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Rakesh Kumar Singh


Roll No. : 510910259

Learning Centre : Systems Domain (2779)

Subject : Legal Aspects Of Business

Assignment No. : Set – II (MB0035)

Date of Submission : 2010
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MB0035 – Legal Aspects of Business
Assignment Set- 2

Q1. What is process for an enterprise to get incorporated as a company?

Ans: The process of formation of a company can be divided and discussed under the following four

1. Promotion;
2. Incorporation or Registration;
3. Capital subscription;
4. Commencement of business.

Of these stages only the first two are necessary for the formation of a private company and of a public
company not having any share capital. They may commence business immediately after they have
received a certificate of incorporation. But a public company having a share capital has to pass through
all the four stages mentioned above before it can commence business or exercise any borrowing powers.

Promotion: Before a company can be formed, there must be some persons who intend to form a
company and who take the necessary steps to carry that intention into operation. Such persons are
called promoters. It is they who conceive the idea of forming the company and it is they who take the
necessary steps to incorporate it by registration. The promotion of a company is comprehensive term
denoting that process by which a company is incorporated and floated or established financially as a
joint concern by the issue of a prospectus.

The ‘promotion’ is the first stage in the formation of a company. Promotion may be defined as “the
discovery of business opportunities and the subsequent organisation of funds, property and managerial
ability into a business concern for the purpose of making profits there from.”

The promoter: The promoter of a company is a person who does the necessary preliminary work
incidental to the formation of a company. The word ‘promoter’ has not been defined anywhere in the
Companies Act. Palmer has defined a ‘promoter’ as “a person who originates a scheme for the
formation of the company, has the memorandum and articles prepared, executed and registered and
finds the first directors and settles the terms of the preliminary contracts and prospectus (if any) and
making arrangement for advertising and circulating the prospectus and placing the capitals is a

Incorporation of a company: Any seven or more persons or where the company to be formed will be a
private company, any two or more persons, associated for any lawful purpose may, by subscribing their
name to a memorandum of associations and otherwise complying with the requirement of this Act in
respect of registration, form an incorporated company, with or without limited liability.

Documents to be filed for registration: After ascertaining the availability of name, the promoter should
proceed to prepare the following documents and file with the Registrar of companies:

1. Memorandum of Association: The memorandum of association is the charter of the company.
This includes its objectives, its name, the address of its registered office, the capital which the
company is authorised by law, the nature of liability of members as well as the names, addresses
and agreement of people who agree to form a company.
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2. Articles of Association: The other important document is the articles of association which
contains the rules and regulations relating to the internal management of the company.
However, it is not necessary for a public company limited by shares to file the Articles of
Association. If such public company does not file Articles of Association, it is deemed to have
adopted “Table A” of schedule I of the Act.
3. Copy of proposed agreement: If a company purposes to enter into an agreement with any
individual for appointment as a Managing Director, or a whole-time director or manager, a
copy of such an agreement should also be filed with the Registrar of companies.
4. Consent of the Directors: According to Section 266, in the case of a public limited company
having share capital, a person cannot be appointed as a Director by the Articles of Association
unless, he has, before the registration of the articles, either himself or through his agent, signed
and filed, with the Registrar his consent in writing to act as Director.

Certificate of Commencement of Business: A private company can commence business immediately
after incorporation. However, in the case of companies other than the private company and a company
having no share capital, further requirement is to be complied with, namely, obtaining ‘a certificate of
commencement of business’ before it can commence its business.

Q2. Describe in detail the clauses in the Memorandum of Association.

Ans: Memorandum of Association: Section 2(28) defines it as “The Memorandum of Association of
a company as originally framed or as altered from time to time in pursuance of any previous companies
or of this Act”. It sets out the constitution of the company and defines the scope of the activities of the
company. It is the foundation on which the structure of the company depends. It also defines the
relationship of the company with the public. As the interests of the shareholders, creditors and other
members of the public are to be protected by law, this document cannot be altered easily. It was
regarded as an unalterable charter of a company in England, until the year 1980, when the Act was
amended to allow alterations in certain cases and to a certain extent. Section 16 of the Indian
Companies Act lays down that the conditions in the memorandum cannot be altered except in the
cases and in the manner and to the extent provided in the Act.

Importance of Memorandum:

1. Memorandum of Association of a company is its charter and defines the limitations of the
powers of the company, established under the Act.
2. The Memorandum contains the fundamental conditions upon which alone the company is
allowed to be incorporated.
3. The Memorandum of Association is the most important document with regard to its
4. It is the foundation on which the whole super structure of company is built-up.
5. Its purpose is two fold. The first is the prospective inventor knows within what field his money
is to be risked. Secondly, outsiders also know the nature of the activities of the company and
their rights against the company in times of breach of contracts.
6. The memorandum is the basis of the company on which is existence depends.

Section 9 lays down that the memorandum cannot contain anything contrary to the provisions of the
Act. The memorandum must be signed at least by seven members in the case of a public company and
two members in the case of a private company. It is to be divided into paragraphs, numbered
consecutively and printed. It must be dated and duly stamped.

Contents of Memorandum of Association (Section 13):
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i) Name clause: A company may have any name which is not undesirable in the view of the
Central Government. For example, the name cannot be identical or similar to the name of
another existing company. It must contain at its end, the word ‘Limited’ if it is a public limited
company or the words ‘Private Limited’ if it is a private limited company. But companies formed
for the promotion of art, science, etc., may be exempted from adding words “Limited” or “Private
Limited” as the case may be, by means of general or special order granted by the Central
Government under Section 25. Section 147(1) lays down that the name must appear on the
outside of every office or place of business in a conspicuous manner and on all bills, notices, etc.,
of the company.

ii) The Situation Clause: It shows the State in which the registered office of the company is

iii) The Objects Clause: It states separately (1) the main objects and objects ancillary or incidental
to the main objects to be pursued by the company and (2) other objects. It defines the powers of
the company beyond which, the company cannot act. But it cannot contain the objects or powers
which are contrary to the provisions of the Act.

iv) The Liability Clause: It states whether the liability of the members is limited to the extent of
the nominal value of the shares or the extent of the amount guaranteed by the members or

v) The Capital Clause: It states the amount of the capital and the way in which it is to be divided
into shares.

vi) The Association and Subscription Clause: All the signatories of the memorandum make a
declaration that they are desirous of forming themselves into a company and that they agree to
take the number of shares mentioned against their respective names given therein, with their
addresses and occupations.

Q3. Discuss the need for the development of cyber laws.

Ans: In the 49th year of Indian independence, Internet was commercially introduced in India. The
beginnings of Internet were small and the growth of subscribers painfully slow.

However, as Internet has grown, the need has been felt to enact the relevant Cyber laws, which are
necessary to regulate Internet in India. This need for Cyber laws was propelled by numerous factors.

Firstly, India has an extremely detailed and well-defined legal system in place. Numerous laws
have been enacted and implemented and the paramount among them is The Constitution of India. We
have various laws like Indian Penal Code, 1860, The Indian Evidence At, 1872, The Banker’s Book
Evidence Act, 1891, The Reserve Bank of India Act, 1934, The Companies Act, 1956, and so on.
However, the arrival of Internet signaled the beginning of the rise of new and complex legal issues. It
may be pertinent to mention that all the existing laws in place in India were enacted keeping in mind
the relevant political, social, economic, and cultural scenario of that time. Nobody then could really
visualize the emergence of the Internet. Despite the brilliant acumen of our master draftsmen, the
requirements of cyberspace could hardly be anticipated. The advancement of Internet led to the
emergence of numerous ticklish legal issues and problems, which necessitated the enactment of Cyber
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Secondly, the existing laws of India could not be interpreted in the light of the emerging
cyberspace, to include all aspects relating to different activities in cyberspace.

Thirdly, none of the existing laws gave any legal validity or sanction to the activities in
Cyberspace. For example, the Net is used by a large majority of users for email purposes. Yet, e-mail was
not “legal” in our country. There was no law in the country, which accorded legal sanctity to e-mail and
the electronic format. The judiciary in our country had been reluctant to grant judicial recognition to
the legality of e-mail in the absence of any specific law having been enacted by Parliament on the
subject. Thus the need arose for enacting Cyber Law in our country.

Fourthly, Internet requires an enabling and supportive legal infrastructure in time with the
times. This legal infrastructure can only be given by the enactment of the relevant Cyber Laws as the
traditional laws have failed to provide it. E-commerce, the biggest future of Internet, can only be
possible if necessary legal infrastructure complements the same to enable its vibrant growth. As such, an
urgent need was felt for enacting Cyber Law in our country.

Q4. What do you mean by award with reference in arbitration?

Ans: Award means an arbitral award. It is a final decision or judgement of the arbitral tribunal on all
matters referred to it. An award in order to be valid must be final, certain and must decide all the
matters referred to. An award by the arbitrator is as binding in its nature as the judgement of a court.

Arbitral award includes an interim award: There are two types of decisions to be made by the arbitral
tribunal i.e. decision on the merits of the dispute and decision on questions of procedure. Decision on
merits of dispute is to be made by the, majority of members of the arbitral tribunal but question of
procedure can be decided by the presiding arbitrator, if authorised by the parties or all members of the
arbitral tribunal. In the absence of such authorisation by the parties or other members of the tribunal,
the decision on question of procedure is also to be made by majority of members of the arbitral
tribunal. In the absence of such authorisation by the parties or other members of the tribunal, the
decision on question of procedure is also to be made by majority of members of the arbitral tribunal.
The presiding arbitrator has not been given any special power and he acts like any other arbitrator. All
arbitrators have been given equal power irrespective of mode of appointment.

Essentials of an Arbitral Award: Section 31 deals with the form and contents of the arbitral award. The
provisions of Section 31 are discussed in the form of essentials which are as under:

1. An arbitration agreement is required to be in writing. Similarly, a reference to arbitration and
award is also required to be made in writing. The arbitral award is required to be made on
stamp paper of prescribed value. An oral decision is not an award under the law.
2. The award is to be signed by the members of the arbitral tribunal. However, the signatures of
majority of all the members of the tribunal are sufficient if the reason for any omitted signature
is stated.
3. Unless the agreement provides otherwise, the arbitrator must give reasons for the award. Thus,
the making of an award is a rational process which is accentuated by recording the reasons.
However, there are two exceptions where award without reasons is valid i.e.

(a) Where the arbitration agreement expressly provides that no reasons are to be given, or
(b) Where the award has been under section 30 of the new Act i.e. where the parties
settled the dispute and the arbitral tribunal has recorded the settlement in the form of an
arbitral award on agreed terms.
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4. The award should be dated i.e. the date of the making of the award should be mentioned
in the award.
5. The arbitral tribunal shall state the place of arbitration in the award.
6. The arbitral tribunal may include in the sum for which award is made, interest up to the
date of award and also a direction regarding future interest. The rate of interest shall be
eighteen per cent.
7. The award may also include decisions and directions of the arbitrator regarding the cost of
the arbitration.
8. After the award is made, a signed copy should be delivered to each party for appropriate
9. The arbitral tribunal may, at any time during the arbitral proceedings, make an interim
arbitral award on any matter with respect to which it may make a final arbitral award.

Finality of Arbitral Awards (Section 35): An arbitral award shall be final and binding on the parties
and persons claiming under them respectively. Now, under the new Act, by virtue of section 35 of the
Act, the award made by the Arbitrator shall be final and binding on the parties itself and shall be decree
without being made a decree by the court.

Q5. How is a consumer defined in the Consumer Protection Act? Discuss.

Ans: Consumer: ‘Consumer’ means any person who: (i) “Buys any goods for a consideration which
has been paid or promised, or partly paid and partly promised, or under a system of deferred payment,”
or (ii) Hires any services for a consideration which has been paid or promised, or partly paid and partly
promised, or under a system of deferred payment i.e., in respect of hire-purchase, transactions, [Sec.

Thus, consumer is a person who (i) buys any goods for a consideration, or (ii) hires or avails any
services for a consideration. In addition to buyer(s) of goods or hirer(s) or user(s) of services, any
beneficiary of such services, using the goods/services with the approval of purchaser or hirer or user
would also be a deemed a ‘Consumer’ under the Act. The widow of the deceased Policy holder was held
as consumer under the Act by the State Commission of A.P. in the case of A vs. LIC of India. The
consideration may be either paid or promised, or partly paid and partly promised or under any system
of deferred payment. The Act thus covers transactions for the supply of goods and rendering of services.

Buyer of goods for consideration: The Act, unlike the Sale of Goods Act, does not insist on money
consideration only. Transactions of transfer of services, or barter, or exchange will come within the
purview of the Act. The user of such goods, with the approval of the buyer of goods, is also a consumer
as per the Act. But according to Section 2(d) of the Act, the term consumer does not include a person
who obtains such goods for resale or for any commercial purpose. Thus a purchaser of goods for
reselling them or a purchaser of a taxi for plying the same on hire, a purchaser of a V.C.R. for running a
video library, or purchaser of machinery for his commercial establishment is not a consumer. However,
according to Consumer Protection (Amended) Act 1993, a person who purchases tools or machinery
under self-employment scheme is also a consumer.

Hirer of services for consideration: Any person who hires services for a consideration is a consumer.
Consumer, not only means merely one who hires services for consideration, but also includes a person
who is a beneficiary of such services. For example, the user of a telephone, even though he is not
himself the subscriber is a consumer under the Act. Services include all kinds of professional services,
be it the routine services of a barber or the technical services of a highly qualified person. For example,
supply of electricity has been held to be a service and not sale of goods. The services must be of
commercial nature in the sense that they must be on payment. The payments may be in cash or kind. It
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may be made either at once, or partly at once, or partly on credit. The services may be rendered wholly
or partly on credit. However, free services or personal service under a contract have been excluded from
the protective spell of the Consumer Protection Act.

Who are not Consumers?
The following persons are not consumers as per the Consumer Protect Act.
(a) A person who purchased goods for resale.
(b) A person who purchased goods for commercial purpose
(c) A person who obtains services without consideration
(d) A person who obtains services under a contract of personal service

The National Commission, in various cases, had decided that the following are not consumers:
 Tax-payers to municipality
 Contractors
 Applicants for jobs
 Persons who filed suits in courts, etc.

Q6.Undertake a survey of 20 shops and write a report on the provisions being maintained in these
shops as per the Shops and Establishments Act.

Ans: Provisions Applicable to Shops (Sections 7-11)

Opening and Closing Hours of Shops: No shop shall on any day be opened earlier or closed later than
such hours as fixed by the State Government. Any customer who was being served or was waiting to be
served in any shop at the hour fixed for its closing may be served during the quarter of an hour
immediately following such an hour. No person shall carry on, in or adjacent to a street or public place,
the sale of any goods after the hour fixed for closing of shops dealing in the same class of goods except
newspapers in that locality, i.e., selling outside the shop is prohibited after closing hour.

Daily and Weekly Hours of Work in Shops: No person employed in any shop shall be required or
allowed to work therein for more than eight hours in any day and 48 hours in any week. If any such
persons work for any period in excess of the time limit fixed, he is entitled to overtime wages. However,
the period of work including overtime work, shall not exceed 10 hours in any day and in the aggregate
50 hours in any week. Further, he should be given an interval for rest of at least one hour after four
hours of work in any day. The spread-over of work periods of such a person is not to exceed more than
12 hours in any including the intervals for rest.

Closing of Shops and Grant of (Weekly and Additional) Holidays: Every shop is to remain entirely
closed on one day of the week. The shop-keeper has to specify that day in a notice exhibited in a
conspicuous place in the shop and the day so specified is not to be altered by the shop-keeper more
than once in three months. Every person employed in a shop is to be allowed in each week a holiday of
one whole day. This provision is not applicable to any person whose period of employment, in the week
including any days spent on authorised leave, is less than six days or a person who has been allowed a
whole holiday on the day on which the shop has remained closed.

Besides one whole day, the State Government may by Notification require shops to be closed at such
hour in the afternoon of one weekday in every week. Every person employed in any such notified
shop(s) is to be allowed in each week an additional holiday of one-half day. The State Government may,
for this purpose fix different hours for different shops or different classes of shops or for different areas
or for different times of the year. There should be no deduction of wages of any person employed in a
shop on account of weekly holiday (one whole day) and additional holiday (one-half day).