Business law

June 2022 Exams

Question 1:
Answer 1:
Introduction:
With increasing market size and globalization, most firms are now planning to expand their
business to different levels. They want to reach the maximum number of customers not only
at the national level but internationally they want to capture the market. Moreover, with the
growing start-up boom in India and with the help of digitalization many new ventures are
introducing themselves in the market. In both cases, funds play an important role in the
successful establishment of a business or expansion to the next levels. Hence, raising funds
for business becomes quite challenging sometimes, especially if the organization has
recently launched. Hence, an organization can raise funds under the Companies Act, 2013.
As per the Companies Act, 2013 companies can opt for investment by issuing financial
instruments such as shares, debentures, and hybrid instruments.
Concept and Application:
Under the Companies Act, 2013 an organization can go for fundraising by allotting shares/
equity to investors or by taking debt from banking / non-banking institutions. The part of
shares/ equity given by the company owner is also termed as securities. An investor may get
interested in investing in a particular business depends on the amount of security holding he
is getting. These instruments through which a business entity raises the funds are discussed
below:
Share Capital: The interest of shareholders in the company is considered as a Share. This
particular interest of a shareholder is equivalent to the amount of money invested by him or
her, and the company is liable for the same. A shareholder possesses rights in authority and
also can gain profits and assets of the company. So the sum of the amount which a company
raises by issuing its share is the share capital. The share is the fraction part of the share
capital of the company. And it can be transferred from one to another. As mentioned in
Section 43 of the Companies Act 2013, the share capital is divided into two i.e., Equity
Shares and Preference Shares, which are described below:
a) Equity Shares: Equity shares are generally referred to as the amount of money invested by
the shareholder or owner of the company. It also denotes the amount of money returned to
the shareholder or equity holder in case all company assets are liquidated and debts are paid.
Equity shares also allow the owner or equity holder a right to vote while decision-making in
the organization. Moreover, as the company makes progress and profits are generated,
dividends are paid out based on the number of equity shares, but they will be considered
after the dividend payout of preferred shares.
• Equity shares with rights voting rights are those which provide voting rights to its holders.
• The equity shares with Differential Voting Rights (DVRs) are shares with voting rights the
same as ordinary shares, but with differential rights.
• Employee Stock Options (ESOPs) are the shares for employees at pre-defined rates.
• Sweat Equity Shares are the stocks issued by an organization as a reward to its employee.

b) Preference Share: The preference shares are those for which dividend payments will be
released first then the dividend of ordinary stocks will be paid out, in case the company
decides to wind up its business. However, there are no rights for voting for a stockholder of
Preference shares. Moreover, the amount to be paid to these shareholders is fixed, but in the
case of ordinary shares, the amount fluctuates according to the profit made by the company.
There are different types of preference shares, which are mentioned below:

• Cumulative and Non-Cumulative Preference Shares: The shares in which dividend is

paid out to stockholder as per company’s profit and if any previous year’s dividend is
pending then that will be also be added, such kind of shares are called as cumulative
preference share.
The Non-cumulative are those preference shares whose dividends are paid off, but in case
the previous dividends are not paid then they won’t be carried forward for payment.
• Participating and Non-Participating Preference Shares: The shares which allow
shareholders with the right to receive dividends in the amount of the generally established
preferred dividend rate, plus an additional payout provided certain conditions are met are
Participating Preference Shares. This extra payout is usually only paid out if the total
amount of dividends received by common shareholders exceeds a predetermined per-share
amount. Participating preferred shareholders may have the right to be paid back the
purchase price of the stock as well as a pro-rata share of the residual proceeds earned by
common shareholders if the firm is liquidated. The Non-participating preference shares are
those which do not allow surplus profits to be paid to their shareholders.
• Redeemable and Irredeemable Preference Shares: The shares which allow their
shareholder the facility of redeeming the shares after a certain period then are considered
redeemable preference shares. For this companies are eligible to issue redeemable shares
under the Companies Act, 2013 Section 55, if the AoA of the company allows doing so.
The Irredeemable shares are those which does have the allowance to be redeemed.

Debentures: A debenture is an unsecured bond or other debt instruments such as a stock

with no security claims. Because debentures lack collateral, they must rely on the issuer's
trustworthiness and reputation for support. Debentures are regularly issued by enterprises
and governments to raise cash or funds. Since debentures are a form of debt, hence while
settling the payments, debentures are paid off first then the other shareholders are
considered. Since an agreement is made if a company borrows money from a financing
institute or other entity, hence it is a legal commitment between the borrower and lender for
a fixed duration of time. However, in the debenture, there is no voting right and profits
share for the lender, but they can be paid interest as per their agreement. There are different
types of debentures which are described below:
 Convertible Debentures: The debentures which can be converted into equity shares are
known as convertible debentures. This conversion can be done after a certain period as
mentioned in the agreements.

Non-Convertible Debentures: The general debentures which are only loan borrowings
from an investor, but cannot be converted into equity shares are known as non-convertible
debentures. However, to keep the investors keen on the business, these borrowings are done
based on higher interest rates.

Redeemable Debentures: The debentures which can be redeemed as mentioned by the

issuing company in the agreement are considered redeemable debentures. Hence the
borrowing company is bound to pay the amount to the investor as per the date mentioned in
the agreement.

Irredeemable Debentures: The debentures which do not have any fixed date mentioned
for redemption in their agreements are known as irredeemable debentures. These types of
debentures are considered for a long time and can be redeemed only when the company
goes for wind up.

Conclusion: As from the above discussion, we can conclude that fundraising is an

important aspect of the growth and expansion of any business. With the Companies Act
2013, a business entity has a provision for money borrowings in various forms which can be
finalized between the borrower and lender.

Question 2:

Answer 2:

Introduction:
The Indian Constitution is the basis of individual rights and liberties, as well as the basic
framework within which all Indian legislation, including labour and employment
regulations, operates. The right to livelihood is recognized by the Constitution as an
important aspect of the fundamental right to life. Hence separate laws have been defined for
employees and conservation of their rights. These laws protect basic rights for an employee
such as better working conditions, monetary benefits, insurance, compensation, promotions,
remuneration, working hours, and, social security. Some of the laws are described below for
employee welfare.
 Concept and Application:

1. Factories Act, 1948:

The Factories Act 1948, was incorporated to protect the rights of the workers. This law was
introduced on 1 April 1949, wherein certain provisions were imposed on employers because
the workers should be provided a suitable working environment and their health and safety
must be in priority. According to this law, the working hours should be 48 hours per week
only, not more than that.

2. Employees Provident Fund Act, 1952:

The Employee Provident Fund Act, 1952 is to protect the employee’s welfare by providing
a contributory fund, pension funds, and insurance fund which can be claimed when required
especially in case of medical emergencies. Under this law, the corporate firms and
companies under government monitoring are supposed to contribute a fraction of the
amount monthly or yearly in an employee’s EPF account.

3. Maternity Act, 1961:

The Maternity Act, of 1961 is mandatory regulation that allows pregnant women to take
leave during the pregnancy and post the childbirth. These leaves are paid leave and even
work from home is also an addition to this act. Any woman who has been working in the
organization for more than 80 days continuously is entitled to take maternity leaves. This
law also protects the employment of women and secures their job continuity post-
pregnancy, encouraging women for their work along with catering to their personal aspects.

4. Payment of Gratuity Act, 1972:

The Payment of Gratuity Act, 1972 is the law that protects the social security of employees,
and companies may follow regulations for gratuity payments according to the approved
tenure of service of employees. The employee who has completed more than five years or
more in their term of service continuously is entitled to be paid a gratuity amount. This is a
benefit that is paid by an employer to employees post-retirement or in case of death.
5. Employees Compensation Act, 1923:
The Employees Compensation Act, 1923 is the act that ensures the security of employees.
This law was earlier term as the Workman’s Compensation Act, 1923 which was renamed
after amendments. This law provides social security for employees and provides the
regulations which ensure if an employee faces any accidents while working, then the
employer is bound to bear the expenses and compensate the employee with a suitable
amount. This act also comprises financial protection of family members or dependents of
the employee who dies in an accident at the factory.
 The incidents in past social security Laws have protected the rights of employees

1. Manisha Priyadarshini Vs Aurobindo College - Evening & Orgs.

Delhi High Court fined a College of Rs.50,000 due to the termination of an ad-hoc Assistant
professor after applying for maternity leave. In this case, the applicant was working as an
ad-hoc assistant professor in the college. According to Maternity Act, 1961 she requested
maternity leave which the college denied stating that she is not a permanent employee to
utilize such facilities. However, post her pre-mature delivery when she resumed her
services but college informed her that she has been terminated from the college. Hence,
after hearing the entire case, the Court gave a favouring jurisdiction to the lady, considering
the Maternity Act, 1961. Moreover, the court added that such an act of college is
discriminatory and bars a woman from her job because she opts for becoming a mother
which is her rightful choice. The court directed to college to reinstate the professor within
one week and also cost of Rs.50,000 was imposed on the university for dismissing the
assistant professor while she was on maternity leave.

2. The Oriental Fire and General Insurance Company Vs Nani Bala (AIR 1988 Gau.40)
A driver named Tarini was deceased after a road accident while driving a truck that was
owned by the opponent Mr. Ghewar Chand Jain of the Oriental Fire. The truck was insured
by the owner as per the Motor Vehicles Act, 1939. The widow of the driver appealed to the
Commissioner for compensation for the accidental demise of her husband and as per the
Employee Compensation Act, 1923, ordered both owner and insurance company to pay the
compensation as per schedule-IV of Employee Compensation Act, 1923. However, the
insurance company being resentful appealed against the compensation payment. The
Gauhati High Court on hearing both sides stated that according to Motor Vehicles Act, 1939
the truck was insured, and hence the insurer is bound to remunerate. Since this is an
employee accidental case which is considered under the Employee Compensation Act, 1923
the losses are supposed to be indemnified that can be done by “any person” nominated by
the employer which also covers an insurer as well. Thus, the court secured the rights of the
petitioner and gave jurisdiction in favour of Nani Bala, widow of late Tarini, by giving her
rightful compensation.

Conclusion:
Thus, from above the discussed examples, it can be understood that the laws and rights are
very well established to protect the rights and secure the well-being of employees. Hence, it
is recommended to keep a check on the laws and regulations for an employee secured by the
Indian Constitution and Jurisdiction. This will help to understand if one is being provided
the facilities or not as per the set regulations.
Question 3:
Answer 3 (a):
Introduction:
A partnership stands for two or more persons coming together and working together to
achieve a certain goal. In terms of business, this can be a legal agreement between two or
more persons who come together keeping a goal to start a business. Hence according to
Section 4 of the Indian Partnership Act, 1932 a partnership can be defined as “ the relation
between persons who have agreed to share the profits of a business carried on by all or any
one of them acting for all”. Hence it is based on the legal contract which consists of various
mutually agreed terms and conditions. The agreed terms could be based on sharing of
liabilities and profits in an agreed ratio. There could be instances in a partnership firm that
could lead to disputes. These disputes could be because of the underperformance of one
partner, secret profits, conflicts in opinions or interests, etc.
Concept and Application:
There could be any reason for disputes, but the major concern is to resolve the disputes in
the interest of business and partners. It is better for resolving such disputes without opting
for the civil court system which involves litigation and trials. Hence, below are some
methods that can be used for sorting the conflicts between the partners.
Arbitration: This method has been widely used for resolving conflicts in businesses where
a third person is appointed from outside the business and is neutral towards the partners.
This process took place out of the court. The arbitration process can be conducted by a
single person or by a panel of three arbitrators. An arbitrator will be making decisions based
on the trials of both parties. All the required documents such as agreement, company
details, etc are cross-examined at the time of the hearing. The parties can agree to the
decision made by the arbitrator or even suggest their own process. This process is simple
and cost-effective.
Negotiation: The simplest way to resolve any dispute is to negotiate the terms and come to
a settlement. Negotiation is one of the best ways to iron out the disagreement between the
partners. Negotiation can be done directly in person from one party to another or it can be
done taking the help of counsel/ attorney to negotiate on your behalf. Negotiation by
keeping the discussion clear and calm so that both parties can come to a common ground for
settlement.

Mediation: In the mediation process an impartial third-party person is appointed for

communication between the parties. A mediator promotes smooth communication and
encourages reconciliation so that both parties may agree and can come to a common ground
of mutual agreement. The major target of the mediator is to attempt a fair discussion among
the parties and resolve the disputes through healthy communication. However, a mediator
does not impose his or her decision on any of the parties. This is also a cost-effective way to
resolve the dispute.
 Conclusion:
Hence, from above discussed are the best ways to settle the disagreements and disputes
among the partners. These methods are very commonly used to resolve daily business
issues. Using these methods will save time in trials and hearings, also it will be cost-
effective for both parties.

Answer 3(b):
Introduction:
Agreements and disagreements are common in a business firm could be for changes in the
policy of the company or the addition of new members to the firm. Sometimes such
disagreements grow further into conflicts and disputes. However, such disputes can be sorted
out by healthy communication or reconciliation, since disputes if not resolved could harm
business growth and hamper profit earnings of the company. The ADR methods (Alternate
Dispute Resolution) are the best ways to resolve any dispute without going to court for trials.
These methods are Negotiation, Mediation, and Arbitration.
Concept and Application:
Since going to court for settlement is long, time taking, stressful, and could be high on
mentor terms. It is mostly recommended to resolve conflicts outside court using methods of
mediation, negotiation, and arbitration. The advantages of these methods are listed below:
• Less Time taking: Since the settlement discussion by the third-party person or panel
they take less time for providing the solution. As courts are already occupied with
various cases, they may take time to provide the solution in case of business disputes.
• Cost-Effective: A long-running case in court might cause a financial burden.
However, the ADR processes are less expensive as compared to court trials.
• Maintain the Privacy: Since court trials involve data to be accessible to the public as
well, hence in court hearings there are chances of company data to be released
publicly which can hamper the reputation and privacy of the company. However, in
the ADR no data is transferred in any of the methods such as arbitration or mediation.
The claims settled or rewards are kept in secrecy which is beneficial for both parties.
• Procedure Flexibility: The courtrooms have a fixed way of operating and
implementing the regulations. However, ADR procedures can be adjusted as per the
requirements of both parties and allow them to resolve the issue in a convenient
manner.
• Impartial: ADR methods are impartial and after hearing from both parties they
convey their opinion. The mediator or arbitrator discusses the best way of settlement
with both parties and then only shares his or her suggestion for resolving the matter.

Conclusion:
Thus, from the above-discussed advantages, it can be concluded that ADR is the best
suitable way for Gavit and Vinayak to resolve the difference and come to a settlement
that can be agreed upon by both of them. Moreover, these methods are less time-
consuming so they can expect a quick solution to their problems, which will be cost-
effective and secured in terms of privacy.