winding up of a company by the court. 1. Special resolution of the company:

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If the company has by a special resolution resolved that it may be wound up by the court. The power of the court in such a case is discretionary. The court may refuse to order winding up where it is opposed to public or companys interest. 2. Default in holding statutory meeting: If a company makes a default in delivering the statutory report to the registrar or in holding the statutory meeting, the court may order winding up of the company either on the petition of the register or on the petition of the contributory. The petition for winding up must not be filed before the expiration of 14 days after the last day on which the statutory meeting ought to have been held. However, the court may instead of making a winding up order, direct the statutory report shall be delivered or that meeting shall be held. 3. Failure to commence or suspension of business: Where a company does not commence its business within a year from its incorporation, or suspends its business for a whole year, the court may order for its winding up. The power of the court is discretionary and will be exercised only where there is a fair indication that the company has no intension to carry on the business. Where the suspension of the business is temporary or can be satisfactorily accounted for, the court will refuse to make an order. A company will not be wound up if it abandons one of its several businesses, unless that business is the main object of the company. 4. Reduction of members below minimum: Where the number of members is reduced below 7 in the case of public company and below 2 in case of a private company, the court may order the winding up of the company. This provision is for the protection of existing members against unlimited liability. 5. Inability to pay debts: The court may order for the winding up of a company if it is unable to pay its debts. The basis of an order for winding up under this clause is that the company has ceased to be commercially solvent i.e. it is unable to met its current demands, although the assets when realized may exceed its liabilities. According to section 434 of the act a company shall be deemed to be unable to pay its debts in the following cases: a. If a creditor to whom the company owes a sum of Rs.500 or more has served on the company a notice for payment and the company has for three weeks neglected to pay or otherwise satisfy him. But where the company bonafide disputes the debt and the court is satisfied with the defense of the company, the court will not order for its winding up. b. If execution or other process issued on a decree or order of any court in favor of a creditor is returned unsatisfied in whole or in part. c. If it is proved to the satisfaction of the court that the company is unable to pay its debts and in determining whether a company is unable to pay its debts, the court will take into account the contingent and the prospective liabilities of the company. What has to be proved under this clause is not whether the companys assets exceed it s liabilities, but whether it is unable to meet its current demands. If a company is unable to meet its current liabilities, it is commercially insolvent and liable to be bound up. 6. Just and equitable:

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The last ground on which the court can order the winding up of a company is when the court is of the opinion that it is just and equitable that the company should be wound up. This clause gives the court a very wide power to order winding up wherever the court considers it just and equitable to do. The court will consider such grounds to wind up a company for just and equitable reasons as are not covered by the preceding fie clauses.

DEFINITIONS AND DIFFERENCES Definition of Memo The Memorandum of Association is a document which contains the fundamental rules regarding the construction and activities of a company. It is the basic document which lays down how the company is to be constituted and what work it shall undertake. The purpose of the memorandum is to enable the members of the company, its creditors, and the public to know what its powers are and what is the range of its activities. The memorandum contains rules regarding the capital structure, the liability of the members, the objects of the company, and all other important matters relating to the company. The memorandum is altered only after certain formalities are observed. Definition of Articles The Articles of Association is a document which contains rules, regulations and bye-laws regarding the internal management of the company. Articles must not violate any provision of the memorandum or any provision of the Companies Act. The rules laid down in the articles must always be read subject to the rules contained in the memorandum.

Difference between memorandum and articles of association :

(1) The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. It defines and limits the objects of the company beyond which the action of the company cannot go. The articles are the internal regulations of the company and are subsidiary to the memorandum. (2) The memorandum is subordinate to the Act only, while the articles are not only subordinate to the Act but also to the memorandum. (3) The memorandum must compulsorily be filed with the Registrar by all types of companies at the time of incorporation while a public company limited by shares need not file a separate set of articles at the time of incorporation as it may choose to adopt 'Table A'the model set of articles. (4) The memorandum defines the relation between the company and the outsiders e.g., creditors, buyers, sellers, debtors and members etc. Articles govern internal relationship between the company and the members and generally have nothing to do with the outsiders. (5) The memorandum cannot be easily altered while articles are easily alterable by passing a special resolution only, Page No. 9 of 11

(6) Acts done by a company ultra vires the memorandum are void and cannot be ratified by the shareholders. But acts done by a company ultra vires articles but inter vires the memorandum are simply irregular and not void and can be ratified subsequently by the shareholders. (7) Outsiders have no remedy against the company for contracts entered into ultra vires the memorandum, while they can enforce the contract against the company even if it is ultra vires the articles i.e., where some formality relating to internal regulation like passing of the required resolution, might have not been performed, provided they act carefully and had no notice of the irregularity.

Clause 49 of the ListingAgreement, which dealswith Corporate Governance norms that a listed entity should follow, was first introduced in the financial year 2000-01 based on recommendations of Kumar Mangalam Birla committee. After these recommendations were in place for about two years, SEBI, in order to evaluate the adequacy of the existing practices and to further improve the existing practices set up a committee under the Chairmanship of Mr Narayana Murthy during 2002-03. The Murthy committee, after holding three meetings, had submitted the draft recommendations on corporate governance norms. After deliberations, SEBI accepted the recommendations in August 2003 and asked the Stock Exchanges to revise Clause 49 of the Listing Agreement based on Murthy committee recommendations. This led to widespread protests and representations from the Industry thereby forcing the Murthy committee to meet again to consider the objections. The committee, thereafter, considerably revised the earlier recommendations and the same was put up on SEBI website on 15th December 2003 for public comments. It was only on 29 th October 2004 that SEBI finally announced revised Clause 49, which will have to be implemented by the end of financial year 2004-05. These revised recommendations have also considerably diluted the original Murthy Committee recommendations. Areas where major changes were made include: Independence of Directors Whistle Blower policy Performance evaluation of nonexecutive directors Mandatory training of non-executive directors, etc. The changes in corporate governance norm as prescribed in the revised Clause 49 are as follows: A. Composition of Board The revised clause prescribes six tests, which a non-executive director needs to pass to qualify as an Independent Director. The existing requirement is that to qualify as an Independent Director, the director should not have, apart from receiving directors remuneration, any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the Board may affect independence of judgment of the director. B. Non-Executive Directors compensation & disclosures A new requirement has been provided for obtaining prior approval of shareholders for payment of fees/compensation to non-executive directors. If there is stock option, the limit for the maximum number that an be granted to non-executive directors in any financial year and in aggregate should be disclosed. According to the Companies Act, 1956 fees paid to directors do not form part of Managerial remuneration and hence no approval of shareholders for payment of fees to directors is required. Listed companies will now need to obtain prior approval of shareholders for payment of sitting fees to directors. Unless the Government is contemplating to change the law and bring sitting fees within the ambit of Managerial remuneration this contradiction should have been avoided. C. Other provisions relating to Board Page No. 10 of 11

(i) Gap between two meetings has been reduced to three months from four months ruling at present. (ii) A code of Conduct for Board members and senior management has to be laid down by the Board which should be posted on the website of the company. All Board members and senior management should affirm compliance with the code on annual basis and the annual report shall contain a declaration to this effect signed by the CEO. D. Audit Committee Following are the changes with regard to Audit Committee: (i) Two-third of the members of Audit committee shall be independent directors as against the present requirement of majority being independent; (ii) Earlier, only non-executive directors could be members of Audit committee. The revised clause has omitted this requirement. (iii) All members of the Audit committee shall be financially literate (as defined in the revised clause) as against the existing requirement of at least one member having financial and accounting knowledge

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