LEGAL ASPECTS OF BUSINESS: LAW OF CONTRACT

Introduction:
 In the course of daily life, each of us enters into a variety of contracts, whether
knowingly or unknowingly.
 Certain obligations and rights are created in every contract, either directly or
indirectly.
 The Indian Contract Act of 1872 is the legal document that establishes the rules and
fundamentals governing business agreements. On September first, 1872, the act
became operative.
 The English Common Law principles serve as the foundation for the law, which was
passed by British India. Jammu & Kashmir is the only state of India that is not
applicable.
 The Act covers the establishment of a contract, its performance, contract breaches,
and related remedies.
Meaning & Essentials of Contract:
 "Contract is an agreement enforceable by law," states Section 2(h).
 Agreement denotes a commitment.
It is made when someone offers something to someone else and that other accepts it in
exchange for something else.
Agreement = Offer + Acceptance of offer

 All agreements are not contract, only those agreements which create legal right and
are enforceable by law are contracts.
The following are the essential elements of a valid contract:

Plurality of
Parties

Offer &
Legal formalities
acceptance

Intention to
Not declared
create legal
void
relation

Possibility to Valid Contractual

perform
Contract capacity

Centainty of
Consent
meaning

Lawful Object Free Consent

Consideration

1. Plurality of Parties: A contract must involve at least two parties. They are
commonly referred to as promisor and promisee.
2. Offer & acceptance (Agreement): One party should present an offer, which the
other should accept according to the offer's terms.
3. Intention to create legal relation (Enforceable by law): Both parties must
intend to enter into a legal relationship.
4. Contractual Capacity: Contract parties should be adults and of sound mind.
They shouldn't be legally prohibited from entering into contracts.
5. Consent: It indicates that parties must agree on the same issue and in the same
sense.
6. Free consent: If there was no coercion (force), unfair influence, fraud,
misrepresentation, or error, the consent was free.
7. Consideration: It implies receiving something in return with monetary value.
8. Lawful Object: A contract is said to be void ab initio if it lacks a valid
purpose. It shouldn't be fraudulent in nature or be ruled by the court to be
against public policy.
9. Certainty of Meaning: Each and every phrase used in the contract must have a
specific meaning. There should be no room for doubt.
10. Possibility to perform: Agreement must be executable both legally and
physically.
11. Agreement not declared void: Agreements which fulfil the conditions of
lawful contract can also be declared void by law.
12. Compliance of legal formalities: All legal requirements must be fulfilled.
Classification of Contracts:

According to
Enforceability/
Legality

Classification
of Contract

According
According
to extent
to mode of
of
Formation
Execution

 ACCORDING TO ENFORCEABILITY / LEGALITY

1. Valid Agreement (Contract): A valid agreement is a contract enforceable by law. It has all
essentials of contract under sec.10.
2. Void Agreement: A contract that is not enforceable by law is void [Section 2(g)]. It lacks
crucial components of a tenable agreement. Restitution is not allowed and such agreements
are void ab initio (void from the start). It implies that any consideration granted by the parties
to one another cannot be recovered.
3. Void Contract: A contract is void if it is initially valid but later loses its ability to be enforced
due to a change in the facts or the law (not valid or legal). Restitution and compensation for
partial performance are permitted under invalid contracts.
4. Voidable Contract: An agreement that is legally enforceable at the option of one side and not
the other. It refers to a contract that can be cancelled at the request of the person who was
aggrieved. Until it is ruled void by the party who was aggrieved, the contract in question will
stay in effect. Loss due to breach of contract may be sought through restitution or
compensation.
5. Illegal Agreement: If an agreement is not permitted by law, goes against public policy, is
criminal in character, or is immoral in nature, it is unlawful. Any collateral arrangement will
likewise be void because such agreements are void from the beginning.
6. Unenforceable Contract: If a contract's technical flaws, such as missing stamp requirements
or signatures, stop it from being executed. The moment the technical flaw is fixed, the
contract is valid.
 Valid
Agreement

Unenforceable Void
contract agreement

According to
Enforceability

Illegal
Void Contract
agreement

Voidable
Contract

 ACCORDING TO MODE OF FORMATION

1. Express Contract: An express contract is one that is made by spoken or written
language. It may appear in letters, phone calls, e-mails, etc.
2. Implied Contract: Contract made without express language is implied. It results from
the parties' actions and behaviour or their circumstances. For instance, 'A' dial a cab
number. If the cab arrives, an implied agreement to pay is present.
3. Quasi Contract: It is a contract that the law has imposed on the parties and creates
duties similar to those of a valid contract. E.g. A gives B (mad) some products. As B
is mad or lunatic he cannot contract but law can create a contract between A & B on
the principle of equity in which A can get money from B’s property

Express
Contract

Mode of
Formation

Quasi Implied
Contract Contract

 ACCORDING TO EXTENT OF EXECUTION

 1. Executed Contract: An executed contract is one in which all parties have fulfilled
their promises. For instance, X might pay Y 1 lakh for his car. X provides the vehicle,
and Y covers the cost. The contract has been executed.
2. Executory Contract: An executory contract is one in which the parties are still
required to fulfil their obligations.
3. Bilateral Contract: It is a situation where both parties make promises with respect to
one another. In exchange for the other party's promise to carry out an action, one
party agrees to execute an action in the future. Similar to an executory contract, it.
Each participant is a promisee and a promiseor.
4. Unilateral Contract: A contract in which one party promises to the other to do
something if he performs his desired work.
E.g. A promises to pay Rs.100 by advertisement to anyone who finds his lost horse.
Anyone can search his horse & bind A for payment. But A cannot bind any one to
search his horse.

Executed
Contract

Unilateral Extent of Executary

Contract Execution Contract

Bilateral
Contract

PROPOSAL & ACCEPTANCE

A proposal is an expression of interest by one party to enter into an agreement with another with the
intention of winning the other party's approval. "Proposer" or "offerer" refers to the person making the
proposal or offer. The individual making the proposal is referred to as the "promisor" and the person
accepting it is referred to as the "promisee" or "acceptor" upon acceptance.
According to Section 2(b), "The proposal is considered to be accepted when the person to whom the
proposal is made communicates his acceptance." It is a signal that he wants to be held to the
conditions of the offer.
Following are not proposals:

 Intention to put a proposal: - It is a person's declaration that they will provide something in
the future. It is not designed to win the other's approval. E.g. advertisement for auction sale or
sale of goods.
  Invitation to put a proposal: - It is designed to accept proposal from others. E.g. a restaurant's
menu card is a request for an offer. The timetable for the trains, roads, and airlines is a request
for entries.
CAPACITY TO CONTRACT
In according to Section 11, "Every person who is of the age of majority, who is of sound mind, and
who is not excluded from contracting by any law, is applicable to contracts."

Minor
s

CAPACITY
TO
CONTRACT
Persons Persons of
disqualified
from
Unsound
contracting. Mind

MINOR
Section 3 states that a minor is someone who has not reached the age of 18. However, in the following
circumstances, he reaches majority when he turns 21:

 When the Guardians & Wards Act of 1890 appointed guardians for a minor.
 When the court of wards has custody of a minor's property.
Law relating to minor’s agreements:

 A contract with a minor is void from the start.

 After achieving majority, ratification is not permitted because it involves approving an earlier
contract. Agreements entered into by minors are null and void from the start.
 Minor can be a beneficiary or can take benefit out of a contract. He cannot be required to give
up or lend his property.
 A minor has the option of claiming minority, which means that even if they commit a crime,
they are not legally accountable for it. For instance, A (minor) can falsely claim to be a major
and seek B for a loan of Rs. 1000. B lends the money, but A cannot claim for reimbursement.
 Parents or guardians may enter into contracts on behalf of minors, but they may not purchase
or sell real estate.
 Minors are not allowed to sign a partnership agreement, but they are allowed to share in the
profits.
 Minor can act as an agent and bind the principal without being held personally responsible.
  Apart from in cases when the minor acts as the parents' agent, the parents are not responsible
for the contracts that the minor enters into.
 A minor may write, accept, and endorse bills of exchange under the Negotiable Instruments
Act, but is free of responsibility if they are not honoured.
 Minor can be a shareholder for fully paid up shares.
 Minors are completely responsible for punishment for criminal acts.
 Even after reaching majority, a marriage contract signed by a minor is void.

PERSONS OF UNSOUND MIND

According to Section 12, a person has sound mind if:

 He is capable of understanding the contract at the time of making it.

 He is capable of making rational judgment i.e. effect of contract on his interests.
Following are the persons who are considered as persons of unsound mind under the act:

 Idiot: He is a person who no longer has the mental capacity to understand even ordinary
things. It is permanent.
 Lunatic: He is a person whose mental state has been impacted by stress or other shocks. It is
temporary and treatable. When lucid, he is able to make legal contracts.
 Person who is drunk or intoxicated.
 Hypnotized person.
 Mental decay: Due to old age or poor health, a person's mental capacity may have declined,
making them incapable of forming a legally binding contract.

PERSONS DISQUALIFIED BY LAW

The following persons are disqualified by law from entering into a contract:

 Foreign Ambassadors: In India, they are fully capable of contracting, but They cannot be sued
in our courts without the permission of the central government.
 Alien Enemy: It signifies a foreign citizen living in India. Contract with foreign friend is
enforceable with some limitations. A declared alien enemy (declaration of war) prevents the
alien from contracting.
 Companies: Company can only contract through his human agents. Company’s contractual
capacity is determined by “Object Clause” of its memorandum of association. Contract made
outside its scope is void.
 Married Women: She is able to sign contracts, but only her own property—Streedhan—can
be held accountable; her husband's property cannot. A husband is responsible for the contract
his wife established for the provision of necessities of life. She is, by necessity, acting as her
husband's agent in this situation.
 Convicts: Convicted parties cannot sign contracts while they are in custody. Can't file a
lawsuit against agreements reached before conviction. If he obtains a permit, i.e. He is
authorised to negotiate for a ticket of leave. After imprisonment, he can contract.
 Insolvent: Contracts cannot be entered into by a bankrupt person. His official receiver is
permitted to sign contracts, file lawsuits, and be sued on his behalf.

FREE CONSENT
According to Section 13, “When two or more persons agree on same thing in the same sense, they are
said to consent.”

Coericion

Undue
Mistake Influence
Consent
is free
if,

Misrepresntation Fraud

COERCION [Section 15]

 It refers to using physical force or threats of physical force to pressure someone into signing a
contract.
 E.g. Alia Slapped Bhim & dislocated some of his teeth & threatens to repeat the same if Bhim
does not lend him Rs. 30,000. The contract is caused by coercion.
Essential Elements:
1. Committing or threatening to commit any act forbidden by Indian Penal Code: - E.g.
murder, theft, physical compulsion.
2. Suicide threat is a form of coercion.
3. Illegally holding onto any property or threatening to hold onto any property.
4. The goal must be to force the other party into signing a contract. E.g. A beats B to
take revenge for his insult. This is not coercion.
5. Coercion may be from the party or from any other person/stranger.
Effects:
1. Contract becomes voidable, at the option of the party whose consent is taken by
coercion.
2. Restitution: The person who was harmed can recover the benefits.
UNDUE INFLUENCE [Section 16]
It is a form of moral pressure, when the relationship between the parties is such that one party
can control the other's will and exploit that control to their benefit.
Essential Elements:
1. There must be close relation between the parties.
2. One party should be in the position to dominate the will. It includes following situations:-
 
Real authority over the other like master & servant, doctor & patient.

When relation of trust & confidence exist between parties. E.g. Father 7 son, husband
& wife.
 Undue influence can be used against the person whose mental capacity is affected by
old age, illness etc.
3. Thee intention should be to take undue advantage.
4. Misuse of position to take advantage.
Effects:
1. Contract is voidable at the decision of the person that feels mistreated.
2. The aggrieved person receives their benefit back.
FRAUD [Section 17]
Fraud is defined as the deliberate misrepresentation or hiding of important information. The goal is to
fool (cheat) the other party and convince him to sign a contract.
It include the following acts:

 Suggestion of anything that is false, or something made by someone who doesn't think it's
true.
 A person who knows about a fact, still hiding it.
 Promise made without any intention of performing it.
 Such act which law declares to be fraudulent.
Essential Elements:
1. Fraud may be done by a party to the contract or his agent.
2. There must be representation which is false. E.g. ‘A’ intends to deceive ‘B’ & falsely
represents that the car which he offers for sale is imported but actually it is Indian.
3. False representation must be of material fact, not an opinion.
4. A promise made with intention to perform is a fraud.
5. The intention must be to induce the other party to act upon false representation.
6. The other party must have been relied upon the statement & must have been deceived &
suffered some loss.
Effects:
1. Aggrieved party has the right to rescind [declare invalid] the contract [voidable].
2. Sue for damages or loss suffered.
3. Benefit received is restored.
4. An angry party may demand performance and request to be placed in the same situation as
he would have been in if the representations were true.

MISREPRESENTATION [Section 18]

Misrepresentation is the term for any innocent or unintentional false statement of fact made by one
party to the other during contract negotiations.
It Includes:

 When someone positively states that something is true even though their information does not
support it.
  When someone violates their responsibility in a way that benefits them while harming the
other (without intending to cheat).
Essential Elements:
1. Misrepresentation must be of fact & not mere opinion.
2. The other party must be encouraged to enter into a contract.
3. Intention should not be to deceive the other party.
Effects:
1. Contract is voidable at the choice of the party who feels mistreated
2. An angry party may demand performance that would place him in the same situation as if the
claim made had been true.
3. Benefits may be restored.
4. Claim for damages except in following cases:
 When the party who feels cheated has the ability to learn the truth.
 If aggrieved party gave consent in ignorance of misrepresentation.
 If a party fails to cancel the agreement within a reasonable amount of time.
MISTAKE [Section 20, 21 & 22]
A mistake is a false assumption or misunderstanding of something. In most cases, a mistake doesn't
invalidate a contract. When both parties are in error, the agreement is void, as stated in Section 20.
Essential Elements:
1. Both parties can be a mistake [bilateral mistake].
2. Mistake can be of two types:
 Mistake of Fact: Mistake of fact relates to the contract's subject matter. It could be
either a bilateral or unilateral error.
 Mistake of law: If there is mistake of law, the contract is valid because everyone is
assumed to have knowledge of it. & ignorance of law is no excuse.
Effects:
1. According to Section 22, Contract is not voidable due to unilateral mistake of facts.
2. Agreement made on bilateral mistake is void.
3. Mistake as to foreign law is treated as a mistake of fact & is excusable.

LEGALITY OF OBJECT AND CONSIDERATION

 The term "object" is specifically used to refer to the agreements "purpose or design."
 Consideration is not the same as the object.
 Consideration refers to the gain or loss resulting from an agreement.
 According to Section 10, an agreement must be for a legal consideration and have a legal
purpose in order to be enforceable by law. Any agreement that has an illegal purpose or value
is void.
Unlawful Consideration or object:
Object or Consideration is considered as unlawful in following cases:
1. If the act is forbidden by law. E.g. X promised Y to pay Rs.3 lakh for murder of Z. It is
unlawful.
 2. If it breaches any legal requirements: The act may not be made illegal by the law. However, if
it is allowed, it will violate all legal requirements. E.g. P & Q married under Mohammedan
law but agreed before marriage that wife would be allowed to live with her parents after
marriage. This agreement is void because it defeats the provisions of Mohammedan law.
3. If it is Fraudulent [False] in nature.
4. If there is damage to another individual's property or person.
5. If the court considers it unethical. E.g. an agreement between husband and wife for future
separation is immoral.
6. If a court finds something to be against public policy, it means that no one can legally do
anything that might harm the welfare of the public. E.g. Agreement to sell seat in medical or
engineering college, agreement for getting votes in election for consideration, agreement to
get a public title like ‘Bharat Ratna’ for consideration.
7. Agreement that violates parental responsibilities and rights.
8. Contracts that limit individual freedom.
9. Contracts that prohibit marriage or conflict with a couple's obligations.
10. Contracts that lead to monopolies.
11. Agreements to not place a bid at an auction sale.

PERFORMANCE AND DISCHARGE OF CONTRACTS

Contract performance refers to the parties' compliance with the agreement's provisions within the
allotted time frame and in the specific way.
Mode of Performance: Performance may be in two ways:

Actual performance Attempted Performance

 By performing Promises
 When both parties have completed their
contractual responsibilities in the
manner and time specified.
 Offer or tender to perform
 Promisor offers to
 Perform his obligations under the
contract it is called tender. It is also
called attempted performance.
 When a promisor offers delivery of
goods to promisee, it is tender of goods.
An offer to make payment is called
tender of money.

Essentials of a Valid Tender/Offer [Section 38]

1. It must be unconditional.
2. It must be a full-performance offer.
3. It must be made at proper time & place.
4. The promisee should be given a fair chance to inspect and satisfy (applicable to tender of
goods).
5. It must be paid in legal tender money, It means current Indian currency notes or coins.
Discharge of Contracts
When the obligation established between the parties expires, a contract is discharged. There are
various ways to terminate contracts, including:
1. Discharge by performance of Promise
 The contract expires or is discharged when the parties keep their promises.
  It can be performed in two ways – by actual performance or by attempted
performance
2. Discharge by Mutual Agreement
Methods of discharge of an existing contract by a fresh agreement by mutual consent are:
 NOVATION: It means substitution of a new contract in place of the existing contract.
It may be done in two ways-
a) New contract with new terms with same parties.
b) New contract on same terms with one party same & one new party.
 ALTERATION: It means change in one or more terms of the contract with the
consent of all parties. A valid alteration discharges the original contract & a contract
with new terms is created.
 RESCISSION: It means cancellation of contract. Cancellation may be by mutual
agreement of both parties or by aggrieved [cheated] party if free consent is not given.
 REMISSION: It means acceptance of a lesser performance in discharge of a whole
promise made.
 WAIVER: It means intentional withdrawal of rights. Waiver is the act of releasing
one party who is entitled to performance from the other party's responsibility to
perform.
 MERGER: It means the combination of two or more rights into a single contract.
A merger of rights occurs when an existing party's inferior right combines with a new
superior right acquired by the same party. In such case, inferior right automatically
stands discharged. E.g. A person holding a property under a lease, buys the property
in his name. His rights as a lessee are merged into the rights of ownership.

3. Discharge by Lapse of time

 When time is fixed for the contract & a party does not perform it within that time, the
contract is discharged by lapse of time.

4. Discharge by Operation of law

The contract discharges by operation of law in following cases:
 Merger: Inferior right is discharged & not required to be enforced.
 Insolvency: When court declares insolvent, the person is discharged from all
obligations of any contract & they are transferred to his official receiver.
 Death: If contract involves use of personal skills of promisor then on his death the
contract is discharged. In other cases, the obligation is transferred to legal
representatives.
 If a contract's terms are materially modified without the other party's knowledge or
approval, the other party may terminate the agreement (voidable).
 If a contract's proof is lost, the agreement is void. E.g. document of contract is lost or
destroyed & there is no other evidence available.

5. Discharge by impossibility of performance

According to Section 56, when contract is impossible to perform, the contract is void.
Impossibility may be of two types:
a) Existing Impossibility: It refers to the impossibility at the time of agreement.
b) Subsequent or supervening Impossibility: The contract becomes void when the act
becomes impossible later on.

6. By breach of contract.
 It means non-fulfilment of the promise made by any of the parties to a contract. There are two
types of breach of contract:
a) Actual Breach: It takes place when a party to a contract refuses or fails to perform his
obligation when it is due.
Effects: Claim for damages & can sue in the court.
b) Anticipatory Breach: When a party disables himself or declares that it will not
perform the contract prior to the date of performance. It is also called anticipatory or
constructive breach of contract.
Effects: Promisee is excused from further performance and he can put an end to the
contract & sue other party for default. Alternatively, he may wait till the due date of
performance of contract & then avail legal remedies against other party.
REMEDIES FOR BREACH OF CONTRACT
e
R
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Ip
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jSsiQ
ti
fi
m
C ra
n
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RESCISSION OF THE CONTRACT

 Rescission is the legal term for ending a contract or cancelling it.

 The promisee may cancel the agreement if the promisor breaches it.
 When a contract is voidable or illegal, the court may grant revocation. In the following
situations, the court may reject rescission:
a. When the party who was cheated has approved the contract directly or indirectly.
b. When a scenario emerges due to a change in circumstances and neither party is at
fault, the parties cannot return to their previous positions.
c. When third parties have legally acquired rights throughout the term of the contract.
E.g. X fraudulent bought a diamond bracelet from Y & pledged it to P who kept it for
value & without any notice of fraud. Y cannot break the contract.
SUIT FOR DAMAGES
Four types of Damages:

 Ordinary or natural damages: It is the direct loss suffered by the aggrieved party.
 Special Damages: They include indirect loss suffered by aggrieved party. They arise due to
special circumstances. If special loss can be incurred on breach of contract, it should be
communicated to the other party, otherwise damages will not be given.
 Exemplary Damages: It involves very heavy amount. It happens in the following cases:
a. Breach of contract to marry: Amount will depend upon injury to person’s feeling &
their family reputation.
b. Dishonour of customer’s cheque by the bank without any proper reason. Amount will
depend upon loss to goodwill of customer.
 Nominal Damages: The amount is very small like Rs. 5 or 10. It is given when party has
proved breach of contract. It is given to recognize the right of party to claim damages.

QUANTUM MERUIT

 Quantum Meruit is equivalent to what is earned.

 In some circumstances, the party may request payment of the money he has earned. In
addition to the right to damages, this right is accessible.
 The claim for quantum meruit arises only when original contract is discharged.
 A party who is not in default can only claim for quantum meruit. Claim can be made only if
contract is divisible and express or implied evidence to pay for work is shown.

SPECIFIC PERFORMANCE OF CONTRACT

If monetary compensation is insufficient, the court may order particular fulfilment of the contract's
obligations.
The following situations allow for its use:

 When there is no accepted method for determining the true cost of non-performance.
 When it is unlikely that financial compensation will be available for non-performance.
When the court cannot supervise the performance, when damages are an acceptable remedy, when the
subject matter is non-existent, and when the contract contains confusing words, specific performance
will not be given.

SUIT FOR INJUNCTION

It refers to a court's order to a party to do or not do something specific. An injunction is a court order
that forbids a party from functioning in a certain way in a contract case.

Q. Anil a minor sold a shop to Bhim an adult. Anil got the consideration but the sale deed could not
be registered as he was a minor. Bhim filed a suit for specific performance of the agreement. Could
the amount be recovered of consideration?
A. The agreement being void, cannot be specifically performed. So the amount of consideration also
could not be recovered.
Q. A, a minor sold goods on credit to B, a major. Can A recover this amount from B?
A. Yes, A can recover the amount from B as A is a beneficiary in the agreement.

Q. Amit gives guarantee to Sumit for the payment of loan due from Karan, a minor. On the due date,
Karan fails to repay the loan. What will be the liability of Amit for the repayment of loan?
A. This is contract of guarantee. Hence Amit is the surety or guarantor. So Amit is liable to pay the
money.
UNIT 2
THE COMPANIES ACT 2013

The Companies Act

 The word ‘Company’ is derived from Latin word – Com Panis

 Com = “with or together” and “Panis = Bread”
 It originally referred to an association of persons who earned the meals.
 Definition:
 In terms of the Companies Act, 2013 a “company” means a company incorporated
under this Act or under any previous company law [section 2(68)]
 In common law, a company is a “legal person” or “legal entity”.

 The goal of Indian company law is to unify business procedures across the country.
 The outdated Companies Act of 1956 has been updated by the new Companies Act of 2013.
 All public and unlisted enterprises in the nation are governed by the complete provisions of
the Act.
 Numerous parts of the Companies Act of 2013 were added, while the comparable sections of
the Companies Act of 1956 were removed.
 Company is an artificial person with unlimited succession, a common seal, and a separate
legal status from its members.
 Shareholders are referred to as members and the capital of the company is divided into
transferable shares.
NATURE OF THE COMPANY

 CORPORATE PERSONALITY
 A company comes into existence after registration, it becomes body corporate under
the name used during registration.
 It has its own legal existence independent of its members.
 It can enter into contracts & sue & be sued by its members as well as outsider in his
own name.
 A common seal is mandated by law for every business. It has the company's name
carved on it.
 Therefore company is capable of:
 Owning property
 Incurring debts
 Borrowing money
 Have a bank account
 Employ people
 & enter into contract.
 COMPANY AS AN ARTIFICIAL PERSON
 Company is created by law.
 It has no physical body, no soul but it is not a fictitious person. It is a real person &
have same rights & powers like a person.
 It can purchase & sale property & enter into contract through his agents.
 COMPANY HAS NATIONALITY BUT IT IS NOT A CITIZEN
  A company has nationality of the country where it is registered.
 For communication purposes, the residence of the company is the place of its
registered office. For purpose of income tax Act, a company resides where its real
business is carried on.
 The company, is not a citizen under the Citizenship Act, 1995 or the constitution on
India.
 LIMITED LIABILITY
 In case of a company limited by shares, the liability of members is limited to nominal
value of share held by him.
 In a company limited by guarantee, the liability of member is limited to the amount
guaranteed by him.
 PERPETUAL SUCCESSION
 It never dies.
 It continues to exist and is unaffected by the members' illness, retirement, deaths, or
financial difficulties.
 TRANFERABLE SHARES
 The shares in public company are freely transferable subject to conditions given in
the articles.
 In private company, articles have to restrict this right to transfer shares.
 CONTRACTUAL RIGHTS
 A company, being a legal entity different from its members, can enter into contracts
for business in its own name.
 A company can sue & can be sued in its own name.
 LIMITATION OF ACTION
 A company cannot go beyond the power stated in its Memorandum of Association.
 The Memorandum of Association of the company regulates the powers & fixes the
objects of the company.
TYPES OF COMPANIES
I. MEMBERS
 One person company
 Private company
 Public Company
II. LIABILITY
 Company limited by shares
 Company limited by guarantee
 Unlimited Companies
III. SPECIAL COMPANIES
 Government Company
 Foreign Company
 Section B company
 Public Financial Institution
IV. CONTROL
 Holding Company
 Subsidiary company
 Associate Company

 ONE PERSON COMPANY

  One person company [OPC] means a company formed with only one (single) person
as a member, unlike the traditional manner of having at least two members.
 One person company is corporatization of sole proprietorship, so it has all benefits
will a corporate enjoys aside to this it has some relaxations
 Following are some of benefits of One person company:
 It has separate legal entity.
 The liability of shareholder / director is limited
 The organized version of OPC will open the avenues for more favourable
banking facilities.
 Legal status and social recognition for your business. It gives suppliers and
customers a sense of confidence in business.
 The director and shareholder can be same person.
 Exemption available from various provisions under Company law.
 PRIVATE COMPANY
 A private company is a firm that is privately owned.
 Private companies may issue stock and have shareholders, but their shares do not
trade on public exchanges and are not issued through an IPO.
 The high costs of an IPO is one reason companies choose to stay private.
 It has at least 2 & most extreme of 50 individuals.
 Must have a base paid up capital of Rs. 1 lakh or such a higher sum which may be
endorsed every now and then.
 PUBLIC COMPANY
 A public company – also called a publicly traded company – is a corporation whose
shareholders have a claim to part of the company’s assets and profits.
 Ownership of a public company is distributed among general public shareholders
through the free trade of shares of stock on stock exchanges or over-the-counter
[OTC] markets.
 In addition to its securities trading on public exchanges, a public company is also
required to disclose its financial and business information regularly to the public.
 COMPANY LIMITED BY SHARES
 A company limited by shares refer to a company which issues share to the public.
 The ownership of a company limited by shares includes the members of the general
public. Any person from the public can own a share in the company by buying
through the stock exchange.
 A company limited by shares should maintain transparency in its dealings, make
necessary disclosures of material events in all their filings before the stock exchange
and in their communications with the shareholders.
 Also, a listing is not mandatory on the exchanges. However, a company may choose
to list to provide liquidity to its shareholders and greater access to capital markets.
 COMPANY LIMITED BY GUARANTEE
 Company limited by guarantee is also termed as Guarantee Company.
 It is a company without any shareholders but it is owned by members called
guarantors who agrees to pay a nominal amount in the event of company’s being
wound up.
 Members will have protection for being held liable in their personal capacity for the
amount borrowed for business in the name of the company.
 Members of the company are only liable to pay only the guaranteed amount as
mentioned in memorandum of association of the company.
 Members are liable to pay only at the time of winding up of company.
 GOVERNMENT COMPANY
  Government Company is a company or an organization in which at least 51% of the
paid up share capital is held by the central government or the state government or
partly by both central and state government.
 A government company gets its funding from government shareholding and other
private shareholdings. The company can also raise money from the capital market.
 A government company is audited by the agency appointed by the Central
government. This agency is mainly Comptroller and Auditor General of India
(C&AG).
 FOREIGN COMPANY
 A foreign company in India is an entity that has been incorporated outside India, but
happens to perform business operations and activities in India. It has been accurately
defined under the Companies Act 2013.
 Under the Companies Act 2013, It defines a foreign company as any entity that has
been incorporated outside India and –
 Happens to have a place of business in India either physically, through any
other agent or via electronic / digital means.
 Business activities are conducted by the entity in any other manner.
 To be considered a Foreign Company in India, the entity must fulfil the above-
mentioned criteria completely.
 SECTION 8 COMPANY
 A section 8 company is a specific form of company which:
 Is incorporated for the promotion of commerce, art, science, education,
research, sports, charity, social welfare, religion, protection of environment
or any such other object.
 It intends to apply all its profits, income, or other earnings, in promoting
these objects.
 Pays no dividend or income to its members.
 These are limited companies, which are registered under the Companies Act, and will
be treated as limited companies without the phrase “limited” being added to their
name. They may have been registered either as “private limited or public limited
companies”.
 Section 8 companies are a legal form of “non-Profit Organizations (NPOs) or Non-
Governmental organizations (NGOs)”. A section 8 company has the authority to
work anywhere in the country.
 Being an NPO or Non-Profit Organization does not mean that the company cannot
make a profit or income. It only signifies that the company can earn income but the
promoters are not to benefit from those profits. The profits cannot be distributed
among the promoters. All incomes must be applied to promoting the object.
 Some of the advantages are:
 Tax benefits: For section 8 companies in India, many tax benefits are granted.
 Distinct Legal Identity: Section 8 company is a separate legal entity and is different
from its members. The company has perpetual existence. Along with having
organized operations and greater flexibility.
 No minimum capital requirement: 0 minimum capital limit has been mentioned for a
Section 8 company in India. This implies that it can be formed without any share
capital. The funds necessary for carrying the business operations can be brought,
later, in the form of donations and/or subscriptions from members and the general
public.

FORMATION OF A COMPANY

 The Formation of a company goes through a number of steps, starting from idea generation to
commencing of the business.
 The whole process can be broken down into 4 major phases or steps, they are as follows
1) Promotion stage
2) Registration stage
3) Incorporation stage
4) Commencement of Business stage
 Promotion Stage:
 Promotion is the first step in the formation of a company. In this phase, the idea of
starting a business is converted into reality with the help of promoters of the business
idea.
  In this stage the ideas are executed. The promotion stage consists of the following
steps:
o Identify the business opportunity and decide on the type of business that
needs to be done.
o Perform a feasibility study and determine the economic, technical and legal
aspect of executing the business.
o Interest shown by promoters towards the business idea and supply of capital
and other necessary procedures to start the business.
 Registration Stage:
 Registration stage is the second part of the formation process. In this stage, the
company gets registered, which brings the company into existence.
 A company is said to be in existence, if it is registered as per the Companies Act,
2013. In order to get a company registered, some documents need to be provided to
the Registrar of Companies.
 There are several steps involved in the registration phase, and are as follows:
o Memorandum of Association: A memorandum of association (MoA) must be
signed by the founders of the company. A minimum of 7 members are
required in case of a public company and 2 in case of a private company. The
MoA must be properly registered and stamped
o Article of Association: Article of Association (AoA) is also required to be
signed and submitted. All members who previously signed MoA, should also
be signing the AoA.
o The next step is preparing a list of directors which should be filed with the
Registrar of Companies.
o Directors of the company should provide a written consent agreeing to be
directors, should be filed with the Registrar of Companies (RoC).
o The notice of address of the office needs to be filed.
o A statutory declaration should be made by any advocate of either the High
Court or Supreme Court, or a person of the capacity of Director, Secretary or
Managing Director. This declaration shall be filed with the RoC.
 Incorporation Stage
 Certificate of incorporation is issued when the registrar is satisfied with the
documents provided.
 This certificate validates the establishment of the company in the records.
 Commencement of business Stage
 Certificate of commencement of business is required for a public company to start
doing business, while a private company can start business once it has received the
certificate of incorporation.
 Public companies receiving the certificate of incorporation can issue prospectus in
order to make the public subscribe to the share for raising capital. Once all the
minimum number of required shares have been subscribed, a letter should be sent to
the registrar along with a bank document stating the receiving of the money.
 The registrar will issue a certificate upon finding the provided documents
satisfactory. This certificate is known as certificate of commencement of business.
 The company can start business activities from the date of issue of the certificate and
the business shall be done as per rules laid down in the MoA (Memorandum of
Association).

MEMORANDUM OF ASSOCIATION & ARTICLES OF ASSOCIATION

Difference between Memorandum of Association and Article of Association

Basis Memorandum of Association Articles of Association

Objective Memorandum of association defines Articles of association are rules of

the object for which the company is
formed.
Position This is the main document of the
company and is subordinate to the
companies Act.
Relationship Memorandum of association defines
the relationship of the company with
outsiders.
Validity Acts beyond the memorandum are
invalid and cannot be ratified even by
a unanimous vote of the members.
Necessity Every company has to file a
memorandum of association.
Alteration Alteration of memorandum of
associate is quite difficult and in
many cases, approval of certain
statutory authority is required.
internal management of the company.
They indicate how the objectives of
the company are to be achieved.
This is a subsidiary documents and is
subordinate to both the memorandum
of Association and the Companies
Act.
Articles define the relationship of the
members and the company.
Acts which are beyond articles can be
ratified by the members, provided
they do not violate the memorandum.
It is not compulsory for a public
limited company to file articles of
adopt table A of the Companies Act.
Articles can be altered by passing a
special resolution by the members.

MEMORANDUM OF ASSOCIATION

 The Memorandum of Association or MOA of a company defines the constitution and the
scope of powers of the company. In simple words, the MOA is the foundation on which the
company is built. In this article, we will look at the laws and regulations that govern the
MOA.
 The MOA of a company contains the object for which the company is formed. It identifies the
scope of its operations and determines the boundaries it cannot cross.
 It is a public document according to Section 399 of the Companies Act, 2013. Hence, any
person who enters into a contract with the company is expected to have knowledge of the
MOA.
 It contains details about the powers and rights of the company.
 Under no circumstance can the company depart from the provisions specified in the
memorandum. If it does so, then it would be ultra vires the company and void.
NAME CLAUSE

 For a public limited company, the name of the company must have the word ‘Limited’ as the
last word
 For the private limited company, the name of the company must have the words ‘Private
Limited’ as the last words.
 This is not applicable to companies formed under Section 8 of the Act who must include one
of the following words, as applicable:
 Foundation
 Forum
 Association
  Federation
 Chambers
 Council
 Electoral Trust, etc.
REGISTERED OFFICE CLAUSE

 It must specify the State in which the registered office of the company will be situated.
 This helps to pinpoint the jurisdiction of the RoC. The company is required to share the same
with the RoC within thirty days from the company registration date.
OBJECT CLAUSE

 It must specify the objects for which the company is being incorporated.
 Further, if a company changes its activities which are not reflected in its name, then it can
change its name within six months of changing its activities.
 The company must comply with all name-change provisions.
LIABILTY CLAUSE

 It should specify the liability of the members of the company, whether limited or unlimited.
 For a company limited by shares – it should specify if the liability of its members is limited
to any unpaid amount on the shares that they hold.
 For a company limited by guarantee – it should specify the amount undertaken by each
member to contribute to: The assets of the company when it winds-up. This is provided that
he is a member of the company when it winds-up or the winding-up happens within one year
of him ceasing to be a member. In the latter case, the debts and liabilities considered would be
those contracted before he ceases to be a member.
CAPITAL CLAUSE
 This is valid only for companies having share capital.
 These companies must specify the amount of Authorized capital divided into shares of fixed
amounts.
 Further, it must state the names of each member and the number of shares against their
names.
ARTICLES OF ASSOCIATION

 The Articles of Association (AoA) is a document that defines the purpose of a company and
specifies the regulations for its operations. 
 The document outlines how tasks should be accomplished within an organization, including
the preparation and management of financial records, and the process of director
appointments.
 The articles of association (AoA) can be considered the “constitution of a company.” It
outlines the rules and regulations that stipulate a company’s internal affairs.
 The articles of association are also considered a user’s manual for an organization that states
the purpose of the organization and its strategies to accomplish its short-term and long-term
goals.
 Generally, the AoA includes a company’s legal name, address, purpose, equity capital,
organization of the company, financial provisions, and provisions regarding the shareholder
meetings.
 AoA includes the following:
 Provisions on the company name
 Purpose of the company
 Share capital
  Organization of the company
 Provisions on shareholder meetings

DIFFERENCE BETWEEN WINDING UP & DISSOLUTION

PARTICULARS WINDING-UP DISSOLUTION

Meaning Winding up means appointing a
liquidator to sell off the assets of the
company, divide the proceeds among
creditors, and file to the NCLT for
dissolution.
Process Winding up is one of the methods
through which the dissolution of a
company is carried on.
Existence of The legal entity of the company
company continues and exists at the
commencement and during the
winding-up process.
Continuation of A company can be
Business allowed to continue its
business during the winding-up
process if it is
required for the
beneficial winding up of
the company.
Moderator The liquidator carries out the process
of winding up.
Activities Included Filling of winding up resolution or
petition, the appointment of the
liquidator, receiving declarations,
preparation of reports, disclosures to
ROC, and filing for dissolution to the
NCLT.
Dissolution means to dissolve the
company completely. Any further
operations cannot be done in the
company name.
Dissolution is the end process/result
of winding up and getting the name
stuck off from the Register of
Companies.
The dissolution of the company
brings an end to its legal entity status
The company ceases to exist
upon its dissolution.
The NCLT passes the order of
dissolution.
Filing of resolutions, declarations,
and other required documents to the
NCLT to pass dissolution order.

WIND UP OF A COMPANY

 Winding Up is defined as the liquidation of the company in the Insolvency and Bankruptcy
Code, 2016.
 Wind up of a Company is a two-step process, first Insolvency Resolution Process takes place
and then liquidation of the company occurs. While the winding of the company is taking
place the corporate entity still exists however after dissolution, the existence of the corporate
entity is put to an end.
 A Winding Up petition can be submitted by the company itself, by its contributors, by a
Registrar, or by the Central or State Government.
 A company may still be running its business during the procedure for winding up of a
company in India if it instills that it will be beneficial for the winding-up process.
 The type of Wind up of the company is as follows:
 Compulsory winding up of Company
  Compulsory winding up of a Company could be a compulsory winding up as
enforced by the creditors of the company
 Voluntary winding up of Company
 Voluntary winding up of Company of private limited company procedure as
brought in by the corporate person.

DISSOLUTION OF COMPANY

The Dissolution of a company may take place in two ways.

 First in which the company is transferred to another company under the scheme of
reconstruction or amalgamation. In such a case, the transfer of the company will be
dissolved by an order of the Tribunal without it being wound up.
 In the second scenario, the company shall undergo a winding-up process where the assets of
the company shall be realized and proceeds shall be used to pay its liabilities. Once the debts
have been settled, the remaining amount, if any, shall be distributed amongst the
stakeholders, and Tribunal shall pass the order of dissolution of the company and strike its
name off the register of the Registrar of the Companies.

Cases Where Company Winding Up Is Used in India

In India, company winding up is the process of legally terminating a company. The legal
steps involved in winding up a company include filing a petition with the appropriate court,
appointing a liquidator, and distributing assets among shareholders. In most cases, the
company will be dissolved after all assets have been distributed.

Winding up a company can be helpful in resolving disputes between shareholders, protecting

the interests of creditors, and ensuring that company assets are used for the benefit of
shareholders rather than directors or other insiders.

There are several factors to consider when deciding whether to wind up a company. These
include the size and profitability of the business, the amount of debt and liabilities
outstanding, and whether any legal proceedings are pending against the company.

Winding up a company can be costly and time-consuming, but it is often necessary to protect
the interests of shareholders.

Cases Where the Dissolution of Company Is Used in India

In India, the Dissolution of Company is a legal process used to dissolve a company. This
process is used when it is no longer viable to continue the company and its activities. The
Dissolution of Company can be used in various situations, such as when the company is
insolvent, when the management cannot agree on a new direction for the company, or when
the company no longer meets the requirements of Indian law.

The Dissolution of Company can also be used as a way to settle disputes between
shareholders or members of the company. When this happens, the court will decide which
party should get what property belonging to the company.
STATUTORY MEETING

 Statutory meeting is the meeting of shareholders of a company.

 According to Section 165 of the companies’ act, every public limited by shareholder limited
by guarantee, having share capital must hold this meeting.
 This meeting is held once in the lifetime of a company.
 A private company need not hold this meeting.
 Objectives of Statutory meeting:
 To comply with the provision of section 165 of the Companies act 1956.
 To approve the statutory report.
 To inform the shareholders about the formation of company and made by the
company.
 To inform the shareholders about preliminary expenses made by promoters before
incorporation of company.
 To inform the shareholders of any contract entered into by the company.
 Appoint office bearers.

ANNUAL GENERAL MEETING

 An annual general meeting (AGM) is a yearly gathering of a company's interested

shareholders. At an AGM, the directors of the company present an annual report containing
information for shareholders about the company's performance and strategy.
 Shareholders with voting rights vote on current issues, such as appointments to the company's
board of directors, executive compensation, dividend payments, and the selection of auditors.
 An annual general meeting (AGM) is the yearly gathering of a company's interested
shareholders.
 At an annual general meeting (AGM), directors of the company present the company's
financial performance and shareholders vote on the issues at hand.
  Shareholders who do not attend the meeting in person may usually vote by proxy, which can
be done online or by mail.
 At an AGM, there is often a time set aside for shareholders to ask questions to the directors of
the company.
 Activist shareholders may use an AGM as an opportunity to express their concerns.
EXTRAORDINARY GENERAL MEETING

 All general meetings of a company other than the statutory and annual meeting are called
‘extraordinary meetings’.
 Extraordinary general meeting is a meeting which is held between two annual general
meetings. These meetings are called in emergencies or on special occasions.
 This meeting is called to discuss some urgent special business which cannot be postponed till
the next annual general meeting.
What business are transacted in Extra-ordinary general meeting [EGM]?

 As per the Companies Act, 2013 there is no list of business which can be passed by EGM.
However, an EGM might be called to deal with any of the following:
 Matter on whom approval of members is/are required.
 Removal of Director
 Removal of Auditor
 Related party transactions
 Any matter that can’t wait until the next shareholders meeting