Problem 5: Startup Company Registration

Client’s Concerns:

 The entrepreneurs want to start a tech company and need legal guidance on:

1. How to register the company?

2. Which company structure is best?

3. What legal and compliance requirements they need to follow?

Step 1: Understanding the Business Needs

Before choosing the company structure, we must consider:

 Ownership & Control – How many founders will be involved?

 Funding Requirements – Will they seek investment from venture capitalists or angel
investors?

 Liability & Risk – How much legal protection do they need?

 Taxation & Compliance – What is the most cost-effective structure?

Step 2: Choosing the Right Business Structure

India provides several company structures under the Companies Act, 2013 and other laws. Based on
their goals, the entrepreneurs can choose from:

Company Type Features Pros Cons

Owned & managed by Easy to start, fewer No separate legal identity,

Sole Proprietorship
one person compliances unlimited liability

Two or more partners Simple structure, shared Partners have unlimited

Partnership Firm
share ownership responsibilities liability

Partners’ liability is
Limited Liability Combines partnership Higher compliance than a
limited, separate legal
Partnership (LLP) with limited liability regular partnership
entity

Separate legal entity, Limited liability, easy to

Private Limited More regulatory
shareholders own the raise funds, better
Company (Pvt. Ltd.) requirements
company credibility

Owned by a single Can’t have multiple

One Person Limited liability, better
individual but acts like a owners, higher
Company (OPC) than sole proprietorship
company compliance

High compliance burden,

Public Limited Shares can be traded on Can raise funds from the
requires a board of
Company stock exchange public
directors

💡 Recommended Structure for the Tech Startup:

A Private Limited Company (Pvt. Ltd.) is the best option because:
✅ Limited Liability – Founders’ personal assets are protected.
✅ Separate Legal Entity – The company continues even if ownership changes.
✅ Easy Fundraising – Investors prefer Pvt. Ltd. companies.
✅ Brand Credibility – More trust from customers, banks, and suppliers.

Step 3: Registering the Company (Process under Companies Act, 2013)

1. Name Approval (RUN – Reserve Unique Name)

 The founders must submit two name options for approval via the MCA portal.

 The name must be unique and end with "Private Limited".

2. Digital Signatures (DSC) & Director Identification Number (DIN)

 Directors need to obtain Digital Signature Certificates (DSC) for online filings.

 Apply for Director Identification Number (DIN) for company directors.

3. Filing Incorporation Documents

 File SPICe+ (Simplified Proforma for Incorporating a Company) with:

o Memorandum of Association (MoA) – Defines the company’s objectives.

o Articles of Association (AoA) – Rules for running the company.

o Registered Office Address

o Declaration by Directors & Subscribers

4. PAN & TAN Registration

 The company will automatically receive its Permanent Account Number (PAN) and Tax
Deduction and Collection Account Number (TAN) after incorporation.

5. GST Registration (if applicable)

 If the company expects annual turnover > ₹40 lakhs (₹20 lakhs for services), GST
registration is required.

Step 4: Legal & Compliance Requirements

✅ Regular Filings: Annual returns, financial statements with the Ministry of Corporate Affairs (MCA).
✅ Tax Compliance: Filing Income Tax Returns (ITR), TDS deductions.
✅ Employment Laws: Registering for EPF (Employees' Provident Fund) & ESIC (Employees' State
Insurance Corporation) if employees are hired.
✅ Intellectual Property Protection: Trademark, patent, and copyright registrations (if needed).

Problem 6: Director’s Conflict of Interest

Client’s Concerns:
  The company director is planning an investment that benefits another business they own,
but it might harm the company they serve.

 The director has not disclosed this conflict to the board.

 The company wants to know the legal implications and how to handle the situation.

Step 1: Understanding Legal Obligations

Under the Companies Act, 2013, directors must act in the best interests of the company and
disclose conflicts of interest.

Key Legal Provisions:

🔹 Section 166 – Director’s Duties

 Directors must act in good faith and avoid conflicts of interest.

 A director cannot use their position for personal gains.

🔹 Section 184 – Disclosure of Interest

 A director must disclose any financial interest in another company at the first board
meeting of the financial year.

🔹 Section 188 – Related Party Transactions

 If a director’s personal business is involved in company deals, prior board approval is

needed.

🔹 Penalties for Non-Disclosure

 Fine of ₹1 lakh – ₹5 lakh under Section 184.

 Possible disqualification as a director under Section 167.

 Can lead to shareholder lawsuits for breach of duty.

Step 2: How the Company Should Handle the Conflict

1. Conduct an Internal Review

 The board should gather information on the director’s proposed investment.

 Check if the investment is directly harming the company.

 If needed, consult an independent auditor to evaluate financial risks.

2. Require Full Disclosure (Legal Obligation)

 The company should ask the director to disclose their interest under Section 184.

 If the director refuses, record it as "failure to disclose" in board meeting minutes.

3. Approving or Rejecting the Investment

 If the investment does not harm the company, the board may approve it with conditions.
  If it creates a serious conflict, the board can:
✅ Ask the director to step back from decision-making.
✅ Reject the investment to protect company interests.

4. Legal Action if the Director Refuses Compliance

If the director refuses to disclose or withdraw from the conflict, the company may:

 File a complaint with the National Company Law Tribunal (NCLT).

 Call a shareholder meeting to decide on removal under Section 169.

 Report unethical behavior to the MCA for legal action.

Step 3: Preventing Future Conflicts

✅ Code of Conduct: Adopt a corporate policy requiring directors to declare conflicts of interest in
writing.
✅ Independent Oversight: Appoint an independent director or legal counsel to review transactions.
✅ Whistleblower Policy: Allow employees to report unethical behavior anonymously.

Conclusion:

The director is legally required to disclose conflicts under the Companies Act. If they fail to do so,
the company can take legal action through the NCLT or MCA. Preventive measures like a strong
conflict-of-interest policy can avoid such issues in the future.

Problem 8: Independent Director Removal (Procedural & Negotiation-Based Issue)

Client’s Concerns:

 The client is an independent director of a company.

 The company’s board or shareholders want to remove them.

  The client wants to know:

1. Is the removal legal?

2. What procedural safeguards exist?

3. Can they negotiate an exit or challenge the removal?

Step 1: Understanding the Legal Framework

Independent directors are protected under:

🔹 Companies Act, 2013 – Defines their appointment and removal process.
🔹 SEBI (LODR) Regulations, 2015 – Additional rules for listed companies.
🔹 Corporate Governance Principles – Ensuring fairness in boardroom decisions.

1. Removal by Shareholders (Special Resolution – Section 169 of Companies Act, 2013)

 Independent directors can be removed before their tenure ends only by passing a special
resolution in a general meeting.

 The director must be given a reasonable opportunity to present their case before removal.

 Majority requirement: At least 75% shareholder approval is needed for removal.

2. Removal by the Board (Non-Possible Without Shareholder Approval)

 The board cannot remove an independent director directly.

 Exception: If the director is disqualified under Section 164 (e.g., convicted of fraud, financial
mismanagement).

Step 2: Legal & Strategic Options for the Client

1. Challenging the Removal (If Procedural Lapses Exist)

 If the company did not follow the required procedure, the client can challenge the removal
in the National Company Law Tribunal (NCLT).

 Grounds for challenge:

✅ Lack of fair opportunity to defend themselves.
✅ Violation of Companies Act, 2013 provisions.
✅ Retaliation or bad faith removal due to resistance to unethical practices.

2. Negotiating an Exit Package (If Removal is Inevitable)

 If the removal cannot be legally challenged, the client can negotiate:

✅ Severance benefits (compensation for early exit).
✅ Professional reputation safeguards (a neutral or positive exit statement).
✅ Continued advisory role or transition period to mitigate reputational damage.
3. Filing a Complaint with SEBI (For Listed Companies)

 If the company is publicly listed, and the removal is driven by governance issues, the client
can:
✅ File a complaint with SEBI under LODR Regulations.
✅ Report unethical board practices to regulatory authorities.

Step 3: Steps to Strengthen the Client’s Position

✅ Review Company Documents: Check appointment letters, board minutes, and corporate
governance policies.
✅ Document Any Misconduct or Pressure: If the removal is retaliatory, gather evidence of prior
conflicts or ethical concerns.
✅ Engage Legal Counsel: To evaluate whether a legal challenge or negotiation is the best course.

Conclusion:

If procedural lapses exist, the client can challenge the removal in NCLT. If the removal is
unavoidable, negotiating a favorable exit package is the best approach. For listed companies, SEBI
intervention is an option if governance norms are violated.

Problem 4: Corporate Social Responsibility (CSR) Non-Compliance (Regulatory Fixable Issue)

Client’s Concerns:

 The client’s company has not met its CSR obligations under the Companies Act, 2013.

 Regulatory authorities have issued a notice for non-compliance.

  The client wants to know:

1. What penalties apply for non-compliance?

2. How can they rectify the issue?

3. Can they negotiate with regulators to avoid severe penalties?

Step 1: Understanding CSR Compliance Requirements

🔹 Section 135 of the Companies Act, 2013 mandates that companies meeting certain financial
thresholds must spend at least 2% of their average net profits on CSR activities.
🔹 Companies covered under CSR obligations:

 Net worth of ₹500 crore+

 Turnover of ₹1000 crore+

 Net profit of ₹5 crore+

🔹 If the company fails to spend the required CSR amount, it must:

✅ Transfer unspent CSR funds to a CSR fund within 6 months of the financial year’s end.
✅ Explain the non-spending in the Board Report with valid reasons.

Step 2: Addressing the Non-Compliance Issue

1. Immediate Remedial Action to Avoid Penalties

 The client should immediately allocate the unspent CSR funds to a compliant CSR initiative.

 CSR spending can be directed to:

✅ Government-approved CSR projects (education, health, rural development).
✅ PM CARES Fund or State Relief Funds.
✅ Registered NGOs with CSR-compliant projects.

 If funds were unspent due to project delays, the company should provide a detailed
explanation in its Board Report.

2. Negotiating with Regulators to Reduce Penalties

 The company can request leniency by:

✅ Showing genuine reasons for non-compliance (e.g., pandemic, economic downturn).
✅ Providing a CSR action plan for future compliance.
✅ Demonstrating a commitment to CSR in the upcoming financial year.

 If an official penalty is imposed, the company can file an appeal with the Registrar of
Companies (RoC) or the Ministry of Corporate Affairs (MCA).

3. Legal Consequences of CSR Non-Compliance

 Financial Penalty: The company can be fined twice the unspent CSR amount (up to ₹1
crore).
  Director Liability: Officers responsible for CSR compliance can face fines of ₹50,000 to ₹5
lakh.

 Criminal Action (In Extreme Cases): If CSR funds were misused or diverted, criminal charges
may apply under corporate fraud provisions.

Step 3: Strengthening the Company’s CSR Strategy for Future Compliance

✅ Set up a Dedicated CSR Committee – Ensure ongoing monitoring and project selection.
✅ Partner with Established NGOs – Reduce project execution risks.
✅ Pre-plan CSR Spending – Allocate funds quarterly rather than waiting until year-end.

Conclusion:

To fix the non-compliance issue, the company should immediately allocate unspent CSR funds and
submit a remedial plan to regulators. Negotiating penalties is possible if the company demonstrates
genuine intent to comply. Future compliance should focus on better CSR planning and execution to
avoid legal risks.