LEGAL ENVIRONMENT OF

BUSINESS
SUBJECT CODE – CP-402

MASHUDUL HAQUE
ROLL NO. – 18-MBE-065
ASSIGNMENT NO. - 1
QUESTION 1. WHAT ARE NEGOTIABLE INSTRUMENTS ACCORIDNG TO NEGOTIABLE
INSTRUMENTS ACT, 1881? DISCUSS THE IMPORTANCE OF NEOGTIABLE
INSTRUMENTS IN THE GOVERNANANC OF BUSINESS ENVIORNMENT WITH THE
HELP OF DECIDED CASES/ ILLUSTRATIONS.

ANSWER:

INTRODUCTION TO NEGOTIABLE INSTRUMENTS ACT, 1881

The Negotiable Instruments Act was enacted, in India, in 1881.Prior to its enactment, the
provision of the English Negotiable Instrument Act were applicable in India, and the present
Act is also based on the English Act with certain modifications. It extends to the whole of India
except the State of J&K.

DEFINITION:

According to section 13 of Negotiable Instruments Act, 1881- A 'negotiable instrument' means

a promissory note, bill of exchange or cheque payable either to order or to bearer.

NEGOTIABLE INSTRUMENTS

Documents of a certain type, used in commercial transactions and monetary dealings, are
called Negotiable instruments. The word 'negotiable' means transferable from one person to
another and the term 'instrument' means 'any written doc. by which a right is created in favor
of some person.' Thus, the negotiable instrument is a doc. by which rights vested in a person
can be transferred to another person in accordance with the provisions of the Negotiable
Instruments Act, 1881.

A negotiable instrument is a piece of paper which entitles a person to a sum of money and
which is transferable from person to person by mere delivery or by endorsement and delivery.
The person to whom it is transferred becomes entitled to the money also to the right to further
transfer it. Thus, negotiable instruments play a major role in the trade world.

MAIN FEATURES OF A NEGOTIABLE INSTRUMENT

An instrument may be negotiable either by

 Statute - Promissory notes, bills of exchange and cheques are negotiable instruments
under the Negotiable Instruments Act, 1881; or
 By usage - Bank notes, bank drafts, share warrants, bearer debentures, dividend
warrants, scripts and treasury bills.
 An instrument is to be called 'negotiable' if it possesses the following characteristic
features:
Freely transferable - Transferability may be by
 delivery, or
 By endorsement and delivery.

PURPOSE OF NEGOTIABLE INSTRUMENT

Main purpose of negotiable instruments is to avoid the carriage of higher amount of money
and to reducing the risk of theft; robbery etc.
To give legal effect to negotiable instruments there is legislation and the name of that
legislation is The Negotiable Instruments Act, 1881.
CHARACTERISTICS OF NEGOTIABLE INSTRUMENT

FREELY TRANSFERABLE: The property in a negotiable instrument passes from one person
to another by a simple process, i.e. by mere delivery if it is payable to bearer, and by
endorsement and delivery if it is payable to order.

HOLDER’S TITLE FREE FROM ALL DEFECTS: The holder in due course (one who acquires
the instrument in good faith and for consideration) gets it free from all defects.

RECOVERY: One can sue upon the instrument in his own name.

PAYABLE TO ORDER OR BEARER: It must be payable either to order or bearer.

PRESUMPTION AS TO HOLDER: Every holder of negotiable instrument is presumed to

holder in due course.

PRESUMPTION AS TO CONSIDERATION: Every negotiable instrument is presumed to have

been made, drawn, accepted, endorsed, negotiated or transferred for consideration.

According to professor Goode, instrument is described as a document of title of

money Therefore an instrument is a document which physically expresses the payment
obligation. An instrument will be in deliverable state only if it is signed by the possessor or it
should be with the authority of that person. The instrument clearly states the contractual right
to payment and the right will be transferred only after the complete delivery. The person who
has that entitlement and possess the instrument is consider as the true owner.

IMPORTANCE OF NEGOTIABLE INSTRUMENTS:

Negotiable Instrument is a certain type of document, which transfers the money. It makes easy
to carry money from one place to another place. So, it is very important for the transfer of
money in the business sector.

Following are the importance of a Negotiable Instrument:

 Negotiable Instrument is an easier means of transfer of money.

 It is easy to delivery from one place to another place.
 It helps to flourish in the business sector.
 It creates the right of property.
 It has the easy negotiability and somewhere it provides the security.
 It makes the fast transaction of money.
 It makes the security of money as well as personal security in course of the transaction
of money.

Negotiable Instrument is an easier way to transfer money from one place to another place. It
provides a safe way to deliver the money. It has an important role to develop the way of money
transaction as well as the business realm.

PROMISSORY NOTE

A Promissory Note is an instrument in writing, except government note or bank currency,

containing unconditional undertaking signed by the Maker to pay a certain sum of money only
to, or to the order of or to the bearer or to a certain person related to the instrument. Section
2(f) of Negotiable Instrument Act, 2034 The person, who makes the promissory note or
promises, is called a ‘Maker’ and he has to sign that document as a debtor.
The person to whom payment is to be made is called the ‘payee’. A promissory note is an
unconditional promise to pay put into writing by a person or entity and signed by the borrower
or person making the promise. Promissory notes are often created between a borrower and a
lender in which the borrower promises to pay the lender a specific amount of money by the
specified date.

A promissory note, similar to a contract, contains all of the details pertaining to the transaction
such as the amount borrowed, late fees, interest rates, and so forth, and should contain the
term “promissory note” within the body. In terms of enforceability, a promissory note lies
somewhere between an informal IOU and a formal loan contract.

BILL OF EXCHANGE

Bill of exchange is another type of Negotiable Instrument. It is also in practice in the business
sector. A bill of exchange is an instrument in writing containing an unconditional order, signed
by the maker, directing a certain person to pay a certain sum of money only to, or to the order
of, a certain person or to the bearer of the instrument.

It is defined under section 2(g) of the Nepalese Negotiable Instrument Act, 2034. Section 2(g)
defines as “A bill of exchange is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of money to, or to the
order of a person or to a person or to the bearer of the instrument”.

On the basis of the above definition, there are three parties in the bill of exchange, which are
Drawer, Drawee and Payee.

Another commonly used type of negotiable instrument is the bill of exchange. A bill of
exchange is a financial document that states an individual or business will pay a certain
amount on a specific date. The date may range from the date it is signed, to within six months
into the future.

A bill of exchange must contain the signature of the individual promising to pay to be
considered legally binding. Unlike a promissory note, a bill of exchange may be transferred to
a third party, binding the payor to pay the third party who was not involved in the first place.

CHEQUE

The cheque is a very common form of negotiable instrument. If you have a savings bank
account or current account in a bank, you can issue a cheque in your own name or in favor of
others, thereby directing the bank to pay the specified amount to the person named in the
cheque. Therefore, a cheque may be regarded as a bill of exchange; the only difference is
that the bank is always the drawee in case of a cheque.

The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a
specified banker and not expressed to be payable otherwise than on demand. From the above
dentition, it appears that a cheque is an instrument in writing, containing an unconditional
order, signed by the maker, directing a specified banker to pay, on demand, a certain sum of
money only to, to the order of, a certain person or to the bearer of the instrument.

The person who draws a cheque is called the “Drawer”. The banker on whom it is drawn is
the “Drawee” and the person in whose favour it is drawn is the “payee”. Actually, a cheque is
an order by the account holder of the bank directing his banker to pay on demand, the specified
amount, to or to the order of the person named therein or to the bearer.
EXAMPLE CASES

1- DALMIA CEMENT BHARAT LTD. V. GALAXY TRADERS AND AGENCIES LTD.

The Supreme Court referred to the object of Section 138 of the Act in present case. The court
observed that the act was enacted and Section 138 incorporated with a specified object of
making a special provision by incorporating a strict liability so far as the cheque as negotiable
instrument is concerned.

2- CANARA BANK VS. CANARA SALES CORPORATION AND OTHERS

The Supreme Court observed that when customer’s signature is forged, there is no mandate
to the bank to pay. And hence, as such the bank is not entitled to debit customers account on
forged note cheque.

CONCLUSION

Today in the modern business world NEGOTIABLE INSTRUMENT plays an important role as
well as convenient mode of settling account. A negotiable instrument is a special type of
contract for payment of money which is unconditional and capable of transfer by negotiation.
Negotiable instrument make the economy goes round. The law relating to the Negotiable
Instrument, i.e, Negotiable Instrument Act, 1881 has a tremendous importance as a
considerable amount of litigation in Indian courts revolve around this sphere.

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QUESTION 2. DISCUSS THE SALIENT FEATURES OF INDIAN COMPANIES ACT 1956

AND ITS AMENDEMENT IN THE YEAR 2013 AND THE COMPANIES (AMENDMENT)
BILL, 2019/2020. DRAW A COMPLETE OUTLINE WITH SUTABLE CASES.

ANSWER:

INTRODUCTION

The Companies Act 1956 is administered by the Government of India through the Ministry of
Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public
Trustee, Company Law Board, Director of Inspection, etc. The Act is 658 sections long. The
Act contains provisions about Companies, directors of the companies, memorandum and
articles of associations, etc. This act states and discusses every single provision requires or
may need to govern a company. It mentions what type on companies their differences,
constitution , management, members , capital, how should the shares should be issues,
debentures, registration of charge, at the end of the act it concludes the about winding up of
a company, discussing the situations a company needs to be winded up. The ways it should
be done by volunteer or through courts.

SALIENT FEATURES OF COMPANIES ACT, 1956

The salient features of the companies act 1956 entails that a company needs to be registered
formally with the government with documents that act as proof.
Explanation: The Indian Companies Act 1956 was provided by the government in the year
1956 which determined the establishment of companies through the act of registration. It
provides important information in regards to its working and also closing of the company.

The company act 1956 provides for the document which is referred to as "Memorandum of
Association" which determines the roles and responsibilities of the people associated with the
company. It provides a system of legality to the entire procedure.

The company can expand further and form other companies with the help of the legal
documents. The company is single entity with its own identity and rights unless it is winded up
or closed due to any reason. It consists of number of shareholders and there are other
directors and managers who are responsible of running the company.

THE BASIC OBJECTIVES UNDERLYING THE LAW ARE:

 A minimum standard of good behaviour and business honesty in company promotion

and management.
 Due recognition of the legitimate interest of shareholders and creditors and of the duty
of managements not to prejudice to jeopardize those interests.
 Provision for greater and effective control over and voice in the management for
shareholders.
 A fair and true disclosure of the affairs of companies in their annual published balance
sheet and profit and loss accounts.
 Proper standard of accounting and auditing.
 Recognition of the rights of shareholders to receive reasonable information and
facilities for exercising an intelligent judgment with reference to the management.
 A ceiling on the share of profits payable to managements as remuneration for services
rendered.
 A check on their transactions where there was a possibility of conflict of duty and
interest.
 A provision for investigation into the affairs of any company managed in a manner
oppressive to minority of the shareholders or prejudicial to the interest of the company
as a whole.
 Enforcement of the performance of their duties by those engaged in the management
of public companies or of private companies which are subsidiaries of public
companies by providing sanctions in the case of breach and subjecting the latter also
to the more restrictive provisions of law applicable to public companies.

AMENDMENT INTRODUCED IN THE YEAR 2013 BY THE COMPANANIES ACT

Class action suits for Shareholders: The Companies Act 2013 has introduced new concept
of class action suits with a view of making shareholders and other stakeholders, more informed
and knowledgeable about their rights.

More power for Shareholders: The Companies Act 2013 provides for approvals from
shareholders on various significant transactions.

Women empowerment in the corporate sector: The Companies Act 2013 stipulates
appointment of at least one woman Director on the Board (for certain class of companies).

Corporate Social Responsibility: The Companies Act 2013 stipulates certain class of
Companies to spend a certain amount of money every year on activities/initiatives reflecting
Corporate Social Responsibility.
National Company Law Tribunal: The Companies Act 2013 introduced National Company
Law Tribunal and the National Company Law Appellate Tribunal to replace the Company Law
Board and Board for Industrial and Financial Reconstruction. They would relieve the Courts of
their burden while simultaneously providing specialized justice.

Fast Track Mergers: The Companies Act 2013 proposes a fast track and simplified procedure
for mergers and amalgamations of certain class of companies such as holding and subsidiary,
and small companies after obtaining approval of the Indian government.

Cross Border Mergers: The Companies Act 2013 permits cross border mergers, both ways;
a foreign company merging with an India Company and vice versa but with prior permission
of RBI.

Prohibition on forward dealings and insider trading: The Companies Act 2013 prohibits
directors and key managerial personnel from purchasing call and put options of shares of the
company, if such person is reasonably expected to have access to price-sensitive information.

Increase in number of Shareholders: The Companies Act 2013 increased the number of
maximum shareholders in a private company from 50 to 200.

Limit on Maximum Partners: The maximum number of persons/partners in any

association/partnership may be upto such number as may be prescribed but not
exceeding one hundred. This restriction will not apply to an association or partnership,
constituted by professionals like lawyer, chartered accountants, company secretaries, etc.
who are governed by their special laws. Under the Companies Act 1956, there was a limit of
maximum 20 persons/partners and there was no exemption granted to the professionals.

One Person Company: The Companies Act 2013 provides new form of private company, i.e.,
one Person Company. It may have only one director and one shareholder. The Companies
Act 1956 requires minimum two shareholders and two directors in case of a private company.

Entrenchment in Articles of Association: The Companies Act 2013 provides for

entrenchment (apply extra legal safeguards) of articles of association have been introduced.

Electronic Mode: The Companies Act 2013 proposed E-Governance for various company
processes like maintenance and inspection of documents in electronic form, option of keeping
of books of accounts in electronic form, financial statements to be placed on company’s
website, etc.

Indian Resident as Director: Every company shall have at least one director who has stayed
in India for a total period of not less than 182 days in the previous calendar year.

Independent Directors: The Companies Act 2013 provides that all listed companies should
have at least one-third of the Board as independent directors. Such other class or classes of
public companies as may be prescribed by the Central Government shall also be required to
appoint independent directors. No independent director shall hold office for more than two
consecutive terms of five years.

Serving Notice of Board Meeting: The Companies Act 2013 requires at least seven days’
notice to call a board meeting. The notice may be sent by electronic means to every director
at his address registered with the company.

Duties of Director defined: Under the Companies Act 1956, a director had fiduciary (legal or
ethical relationship of trust) duties towards a company. However, the Companies Act 2013 has
defined the duties of a director.
Liability on Directors and Officers: The Companies Act 2013 does not restrict an Indian
company from indemnifying (compensate for harm or loss) its directors and officers like the
Companies Act 1956.

Rotation of Auditors: The Companies Act 2013 provides for rotation of auditors and audit
firms in case of publicly traded companies.

Prohibits Auditors from performing Non-Audit Services: The Companies Act

2013 prohibits Auditors from performing non-audit services to the company where they are
auditor to ensure independence and accountability of auditor.

THE COMPANIES (AMENDMENT) BILL, 2020

The Companies (Amendment) Bill, 2020 was introduced in Lok Sabha by the Minister for
Corporate Affairs, Ms. Nirmala Sitharaman, on March 17, 2020. The Bill seeks to amend the
Companies Act, 2013.

Producer companies: Under the 2013 Act, certain provisions from the Companies Act, 1956
continue to apply to producer companies. These include provisions on their membership,
conduct of meetings, and maintenance of accounts. Producer companies include companies
which are engaged in the production, marketing and sale of agricultural produce, and sale of
produce from cottage industries. The Bill removes these provisions and adds a new chapter
in the Act with similar provisions on producer companies.

Changes to offences: The Bill makes three changes. First, it removes the penalty for certain
offences. For example, it removes the penalties which apply for any change in the rights of a
class of shareholders made in violation of the Act. Note that where a specific penalty is not
mentioned, the Act prescribes a penalty of up to Rs 10,000 which may extend to Rs 1,000 per
day for a continuing default. Second, it removes imprisonment in certain offences. For
example, it removes the imprisonment of three years applicable to a company for buying back
its shares without complying with the Act. Third, it reduces the amount of fine payable in
certain offences. For example, it reduces the maximum fine for failure to file annual return
with the Registrar of Companies from five lakh rupees to two lakh rupees.

Under the Act, one person companies (i.e., companies with only one member) or small
companies (i.e., with lower paid-up share capital and turnover thresholds) are only liable to
pay up to 50% of the penalty for certain offences (such as failing to file annual return). The
Bill: (i) extends this provision to all producer companies and start-up companies, (ii) extends
this provision to apply to violation of any provision of the Act, and (iii) limits the maximum
penalty to two lakh rupees for the company and one lakh rupees for a defaulting officer.

Direct listing in foreign jurisdictions: The Bill empowers the central government to allow
certain classes of public companies to list classes of securities (as may be prescribed) in
foreign jurisdictions.

Exclusion from listed companies: The Bill empowers the central government, in
consultation with the Securities and Exchange Board of India, to exclude companies issuing
specified classes of securities from the definition of a "listed company".

Remuneration to non-executive directors: The Act makes special provisions for payment
of remuneration to executive directors of a company (including managing director and other
whole-time directors) if the company has inadequate or no profits in a year. For example, if
a company has an effective capital of up to five crore rupees, the annual remuneration to its
executive directors cannot exceed 60 lakh rupees. The Bill extends this provision to non-
executive directors, including independent directors.
Beneficial shareholding: Under the Act, if a person holds beneficial interest of at least 10%
shares in a company or exercises significant influence or control over the company, he is
required to make a declaration of his interest to the company. The company is required to
note the declaration in a separate register. The Bill empowers the central government to
exempt any class of persons from complying with these requirements if considered necessary
in public interest.

Exemptions from filing resolutions: The Act requires companies to file certain resolutions
with the Registrar of Companies. These include resolutions of the Board of Directors of the
company to borrow money, or grant loans. However, banking companies are exempt from
filing resolutions passed to grant loans, or to provide guarantees or security for a loan. This
exemption has been extended to registered non-banking financial companies and housing
finance companies.

Corporate Social Responsibility (CSR): Under the Act, companies with net worth, turnover
or profits above a specified amount are required to constitute CSR Committees and spend 2%
of their average net profits in the last three financial years, towards its CSR policy. The Bill
exempts companies with a CSR liability of up to Rs 50 lakh a year from setting up CSR
Committees. Further, companies which spend any amount in excess of their CSR obligation
in a financial year can set off the excess amount towards their CSR obligations in subsequent
financial years.

Periodic financial results for unlisted companies: The Bill empowers the central
government to require classes of unlisted companies (as may be prescribed) to prepare and
file periodical financial results, and to complete the audit or review of such results.

Benches of NCLAT: The Bill seeks to establish benches of the National Company Law
Appellate Tribunal. These shall ordinarily sit in New Delhi or such other place as may be
notified.

EXAMPLE OF CASES ON COMPANY LAW

As the trend of asking questions have been changed by ICAI, I thought this might be useful. I
compiled these decided case laws from various sources like RTP, study module, compilation
of suggested answers. I am laying down only those which I feel important from examination
point of view. These case laws make the concept even clearer because example is a better
teacher.

1. Saloman Vs. Saloman & Co. Ltd. (1895 - 99)

Facts

Saloman sold his business to a company named Saloman & Company Ltd., which he formed.
Saloman took 20,000 shares. The price paid by the company to Saloman was £ 30,000, but
instead of paying him, cash, the company gave him 20,000 fully paid shares of £ 1 each & £
10,000 in debentures. The company wound up & the assets of the company amounted to £
6,000 only. Debts amounted to £10,000 due to Saloman & Secured by debentures and a
further £ 7,000 due to unsecured creditors. The unsecured creditors claimed that as Saloman
& Co. Ltd., was really the same person as Saloman, he could not owe money to himself and
that they should be paid their £ 7,000 first.
Judgement:

 A Company is a "legal person" or "legal entity" separate from and capable of surviving
beyond the lives of, its members.
 The company is not in law the agent of the subscribers or Trustee for them.
 Saloman was entitled to £ 6,000 as the company was an entirely separate person from
Saloman.
 The unsecured creditors got nothing.
 Lee Vs. Lee's Farming Co. Ltd. (1960)

Facts

Lee incorporated a company of which he was the managing director. In that capacity he
appointed himself as a pilot of the company. While on the business of the company he was
lost in a flying accident. His widow claimed compensation for personal injuries to her husband
while in the course of his employment. It was argued that no compensation was due because
L & lee's Air Farming Ltd. were the same person.

Judgement:

 L was separate person from the company he formed and compensation was payable.
 His widow recovered compensation under the Workmen's Compensation Act
 A member of a company can contract with a company of which he is a shareholder.
 The directors are not precluded from being an employee of the company for the
purpose of workmen’s compensation legislation.