Punjabi University

Patiala

TOPIC = LEGAL ENVIRONMENT

COURSE = MBA (REGULAR) SEM-1

SUBJECT = BUSINESS ENVIRONMENT

SUBMITTED TO:

SIRA MAAM

SUBMITTED BY:

SWATI SHARMA

ROLL NO = 20421074
LEGAL ENVIRONMENT

The laws which are passed by the government for business operation is called legal

environment. In every country, the government regulates business activities. These
regulations of government are considered as legal environment. In
practice legal and regulatory goes hand in hand.

Legal environment in a country has a dominating position on all decisions of organization. As

all business policies are highly influenced by government, the organization should have
thorough knowledge of these policies because non-implementation of legal policies results in
heavy fines, penalties & punishment & therefore every organization must follow all these
regulations.
Following are some of the government Acts & government policies relating to legal or
regulatory environment for business operations:

 The Sale of Goods Act, 1930.

 Indian Companies Act, 1956.
 Income Tax Act, 1961.
 The Consumer Protection Act, 1986.
 The Weights & Measures Act, 1958.
 Environment Protection Act, 1986.
 Agricultural Policy.
 Industrial Policy
 Foreign Investment Policy.
 Monetary Policy.
 The Factories Act, 1948.
 The Minimum Wages act, 1948.

COMPANY

A company is a business entity registered under the Companies Act. It is a legal entity with a
separate identity from those who are its members or operate it. Therefore, it can be
considered as an artificial person created by the law. In terms of the Companies Act, 2013
(Act No. 18 of 2013) a “company” means a company incorporated under the Act [i.e
Companies Act, 2013] or under any previous company law [Section 2(20)].
According to Chief Justice Marshall of USA, “A company is a person, artificial, invisible,
intangible, and existing only in the contemplation of the law. Being a mere creature of law, it
possesses only those properties which the character of its creation confers upon it either
expressly or as incidental to its very existence”.

Nature of Company

 Separate legal entity

 Artificial person
 Perpetual existence
 Common seal
 Limited liability
 Capacity to sue or to be sued
 Transferability of share

Types of Company
On the basis of Incorporation

 Royal Chartered Companies

Royal Chartered Companies are companies created by the Royal Charter. This means they are
granted power or a right by the monarch or by special order of a king or a queen. Examples of
Royal Chartered Companies are East India Company, BBC, Bank of England, etc.

 Statutory Companies

Statutory Companies are companies incorporated by means of a special act passed by the
central or state legislature. Some examples of statutory companies are The Reserve Bank of
India (formed under RBI act, 1934), Life Insurance Corporation of India (formed under LIC
Act, 1956).

 Registered or Incorporated Companies

All the other companies which are incorporated under the companies act passed by the
government comes under this head. Google India Pvt Ltd is an example of incorporated
companies.

On the basis of liability

 Companies limited by shares:

A company that has the liability of its members limited by the memorandum to the amount, if
any, unpaid on the shares respectively held by them is termed as a company limited by
shares.

 Companies limited by guarantee:

Company limited by guarantee is a company that has the liability of its members limited to
such amount as the members may respectively undertake, by the memorandum, to contribute
to the assets of the company in the event of its being wound-up.

 Unlimited Liability Companies:

A company not having a limit on the liability of its members is termed as unlimited
company. They may be either a public company or a private company.

On the basis of control

 Subsidiary Company:

In some cases, a company’s shares might be held fully or partly by another company. Here, the
company owning these shares becomes the holding or parent company.

 Associate Companies

Associate companies are those in which other companies have significant influence. This
“significant influence” amounts to ownership of at least 20% shares of the associate company.

On the basis of transferability of shares

 Private Companies

Private companies are those whose articles of association restrict free transferability of shares. In
terms of members, private companies need to have a minimum of 2 and a maximum of 200.
These members include present and former employees who also hold shares.

 Public Companies

In contrast to private companies, public companies allow their members to freely transfer their
shares to others. Secondly, they need to have a minimum of 7 members, but the maximum
number of members they can have is unlimited.

FORMATION OF COMPANY
  Company formation is the term for the process of incorporation of a business in the
UK. It is also sometimes referred to as company registration. These terms are both
also used when incorporating a business in the Republic of Ireland. Under UK
company law and most international law, a company or corporation is considered an
entity that is separate from the people who own or operate the company.

 Promotion stage

 Incorporation stage

 Capital subscription stage

 Commencement of business stage

PROMOTION STAGE

The term ‘promotion’ refers to the sum total of activities by which a business enterprise is
brought into existence.

INCORPORATION STAGE

Incorporation or registration stage involves putting an application for registering the company
before the concerned Registrar of Companies and getting it registered. In India, there is an
office of the Registrar of Companies in each major State of the country. 

CAPITAL SUBSCRIPTION STAGE

After a company is registered, it proceeds to get money through allotment of share capital to
members. Initially, shares are allotted to persons who are signatories to documents and have
agreed to subscribe to the prescribed number of shares.

COMMENCEMENT OF BUSNIESS STAGE

After a company is registered, it proceeds to get money through allotment of share capital to
members. Initially, shares are allotted to persons who are signatories to documents and have
agreed to subscribe to the prescribed number of shares.

MEMORANDUM OF ASSOCIATION

The memorandum of association of a company is an important corporate document in certain

jurisdictions. It is often simply referred to as the memorandum. In the UK, it has to be filed
with the Registrar of Companies during the process of incorporating a company. It is the
document that regulates the company's external affairs, and complements the articles of
association which cover the company's internal constitution. It contains the fundamental
conditions under which the company is allowed to operate.

Content of MOA

 Name Clause

It is mandatory to mention the name of the company while drafting the Memorandum of
Association. A company may select any name that it prefers but it should not be identical to
an existing company.

 Situation Clause

The Memorandum of Association of a company must contain the name of the state where the
company operates and the jurisdiction of the Registrar of Company must be specified. It is
mandatory for the company to have the registered office within 15 working days.

 Object Clause
The objective for which the company is formed must be mentioned in the Memorandum of
Association. It is one of the key clauses and should be drafted carefully mentioning all the
types of businesses that the company may possibly engage in the future. A company is legally
prohibited from carrying out any activity that is not specified in the object clause.

 Liability Clause

The liabilities of the members of the company must be clearly stated in the Memorandum of
Association. They may be limited by shares or by guarantee. In case of unlimited liability
company, the entire clause can be eliminated.

 Capital Clause

The maximum amount of authorised capital that can be generated by the members of the
company is ought to be specified in the Memorandum of Association. Stamp duty is
applicable on this amount. Although there is no legal limit to the maximum amount of capital
that can be raised by a company, it cannot increase the authorised share capital once it has
been incorporated.

Form of Memorandum

The memorandum of a company should be formulated in accordance with the respective

forms as mentioned in the tables A, B, C, D & E under Schedule 1 of the Companies Act,
2013.

 Form in Table A is applicable to companies that are limited by shares.

 Form in Table B is applicable to companies that are limited by guarantee and do
not have an authorised share capital.
 Form in Table C is applicable to companies limited by guarantee and have an
authorised share capital.
  From is Table D is applicable to unlimited companies that do not have an
authorised share capital.
 Form in Table E is applicable to unlimited companies that have an authorised
share capital.

ARTICLE OF ASSOCIATION

Articles of association form a document that specifies the regulations for a company's
operations and defines the company's purpose. The document lays out how tasks are to be
accomplished within the organization, including the process for appointing directors and the
handling of financial records.

The contents of articles of association should not contradict with the Companies Act and the
MOA. If the document contains anything contrary to the Companies Act or the Memorandum
of Association, it will be inoperative.

Contents of AOA

Contents of Articles of Association of a limited company is prescribed in Table-F of the

Companies Act, 2013. Generally, the contents of AOA are as follows:

 Interpretation

 Private Company

 Share Capital and Variation of Rights

 Preference Shares

 Alteration to Memorandum

 Control of Shares

 Shares held Jointly

 Increase of Capital
  Lien on Shares

 Calls on Shares and Transfer of Shares

 Transmission of Shares

 Forfeiture of Shares

 Alteration of Capital

 Capitalisation of Profits

 Buy-Back of Shares

 Issue of Shares in Kind

 General Meetings

 Proceedings at General Meetings

 Voting Rights and Proxy

 Directors

 Proceedings of The Board

 Chief Executive Officer, Manager, Company Secretary or Chief Financial Officer.

 Common Seal

 Borrowing Power

Alterations of AOA

The alteration of the Articles should not sanction anything illegal. They should be for the
benefit of the company. They should not lead to breach of contract with the third parties. The
following are the regulations regarding alteration of articles:

 The proposed alteration should not contravene the provisions of the Companies Act.
  The proposed alteration should not contravene the provisions of the Memorandum of
Association.
 The alteration should not propose anything that is illegal.
 The alteration should be bonafide for the benefit of the company.
 The proposed alteration should in no way increase the liability of existing members.
 Alteration can be made only by a special resolution.

DOCTRINES OF ULTRA VIRES

It is a Latin term made up of two words “ultra” which means beyond and “vires” meaning
power or authority. so we can say that anything which is beyond the authority or power is
called ultra-vires. 

Memorandum of association is considered to be the constitution of the company. It sets out

the internal and external scope and area of company’s operation along with its objectives,
powers, scope. A company is authorized to do only that much which is within the scope of
the powers provided to it by the memorandum. 

The doctrine of ultra-vires in Companies Act, 2013

Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for which
incorporation of the company is proposed any other matter which is considered necessary in
its furtherance should be stated in the memorandum of the company.

Basic principles regarding the doctrine

 Shareholders cannot ratify an ultra-vires transaction or act even if they wish to do so.
 Where one party has entirely performed his part of the contract, reliance on the
defence of the ultra-vires was usually precluded in the doctrine of estoppel.
 Where both the parties have entirely performed the contract, then it cannot be attacked
on the basis of this doctrine.
 Any of the parties can raise the defence of ultra-vires.
  If a contract has been partially performed but the performance was insufficient to
bring the doctrine of estoppel into the action, a suit can be brought for the recovery of
the benefits conferred.
 If an agent of the corporation commits any default or tort within the scope of his
employment, the company cannot defend it from its consequences by saying that the
act was ultra-vires.

Types of ultra-vires acts

Ultra-vires acts can be generally of four types:

 Acts which are ultra-vires to the Companies Act.

 Acts which are ultra-vires to the Memorandum of the company.
 Acts which are ultra-vires to the Articles of the company but intra-vires the company.
 Acts which are ultra-vires to the directors of the company but intra-vires the company.

Difference between an Ultra-Vires and an Illegal act

An ultra-vires act is entirely different from an illegal act. People often mistakenly use them as
a synonym to each other, while they are not. Anything which is beyond the objectives of the
company as specified in the memorandum of the company is ultra-vires. However, anything
which is an offense or draws civil liabilities or is prohibited by law is illegal. Anything which
is ultra-vires, may or may not be illegal, but both of such acts are void-ab-initio.

MEETINGS

A meeting is a gathering of two or more people that has been convened for the purpose of
achieving a common goal through verbal interaction, such as sharing information or reaching
agreement.

The purpose of Meeting

Meetings are an important organisational tool as they can be used to :

  Pool and develop ideas
 Plan
 Solve problems
 Make decisions
 Create and develop understanding
 Encourage enthusiasm and initiative
 Provide a sense of direction
 Create a common purpose

Types of Meetings

There are many different types of meetings; here we focus on those used to :

 Inform
 Status update meetings
 Decisions making meetings
 Problem – Solving meetings
 Team – Building Meetings
 Idea- Sharing Meetings

Tips for making best use of Meeting time

 Set clear goals

 Run through a Post- Meeting Recap
 Use dependable Video Conferencing Software

BOARD OF DIRECTORS

A board of directors (B of D) is an elected group of individuals that represent shareholders.

The board is a governing body that typically meets at regular intervals to set policies for
corporate management and oversight. ... Some private and non profit organizations also have
a board of directors.

Every public company must have a board of directors. Some private and non profit
organizations also have a board of directors.
What does a board of directors do?

A board of directors primarily functions as a fiduciary, acting on behalf of the organization's

shareholders. They make decisions about issues, such as:

 Compensation for executives

 Making acquisitions
 Stock-option policies
 Dividend policies
 Selling the company
 Hiring and firing senior executives

Functions of Board of Directors

 Duty to act in accordance with the Articles of Association of the company.

 Duty to act in good faith and best interest.
 Duty to exercise reasonable care, skill, diligence and independent
judgment.
 Duty to avoid conflict of interest.
 Duty not to make undue gain or advantage.
 Duty not to assign his position.
 Cresting dividend policies.
 Creating options policies
 Hiring and firing of executives (especially the CEO
 Establishing compensation for executive
 Supporting executives and their team
 Maintaining company resources
 Setting general company goals
 Making sure that the company is equipped with the tools it needs to be
managed well

Management frauds
Management fraud can be defined as a deliberate fraud committed by. a firm or
company's management that injures investors and creditors. through materially misleading
financial statements, or intentional or. egregious conduct whether by act or omission that
leads to a material. misstatement of financial statements.

THE NATURE OF MANAGEMENT FRAUD 

Management fraud, conducted by one or more top-level managers within the company, is
usually in the form of fraudulent financial reporting. Oftentimes, the chief executive officer
(CEO) or chief financial officer (CFO) conducts fraud by misstating the financial statements
through elaborate schemes or complex transactions. Managers misstate financial statements
in order to receive such indirect benefits as the following:
1. Increased stock price. Management usually owns stock in the company, and it benefits
from increased stock price.
2. Improved financial statements, which enhance the potential for a merger or initial
public offering (IPO), or prevent negative consequences due to noncompliance with
debt covenants or decreased bond ratings.
3. Enhanced chances of promotion, or avoidance of firing or demotion.
4. Increased incentive-based compensation such as salary, bonus, or stock options.
5. Delayed cash flow problems or bankruptc.
Protect Your Business: 10 Types of Business Fraud to Look out For

According to the Association of Certified Fraud Examiners (ACFE), businesses lose around
5% of financial revenue due to fraudulent behaviour. While that may sound like a relatively
small amount, it definitely adds up! Experts estimate total annual loss around the

whopping$3.7 trillion, and this doesn’t even take into consideration the other costs of fraud
like a negative reputation and company morale.

Recognizing what fraud looks like is the first step to protecting your business from it. Below
are 10 of the most common types of fraud that business owners should check for.

10 Types of Fraudulent Scheme

1. PAYROLL FRAUD

Payroll fraud can manifest in a variety of ways. An employee could lie about their
productivity, sales or hours worked to get a higher pay. Some may request for a pay advance
without any intention of paying it back. Others may even take it a step further by enlisting a
co-worker to manipulate their attendance records by clocking in and out for them.

2. ASSET MISAPPROPRIATION/SKIMMING

Asset misappropriation is one of the most common types of business fraud, but it is also one
of the easiest to spot. Watching out for forged checks, missing inventory and accounts that
simply don’t add up is key to identifying asset misappropriation.

3. INVOICE FRAUD SCHEMES

This type of fraud happens when the fraudster (often an employee in sales or accounting)
creates fake invoices to steal money from the business. This could mean invoicing for
products and services that were never bought, creating a fake supplier/shell company to
funnel the money to, or awarding over-inflated contracts to personal friends and family.

4. FINANCIAL STATEMENT FRAUD

Financial statement fraud involves fudging important numbers like sales, revenues, assets and
liabilities. Usually, this is done to dupe investors or the public, manipulate stock or increase
bonuses. 
5. TAX FRAUD

Tax fraud (also known as tax evasion) is a type of fraud that happens when an individual or
company’s earnings and expenses are misreported to the IRS, often to take advantage of
lower tax brackets and special exemptions.

6. DATA, INTELLECTUAL PROPERTY AND IDENTITY

THEFT

A lot of businesses handle sensitive information, whether personal data or intellectual

property (IP). IP theft can damage your business if an employee leaks trade secrets and
patents to your competitors. Identity theft can hurt your reputation due to lower customer
trust.

7. INSURANCE AND BANKING FRAUD

Most companies offer health insurance or workers’ compensation to their employees. Sadly,
there are employees who try to profit off insurance by filing false claims or lying about
injuries and illnesses, resulting in higher premiums and more out-of-pocket expenses for
small business owners.

8. MONEY FRAUD

Money fraud is a type of fraud where a customer uses fake bills to make a real purchase. If
you don’t check regularly, you won’t notice the notes are counterfeit until it’s too late.

9. RETURN FRAUD

Many retail businesses have some sort of return, refund or exchange policy that allows
customers to send back defective items. Some people take advantage of this by lying about
purchases, returning stolen goods, stealing receipts, or using items and then returning them
before the return period is up to get their money back.

10. BRIBERY AND CORRUPTION

Bribery and corruption encompasses a variety of practices such as skimming/getting

kickbacks from projects, using money to influence major company decisions, and
manipulating contracts to favor some people over others

Protect Your Business Against Fraud Schemes

No matter the niche or industry, all businesses are vulnerable to fraud if they don’t know how
the different kinds of fraud manifest. Once you know what to look out for, you can start the
all-important work of creating more effective security measures and mitigating fraud risk in
your day-to-day operations.

WINDING UP

Winding up is the process of dissolving a company. While winding up, a company

ceases to do business as usual. Its sole purpose is to sell off stock, pay off creditors,
and distribute any remaining assets to partners or shareholders.

Modes of winding up
Compulsory winding up by tribunal (NCLT)

A company may be wound up by an order of the tribunal. This is called compulsory winding
up. The tribunal will make an order for winding up on an application by any of the person
enlisted in section 272.

Grounds for compulsory winding-up (section 271)

Section 271 lays down the following grounds where a company may be wound up by the
tribunal.

1. Special resolution.
2. Inability to pay debts.
3. Just and equitable.
4. Default in filling P/L account and B/S or annual return.
5. Acted against sovereignty & integrity of India.
6. Sick industrial company u/s 424G.

Voluntary winding up

Creditors' voluntary liquidation (or creditors' voluntary winding up) - this is when the.

shareholders of a company decide to put the company into liquidation, but there are. not
enough assets to pay all the creditors, i.e. the company is insolvent.
Consequences of voluntary winding up

1. effect on status of a company

2. board’s power to case on appointment of a liquidator
3. avoidance of transfer etc. after commencement of winding up
4. discharge of employees

types of voluntary winding up

a voluntary winding up may be:

(A) A member’s voluntary winding up.

(B) A creditors voluntary winding up.

(A). Member’s voluntary winding up

A members' voluntary winding up is the process for solvent companies when its members no
longer want to retain the company's structure as the company is no longer required and is
serving no useful purpose. A members' voluntary winding up is the only way to fully wind
up the affairs of a solvent company.

Provision applicable to member’s voluntary winding up

1. Appointment of liquidator. (section 310)

2. Board’s power to cease. (section 313)
3. Power to fill vacancy in the office of liquidator. (section 311)
4. Notice of appointment of liquidator to registrar (section312)
5. Duty of the liquidator to inform the assessing officer.
6. General meeting at the end of each year.
7. Final meeting and dissolution. (section 318)

(B). creditor’s voluntary winding up

Creditor are the people who the company owes money to for providing goods, services or
loans to the company. Customers who have not received goods they have already paid for and
employees who have outstanding wages may also be considered creditors.
A creditors’ voluntary winding up is the winding up of a company by a special resolution of
the shareholders under the scrutiny of the company’s creditors. This occurs when the
company is insolvent. If the directors of the company are unable to provide a declaration of
solvency, the company can proceed with the creditors winding up.

1. Provision of creditors voluntary winding up. They are discussed as under:

2. Meeting of creditors. (section 306)
3. Notice to registrar. (section 306)
4. Appointment of liquidator. (section 310)
5. Committee of inspection. (section315)
6. Liquidator’s remuneration. (section 310)
7. Power of board to cease. (section 313)
8. Vacancy in office of liquidator. (section 311)
9. Meeting at the end of each year. (section316)
10. Final meeting and dissolution. (section318)

Difference between member’s voluntary winding up and creditor’s

voluntary winding up

The main difference between a Members’ Voluntary Liquidation (MVL) and a Creditors’

Voluntary Liquidation (CVL) is that the MVL process is used by solvent companies to close
down their business. In contrast, although still voluntarily undertaken, a CVL involves
closure of a company that is insolvent.

After an MVL the proceeds of sale go to the shareholders, whereas a CVL sees the cash
realised from the sale of assets returned to creditors.

As the terms suggest, these forms of liquidation are undertaken voluntarily by directors who
hold meetings with shareholders and creditors to put forth the company’s financial position,
and seek the relevant resolution to wind up the company.

This should not be confused with Compulsory Liquidation where legal action is taken against
the company by a secured or unsecured creditor.