Assignment- 1

Sub : Legal Environment of Business (CP-402)

MBA EXECUTIVE JMI

Name : Nehal Usmani

Roll No : 18MBE041

Q1. What are the Negotiable instruments according to negotiable instruments Act 1881?
Discuss the importance of negotiable instruments in the Governance of business
environment with the help of decided cases / illustrations.

Ans.

Negotiable Instrument:

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 so 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.

TYPES OF NEGOTIABLE INSTRUMENT:

Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory
note, bill of exchange or a cheque payable either to order or to bearer.

Negotiable instruments recognised by statute are:

(i) Promissory notes (ii) Bills of exchange (iii) Cheques.

Negotiable instruments recognised by usage or custom are:

(i) Hundis (ii) Share warrants (iii) Dividend warrants (iv) Bankers draft (v) Circular notes (vi)
Bearer debentures (vii) Debentures of Bombay Port Trust (viii) Railway receipts (ix) Delivery
orders.
This list of negotiable instrument is not a closed chapter. With the growth of commerce, new
kinds of securities may claim recognition as negotiable instruments. The courts in India usually
follow the practice of English courts in according the character of negotiability to other
instruments.

Negotiable instruments recognised by statute are:

Promissory notes:

Section 4 of the Act defines, “A promissory note is an instrument in writing (note being a bank-
note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a
certain sum of money to or to the order of a certain person, or to the bearer of the instruments.”

Essential elements:

An instrument to be a promissory note must possess the following elements:

i. It must be in writing: A mere verbal promise to pay is not a promissory note. The
method of writing (either in ink or pencil or printing, etc.) is unimportant, but it must be
in any form that cannot be altered easily.
ii. It must certainly an express promise or clear understanding to pay: There must be an
express undertaking to pay. A mere acknowledgment is not enough. The following are
not promissory notes as there is no promise to pay.

a. If A writes:
b. “Mr. B, I owe you Rs. 500”.
c. “I am liable to pay you Rs. 500”.
d. “I have taken from you Rs. 100, whenever you ask for it have to pay” .
e. The following will be taken as promissory notes because there is an express
promise to pay:

f. If A writes:
g. “I promise to pay B or order Rs. 500”.
h. “I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand, for
the value received”.
iii. Promise to pay must be unconditional: A conditional undertaking destroys the
negotiable character of an otherwise negotiable instrument. Therefore, the promise to pay
must not depend upon the happening of some outside contingency or event. It must be
payable absolutely.
iv. It should be signed by the maker: The person who promise to pay must sign the
instrument even though it might have 9 been written by the promisor himself. There are
no restrictions regarding the form or place of signatures in the instrument. It may be in
any part of the instrument. It may be in pencil or ink, a thumb mark or initials. The
 pronote can be signed by the authorised agent of the maker, but the agent must expressly
state as to on whose behalf he is signing, otherwise he himself may be held liable as a
maker. The only legal requirement is that it should indicate with certainty the identity of
the person and his intention to be bound by the terms of the agreement.
v. The maker must be certain: The note self must show clearly who is the person agreeing
to undertake the liability to pay the amount. In case a person signs in an assumed name,
he is liable as a maker because a maker is taken as certain if from his description
sufficient indication follows about his identity. In case two or more persons promise to
pay, they may bind themselves jointly or jointly and severally, but their liability cannot
be in the alternative.
vi. The payee must be certain: The instrument must point out with certainty the person to
whom the promise has been made. The payee may be ascertained by name or by
designation. A note payable to the maker himself is not pronate unless it is indorsed by
him. In case, there is a mistake in the name of the payee or his designation; the note is
valid, if the payee can be ascertained by evidence. Even where the name of a dead person
is entered as payee in ignorance of his death, his legal representative can enforce
payment.
vii. The promise should be to pay money and money only: Money means legal tender
money and not old and rare coins. 10 A promise to deliver paddy either in the alternative
or in addition to money does not constitute a promissory note.
viii. The amount should be certain: One of the important characteristics of a promissory
note is certainty—not only regarding the person to whom or by whom payment is to be
made but also regarding the amount. However, paragraph 3 of Section 5 provides that the
sum does not become indefinite merely because
a) there is a promise to pay amount with interest at a specified rate.
b) the amount is to be paid at an indicated rate of exchange.
c) the amount is payable by installments with a condition that the whole balance shall
fall due for payment on a default being committed in the payment of anyone
installment.
ix. Other formalities: The other formalities regarding number, place, date, consideration
etc. though usually found given in the promissory notes but are not essential in law. The
date of instrument is not material unless the amount is made payable at a certain time
after date. Even in such a case, omission of date does not invalidate the instrument and
the date of execution can be independently ascertained and proved. On demand (or six
month after date) I promise to pay Peter or order the sum of rupees one thousand with
interest at 8 per cent per annum until payment.
Bill of exchange:

Section 5 of the Act defines, “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”. A bill of
exchange, therefore, is a written acknowledgement of the debt, written by the creditor and
accepted by the debtor. There are usually three parties to a bill of exchange drawer, acceptor or
drawee and payee. Drawer himself may be the payee.

Cheques:

Section 6 of the Act defines “A cheque is a bill of exchange drawn on a specified banker, and
not expressed to be payable otherwise than on demand”. A cheque is bill of exchange with two
more qualifications, namely, (i) it is always drawn on a specified banker, and (ii) it is always
payable on demand. Consequently, all cheque are bill of exchange, but all bills are not cheque. A
cheque must satisfy all the requirements of a bill of exchange; that is, it must be signed by the
drawer, and must contain an unconditional order on a specified banker to pay a certain sum of
money to or to the order of a certain person or to the bearer of the cheque. It does not require
acceptance.

the Negotiable Instruments Act. It is also open to the parties to expressly exclude the
applicability of any custom relating to hundis by agreement (lndur Chandra vs. Lachhmi Bibi, 7
B.I.R. 682).

Classification of Negotiable Instruments:

The Following Classification of Negotiable Instruments are:

Inland Instrument:

A promissory note, bill of exchange or cheque which is 1) both drawn or made in India and made
payable in India, or 2) drawn upon any person resident in India, is deemed to be an inland
instrument. A bill of exchange drawn upon a resident in India is an inland bill irrespective of the
place where it was drawn.

Foreign Instrument:

An instrument, which is not an inland instrument, is deemed to be a foreign instrument. Foreign

bills must be protested for dishonor if such protest is required by the law of the place where they
are drawn. But protest in case of inland bills is optional.
Instruments payable on demand: 

A cheque is always payable on demand and it cannot be expressed to be payable otherwise than
on demand. A promissory note or bill of exchange is payable on demand:

 When no time for payment is specified in it.

 When it is expressed to be payable ‘on demand’, or ‘at sight’ or ‘on presentment’. The
words ‘on demand’ is usually in a promissory note, the words ‘at sight’ are in a bill of
exchange.

Ambiguous Instrument: 

When an instrument owing to its faulty drafting may be interpreted either as a promissory note or
a bill of exchange, it is called an ambiguous instrument. Its holder has to elect once for all
whether he wants to treat it an as a promissory note or a bill of exchange. Once he does so he
must abide by his election.

Forged Instrument: 

An instrument is a forged when it is drawn, made or alternated in writing to prejudice another

man’s rights. The most common form of forgery is signing another person’s signature, signing
the name of the fictitious or none existing person. Fraudulently writing the name of an existing
person is also the forgery. 

Forgery is a nullity and, therefore, it passes no title. No holder of a forged instrument acquires
any right on the instruments. Even a holder in due course gets no title if he comes into the
possession of a forged instrument. A person has to pay money on a forged instrument by
mistake, can recover it from the person to whom he has paid for it.

Bearer And Order Instruments: 

An instrument is a bearer instrument when the amount payable thereon is payable to the bearer
and him as a holder and in lawful possession, thereof is entitled to enforce payment due on it.
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.

The following points can grasp as 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.

Below is one of the remarkable NI act case to review and discuss the objetives abd
importance of the negotiable instrument act 1881.

K.BhaskaranVs.SankaranVaidhyanBalan and Anr

Case synopsis : Dishonor of the checque due to insuffiecient amount in the account of
accused

This is the case of 2 brothers K. Bhaskaran (Petitioner) and Shankarran Vaidyan Balan
(Respondent) fighthing over a dishonoured cheque.

The respondent presented a cheque with appellant signature at syndicate bank Kayam-Kulam
branch.

The bank bounced the cheque due to in sufficiency of amount in the account of the accused.

The complainant issued a notice by registered post to accused date on Feb-02-1993, which was
returned back to him on 15th February 1993 stated that absence of accused on 3rd , 4th , and 5th of
February.
A complaint was filed by complainant under NI act before court of Judicial Magistrate at Adoor
district under section 138 Act

Accused raised the following condition :

a) Territorial jurisdiction of the court as the cheque was dishonored at the other districts
bank .
b) Accused denied having issued cheque, He owned that it was his own signature and said
that the complainant snatched away few signed cheques and entered the amount.
c) He did not receive any notice from the complainant regarding dishonored of the cheque,
Hence no cause of action.

The Magistrate upheld the contention that his court has no jurisdiction, since the cheque was
dishonored by bank which is located at different district.

Magistrate further held as the respondent did not receive any notice , No cause of action has
arisen and hence Magistrate acquitted the accused.

The complainant went to high court with set aside the acquitted and convicted the appellant
saying that the geographical location of the bank cannot be the soul criteria to determine the
place of offense. It is difficult to fix the place of offense and depends on the number of factors, if
can either be:

 Where the payee resides

 Where the drawer resides.
 Place where either of the carried out the business.

The offense under section 138 can be completed only with concatenation of a number of acts the
acts which are components of said offense of the cheque.

 Drawing of the cheque.

 Presentation of cheque to the bank.
 Returning the cheque unpaid by drawer bank.
 Giving notice in writing to the drawer of the cheque demanding pay of cheque amount.
 Failure of the drawer to make payment within 15days of receiving of the notice.

Thus is is clear , if the different act were done in 5 different locations , any one of the court
exercising jurisdiction in one of the 5 local areas can become the place of trial for the offense
under section 138 of the act.

The high court finally imposed the sentence imprisonment for 6 months and a fine of Rs. 1 lakh
on the accused.
Q2. Discuss the salient features of Indian compay Act 1956. And its Ammendment in the
year of 2013 and the companies (Amendment) bill 2019/2020. Draw a complete outline with
suitable case.

Ans.

Most Important Features of a Company (Indian Companies Act, 1956)

 Incorporated Association:
Company is an incorporated association of persons created by the law of the country. In
India companies are formed and registered under the Companies Act 1956. Incorporation
of a company requires registration of formal documents with the Registrar of Companies.
Memorandum of Association is the important document which contains the fundamental
conditions and purposes for which a company is formed. In fact, a company does not
have its existence beyond its memorandum of association. The other important document
is the Articles of Association which lay down the rules and regulations for governance of
the company.
The ‘Registration Certificate’ or the ‘Certificate of Incorporation, grants a legal entity to
a company enabling it to discharge functions such as entering into contract, purchasing,
owning and holding of properties. A company may be held liable for breach of law. It can
sue and be sued in its name.

 Independent Legal Entity:

A company has a legal entity distinct and separate from its constituent members
(shareholders). It is an autonomous body, self-controlling and self-governing. It can hold
and deal with any type of property of which it is the owner, in any way it likes. It can
enter into contracts, open a bank account in its own name, sue and be sued by its
members as well as outsiders
A company can enter into partnership with one or more individuals or another company.
It can buy shares or debentures of another company. A company can form other
companies by subscribing to their Memorandum of Association
A company can be held liable for criminal acts. It can be held liable for breach of law and
can be made to pay fine. However, no imprisonment of a company is possible. It can be
charged with conspiracy to defraud or may be convicted of making use of false
documents with intent to deceive. It can also be held liable for torts committed by its
employees in the course of their employment.

 Separate Property:
The corporate property is clearly distinguished from the members’ property and members
have no direct proprietary rights to the company’s property but merely their ‘shares’.
 Change in the constitution of the company’s membership will not cause any realization or
slitting of its property.

Company cannot be the property of the person who owns all the shares in the company,
nor can it be considered to be his agent. No member can either individually or jointly
claim any ownership rights in the assets of company during its existence or on its
winding up.

“No shareholder has any right to any item of property owned by the company, for he has
no legal or equitable interests therein.” A member cannot have any insurable interest in
the property of the company.

 Perpetual Existence:
A company has a perpetual, succession. It has no allotted span of life. The mode of
incorporation and dissolution of a company and the right of the members to transfer
shares freely guarantee the continuity of the existence of the company quite independent
of the life of the members. The existence of a company can be terminated only by law.

Being an artificial person, it cannot die irrespective of the fact that its members, even the
founders or subscribers to the Memorandum, may die or go out of it. Moreover, in spite
of the changes in the membership of the company, it can perform its contracts and enter
into future agreements. Thus, members may come and go but the company can go on
forever.

 Common Seal:
Though a company has an artificial personality, it acts through human beings, who are
called as directors. They act as agents to the company but not to its members. All the acts
of the company are authorized by its “common seal”. The “common seal” is the official
signature of the company. A document not bearing the common seal of the company will
not be binding on the company.

 Separation of Ownership and Management:

A company is owned (de facto) by a number of shareholders which is too large a body to
manage the affairs of the company. Shareholders set the objectives of the company and
appoint their representatives or agents (known as directors) to manage the affairs of the
company on their behalf to pursue their objectives.

The directors, in turn, hire professional managers (executives) to run the day-to-day
operations of the company under their supervision and control. This striking feature of
separation of ownership and management has raised many issues which give rise to
evolution of corporate governance as the focal point of modern corporations.
  Limited Liability:
The liability of shareholders of a company is different from the liability of the company.
Shareholders generally have limited liability- limited to the extent of unpaid value of
shares held up. Shareholders have no obligation to the company once they have paid full
amount on the shares held by them. In cases of losses, shareholders are not called upon to
make good the losses.

Creditors cannot claim from the personal wealth of the shareholders. In the case of a
guarantee company, the members are liable to contribute a specified agreed sum to the
assets of the company in the event of the company being wound up.

 Transferability of Shares:
One can sell one’s share of ownership rights to an interested buyer as the shares of a
company are transferable. While in case of public companies shares are freely
transferable which is provided by the law, there are some restrictions in the transferability
of shares of private companies. In fact transferability of shares and limited liability are
the enabling factors for the tremendous rise of companies all over the world.

Amendment of Comapanies Act 1956 in the year 2013

 Introduction of One Person Company

 Stipulation of Woman Director
 Provision of Class Action suits
 Introduction of Registered Valuer
 Fast Track Merger for Holding & Subsidiary Companies
 Cross Border Merger
 Concept of Dormant Company
 Further Use of electronic mode: Maintenance of Documents, Records,
 Registers, Books of Accounts, etc. in e-Form
 Meeting through Video Conferencing
 Summary Procedure for Winding up of Company
 Conciliation panel & special courts
 Corporate Social Responsibility
The Companies (Amendment) Bill, 2020

A bill to amend the Companies Act, 2013 and decriminalise various offences under it was
introduced in the Lok Sabha. The proposed amendments aim to reduce the burden on the
National Company Law Tribunal. The Bill was however vehemently opposed and was demanded
to be referred to the Parliamentary Standing Committee on Finance.

Companies (Amendment) Act, 2019

 It was enacted to consolidate and amend the laws relating to companies.

 It tightened the CSR compliance norms and ensured stricter norms for non-compliance of
the company law regulations.
 It allowed companies to transfer their unspent CSR funds to a separate account, the same
has to be spent within three financial years.
 In case, the money remains unspent, then it should be transferred to any fund specified in
Schedule VII of the Act.
 It empowered the Registrar of Companies to initiate action for removal of a company’s
name if it is not carrying out business activities as per the Companies Act.
 It provided for transferring of functions with regard to dealing with applications for
change of financial year and shifting of powers for conversion from public to private
companies from NCLT to the Central government.
 It provided more teeth to the Central government to deal with violators and reduced the
burden on special courts and enabled the National Financial Reporting Authority (NFRA)
to perform its functions through divisions and executive bodies.

Proposed Amendments in the Bill

 The Bill removes the penalty and imprisonment in certain offences along with the
reduction in the amount of fine payable.
 Decriminalization: The Bill proposed 72 amendments to the Companies Act, 2013 to
decriminalise various offences which can promote Ease of doing ethical business and
Ease of doing honest business.
 It will also boost the confidence of the investors along with giving an impetus to the
business as the fear of imprisonment will be reduced.
 The decriminalization is only for minor, procedural and technical falls which do not
involve fraud, injury to the public interest, or non- compoundable offences.
 Recategorization: The changes recategorize at least 23 offences out of the 66
compoundable offences mentioned under the Act in case of defaults (which can be
determined objectively and which lack an element of fraud or do not involve larger public
interest). Such cases will be dealt with an in-house adjudication framework.
 Compoundable Offences are those which can be conciliated by the parties under
dispute (without the requirement of the permission of the Court).
 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, the conduct of meetings, and maintenance of accounts. The Bill removes
these provisions and adds a new chapter in the Act with similar provisions on producer
companies.
 Producer companies include companies which are engaged in the production, marketing
and sale of agricultural produce, and sale of produce from cottage industries.
 Direct Listing in Foreign Jurisdictions: The Bill empowers the Central government to
allow certain classes of Indian public companies to directly list classes of securities (as
may be prescribed) in foreign jurisdictions.
 This is likely to help start-ups to tap overseas markets for raising capital.
 Remuneration to non-executive Directors: The 2013 Act made special provisions for
payment of remuneration to executive directors of a company (including managing
director and other full-time directors) if the company has inadequate or no profits in a
year. The Bill extends this provision to non-executive directors, including independent
directors.
 This will enhance the productivity of such non-executive directors because of their
increased remuneration.
 Financial Results Filing & Corporate Governance: Specified class of unlisted
companies will now have to prepare and file their financial results periodically and also
complete the audit or review of such results.
 Also, the Bill provides for a window within which the penalties shall not be levied for
delay in filing of annual returns.
 This aims to improve corporate governance as it will bring more transparency into affairs
of closely held companies which are used by major shareholders of large public interest
companies to divert funds through transactions that are not on an arm’s length basis.
Benches of NCLAT: The Bill seeks to establish benches of the National Company Law
Appellate Tribunal in order to ease their burden and decrease the pendency of cases.
 Penalties: It extends lesser penalties for small companies (i.e., with lower paid-up share
capital and turnover thresholds), one-person companies (i.e., companies with only one
member), and producer companies, in case of all offences which attract monetary
penalties.
 Exclusion from listed companies: The Bill empowers the Central government, in
consultation with the Securities and Exchange Board of India (SEBI), to exclude
companies issuing specified classes of securities from the definition of a “listed
company”.
 Exemptions from filing resolutions: The 2013 Act required companies to file certain
resolutions with the Registrar of Companies (RoC). However, banking companies were
exempted from filing such resolutions. This exemption has been extended to registered
non-banking financial companies and housing finance companies by the proposed Bill.
  Corporate Social Responsibility (CSR): Under Section 135 of the Companies Act,
2013, 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, the Bill allows eligible companies (which spend any amount in excess of their
CSR obligation in a financial year) to set off the excess amount towards their CSR
obligations in the subsequent financial years.

Corporate Social Responsibility

o Corporate Social Responsibility is a management concept whereby companies

integrate social and environmental concerns in their business operations and interactions
with their stakeholders.
o While CSR law mandates spending across 12 prescribed schedules ranging from
education and health care to sports or gender equality, few companies spend towards
community development, infrastructure, social & child welfare, etc.
o Under it, companies are mandated to constitute a CSR committee, comprising at least 3
members of the Board (with at least 1 independent member).

A healthy business can only succeed in a healthy society. Thus, it is in the best interest of a
company to produce goods and services which strengthen the health of the society along with the
supportive efforts of the government to provide and create a conducive environment for the
growth of the companies.