Legal Aspects of

Business Management
Dr. Shivangi Sinha
[PhD, LLM, BBA LLB]
 Module-7
Context:-
• Corporate Laws: Introduction to corporate laws,
• Types of companies, Association not for profit, illegal association.
• Formation of company-Promoters, their legal positions, Pre-incorporation contract and Provisional
contracts.,
• Documents-Memorandum and Articles of Association.
• Appointment & Responsibilities of Directors
• Lifting of the Corporate Veil
• Majority Rule and Minority Protection
• Winding up Procedures
 1. Corporate Laws: Introduction to Corporate Laws:-

• In India, the primary corporate law governing companies is the "Companies Act,
2013", which regulates the formation, structure, and operations of corporations,
alongside other significant acts like the Competition Act, 2002, the Limited
Liability Partnership Act, 2008, and the Securities and Exchange Board of India
Act, 1992, all administered by the Ministry of Corporate Affairs (MCA).
Indian corporate laws:
• Companies Act, 2013:- This is the central legislation governing companies in India,
covering aspects like company incorporation, share issuance, board of directors,
shareholder rights, corporate social responsibility (CSR), and company winding up.
• Securities and Exchange Board of India (SEBI) Act, 1992:-This act regulates the
stock market and protects investor interests by overseeing the listing and trading
of securities.
• Competition Act, 2002:-This law aims to promote fair competition in the market by
prohibiting anti-competitive practices like price fixing and market dominance.
• Limited Liability Partnership (LLP) Act, 2008:-This act allows for the creation of a
business structure where partners have limited liability, offering flexibility for
professional firms.
 Important Aspects Covered under the
Companies Act, 2013:
• Corporate Governance:-The Companies Act, 2013 emphasizes good corporate governance
practices, including transparency, accountability, and fair treatment of all stakeholders.
• Registrar of Companies (RoC):-Companies are registered and regulated by the RoC, which
is a part of the MCA.
• Company formation and registration: Procedures for incorporating a company and
filing necessary documents
• Share capital and dividends: Regulations regarding issuance of shares, share
transfers, and dividend payments
• Board of Directors: Composition, responsibilities, and duties of directors
• Shareholder meetings: Rights of shareholders to participate in company decisions
through voting at meetings
• Auditing and financial reporting: Requirements for financial statement audits and
compliance with accounting standards
• Corporate social responsibility (CSR): Mandatory CSR activities for certain large
companies
What is a Company? Characteristics of a
Company under Law:-
• A company is a legal entity formed by a group of individuals to engage in
business or trade with the intention of earning profits or achieving specific
objectives. Companies exist as separate legal entities, meaning they are
distinct from the people who own or manage them.
• The term company is derived from the Latin words ‘com’ (together)
and ‘panis’ (bread), symbolizing a group of people coming together for a
common purpose.
• According to Section 2(20) of the Companies Act, 2013, "A company means
a company incorporated under this Act or under any previous company
law.“
• Salomon v. Salomon & Co. Ltd. (1897): This landmark case established that
a company is distinct from its shareholders, solidifying the principle of
separate legal personality in corporate law.
Characteristics of a Company under
Law:-
• The definition of a company in law carries several distinct characteristics that differentiate it from
other business forms like sole proprietorships or partnerships. Here are the primary legal
characteristics of a company:
• Artificial Legal Person-A company is a legal entity created by law. It has all the rights and
responsibilities of a natural person, such as entering into contracts, owning assets, and suing or
being sued. However, it cannot physically act; it operates through its Board of Directors.
• Separate Legal Entity-A company has a distinct legal identity from its members. This ensures that
the company’s assets and liabilities are separate from those of its shareholders. The principle of
separate legal personality was affirmed in the Salomon case, protecting shareholders from
personal liability for the company’s debts.
• Limited Liability-The liability of a company’s shareholders is limited to the unpaid value of their
shares. This ensures that the personal assets of shareholders are protected, even if the company
faces financial difficulties.
• Perpetual Succession-The company’s existence is not affected by the death, insolvency, or
retirement of its members. It continues to exist until it is legally dissolved through winding-up
procedures.
 Continued:-

• Transferability of Shares-In a public company, shares can be freely

transferred, providing liquidity to investors. However, private companies
may impose restrictions on share transfers through their Articles of
Association.
• Common Seal (Optional)-Though optional under the Companies Act 2013,
many companies use a common seal as their official signature for validating
documents.
• Representative Management-The shareholders elect a Board of Directors to
manage the company’s affairs. This ensures professional and efficient
management, as the day-to-day operations are overseen by directors.
• Voluntary Association for Profit-A company is formed voluntarily by
individuals or entities with the intention of conducting business for profit.
Profits are shared among shareholders as dividends.
 2. Types of Companies, Association Not for profit, Illegal
Association:-

• The Companies Act 2013 provides several classifications of companies to suit different business needs.

On the Basis of Incorporation:

• Chartered Companies: These companies are formed by royal charters and no longer exist in India.
• Statutory Companies: These are established by an Act of Parliament or state legislature for specific
purposes. Example: Reserve Bank of India (RBI).
• Registered Companies: Registered companies are formed under the Companies Act 2013 and are the
most common business entities in India.

On the Basis of Liability:

• Companies Limited by Shares: Shareholders’ liability is limited to the unpaid value of their shares.
• Companies Limited by Guarantee: Members guarantee a specific amount to be paid in case the company
is wound up.
• Unlimited Liability Companies: The liability of members is unlimited, making them personally responsible
for the company’s debts.
 Continued:-

On the Basis of Number of Members:

• Private Company: Cannot invite the public to subscribe to shares. Must include “Private Limited” in its
name.
• Public Company: No limit on the number of members. Can raise funds by issuing shares to the public.
On the Basis of Control:
• Holding Company: A company that holds majority control over another company’s Board or share capital.
• Subsidiary Company: A company controlled by a holding company.
On the Basis of Ownership:
• Government Company: A company where 51% or more of the share capital is held by the government.
• Non-Government Company: A company owned and operated by private individuals or entities.
• Foreign Company: A company registered outside India but operating within India.
• One-Person Company (OPC): Introduced under the Companies Act 2013, an OPC allows a single individual
to run a company with the benefits of limited liability and ease of management.
 Association not for Profit & Illegal
Association:-
• According to the Companies Act 2013, an "illegal association" refers to a
partnership or association consisting of more than the prescribed number of people
carrying on a business for profit without being registered as a company under the
Act, essentially meaning a group of individuals operating a business without proper
legal registration, as defined in Section 464 of the Companies Act 2013;.
Illegal associations:
• Number limitation: An association becomes illegal if it has more than the
prescribed number of members (usually specified as 50) engaged in a profit-
making activity.
• Registration requirement: To be legal, such an association must be registered as a
company under the Companies Act.
• Penalty: Members of an illegal association can face penalties, including fines, for
conducting business in violation of the law.
 Continued:-

• Under the Companies Act 2013, an "Association not for Profit" is referred to as a "Section 8
company," meaning it is a company registered with the primary objective of promoting
charitable activities like education, social welfare, arts, science, sports, and environmental
protection, where profits cannot be distributed to members and must be used solely to
further the company's charitable goals; essentially, a non-profit organization recognized
under the Act.
Section 8 Companies Act, 2013:-
• Purpose: To promote commerce, art, science, sports, education, research, social welfare,
religion, charity, and environmental protection.
• Profit distribution: No dividends can be paid to members; all profits must be reinvested in
achieving the company's charitable objectives.
• Name designation: Section 8 companies are not allowed to use the term "Limited" in their
company name, reflecting their non-profit nature.
• Registration process: Requires filing specific forms with the Registrar of Companies, including
a Memorandum and Articles of Association outlining the company's charitable purposes.
 3. Formation of Company-Promoters, their legal positions,
Pre-incorporation contract and Provisional Contracts.

Step 1: Choose the Right Business Structure- Selecting the correct legal structure is essential,
as it influences the company's operations, compliance requirements, tax obligations, and ease
of raising funds. Here are the most common types of companies in India:
• Private Limited Company (Pvt. Ltd.)
• Public Limited Company
• Limited Liability Partnership (LLP)
• One-Person Company (OPC)
• Sole Proprietorship or Partnership
Step 2: Reserve a Company Name on the MCA Portal-The Ministry of Corporate Affairs (MCA)
requires companies to have a unique name that reflects their business activities and is not
identical to any existing company. You can submit a RUN (Reserve Unique Name) application
on the MCA portal to check name availability.
• Ensure the name complies with the Companies Act, 2013 rules.
• You may propose two names to increase the chance of approval.
Step 3: Obtain a Digital Signature Certificate (DSC)- All company documents must be digitally
signed by the proposed directors and shareholders.
 Continued:-
Step 5: Prepare Documents for Company Registration
• To register your company, you need to prepare the following essential documents:
• Memorandum of Association (MOA)
• Articles of Association (AOA)
• Proof of Registered Office Address
• Identity Proofs and Address Proofs
Step 6: File the SPICe+ Form on the MCA Portal
• The SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) form integrates various
services like company registration, PAN/TAN allotment, and GST registration. Here’s how to proceed:
• Visit the MCA portal and fill the SPICe+ form online.
• Attach the MOA, AOA, and other required documents.
• Pay the prescribed registration fees.
• Submit the form for approval.
Step 7: Obtain PAN, TAN, and GST Registration
• During the registration process, you can apply for:
• PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number) for the
company.
• GST registration if your business meets the turnover threshold or engages in interstate trade.
 Continued:-

Step 8: Receive Certificate of Incorporation

• Once the MCA verifies the submitted documents, the company will receive a Certificate of
Incorporation (COI). This certificate includes:
• Corporate Identity Number (CIN).
• Official approval of the company name.
• Legal recognition to commence business operations.
Step 9: Open a Company Bank Account
• With the Certificate of Incorporation, PAN, and TAN in hand, you can open a bank account in the
company’s name. This account will be used for all financial transactions.
Step 10: Comply with Post-Incorporation Formalities
• After incorporation, you must comply with various post-registration requirements:
• Hold the First Board Meeting within 30 days of incorporation.
• Issue share certificates to all shareholders.
• Maintain statutory registers and records.
• File the annual returns and financial statements with the MCA.
• Obtain professional tax registration if applicable.
 Promoters- Their Legal Position:-
• Promoters are in a fiduciary position to a company they are forming. They have a duty of trust
and confidence to the company. They are responsible for the company's creation and operations.
Legal position
• Promoters are not agents or trustees of the company.
• They are liable for any profits made personally in company deals.
• They can be held personally liable for pre-incorporation contracts.
• They have a duty to act in good faith, disclose personal interests, and avoid conflicts of interest.
Promoter's duties
• They conceive, raise capital and resources, and fulfill the legal requirements of incorporation.
• They control how and when the company is established and determine its operations and
oversight.
• They pay the preliminary costs related to its incorporation, such as stamp duty, registration and
professional fees.
Promoter's liabilities
• They are liable for any act of misconduct or breach of duty.
• They may be compelled to surrender profits or face legal consequences if they fail to disclose
their interest in transactions.
 Pre-Incorporation Contract and
Provisional Contracts :-
• A pre-incorporation contract is made before a company is formed, while a provisional contract is
made after incorporation but before the company starts business.
Pre-incorporation contracts
• Are entered into by promoters on behalf of a future company
• Help establish the company's rules and regulations
• Define the roles and responsibilities of promoters and future shareholders
• Are not binding on the company unless the company adopts them
• Are governed by the Specific Relief Act
Provisional contracts
• Become binding on the company when it receives its certificate of commencement of business
• Are governed by the Companies Act
• Are contracts entered into after incorporation but before the company starts business
• General considerations
• A company that has not been incorporated has no legal personality and cannot be held to contracts
made on its behalf.
• A company can adopt a pre-incorporation contract after incorporation through ratification.
• Provisional contracts are temporary and can change into something permanent.
4. Documents-Memorandum and Articles of Association.

• The Memorandum of Association (MOA) and Articles of Association (AOA)

define a company's scope of work, objectives, rules and internal
management. The MOA and AOA are two essential documents that are
the basis of the company's constitution.
• A Memorandum of Association (MOA) is a document containing details of
the company’s constitution and is the foundation of the company’s
structure. It is known as the charter of a company. It lays down the scope
of the company’s activities, objectives for which it is formed, determine
the scope of its authority and its relationship with the outside world.
• The creation of an MOA is the first step towards company registration.
During the formation of a company, the company members must
subscribe to the MOA. Subscribing to an MOA means to put one’s mark or
signature on the document as attestation or approval of its contents.
 Continued:-

Contents of MOA:-
Every company’s MOA should contain the following five
clauses:
• Name clause
• Registered office clause
• Object clause
• Liability clause
• Capital clause
 Continued:-

• The Articles of Association (AOA) of the company contains

its rules or bye-laws and regulations that control or govern
the conduct of its business and manage its internal affairs.
The AOA is subordinate to the MOA of a company and is
governed by the MOA.
• Every company must have an AOA as it plays a vital role in
defining its internal rights, workings, management and
duties. The contents of AOA should be in sync with the MoA
and the Companies Act, 2013.
 Continued:-

Contents of AOA:-
• Details regarding the share capital
• Details of director’s qualification, appointment, powers,
remuneration, duties etc.
• Rules regarding company dividends and reserves
• Details regarding company accounts and audit
• Provisions relating to the company’s borrowing powers
• Provisions relating to conducting meetings
• Process of winding up of the company
Difference Between MOA and AOA:-
Continued:-
Continued:-
Legal Provisions under Companies Act,
2013:-
5. Appointment & Responsibilities of Directors:-

• The director appointment process aims to select individuals with the

necessary expertise, integrity, and commitment to fulfil their fiduciary
duties. It must also comply with the requirements outlined in the
company's articles of association and relevant legal provisions.
• A director is an individual appointed to oversee a company's operations
and affairs. He or she is essential in guiding and supervising the company's
activities. Every registered company must have at least one director.
• Directors are decision-makers who help shape the company's direction and
are appointed or elected to safeguard its best interests and ensure its
success. They have a legal obligation to act in a way that benefits the
company and its shareholders, which involves considering the needs of
everyone involved, including employees, customers, suppliers, and the
community.
Continued:-
 Continued:-

• Directors have several duties in company law to the company and

its stakeholders. Let's explore the core responsibilities they carry.
Fiduciary Duty - Section 166(2)
• Fiduciary duty is a fundamental obligation of directors in company
law. It requires directors to act in good faith and the company's
best interest.
• The power of directors in company law is to make decisions with
the utmost loyalty, honesty, and integrity. They should avoid
conflicts of interest and not misuse their position for personal
gain.
 Continued:-

Duty of Care and Skill - Section 166(3)

• Directors are expected to exercise reasonable care, skill, and diligence in their
responsibilities.
• They should apply their expertise, knowledge, and experience to make informed
decisions and act in the company's best interest.
• Directors should stay informed about the company's affairs, keep up-to-date with
industry trends, and seek professional advice when necessary.
Duty to Promote Success of the Company - Section 172
• Directors have a responsibility to promote the long-term success of the company.
• This duty goes beyond short-term profitability and requires directors to consider
the broader implications of their decisions on stakeholders, the environment, and
society.
 Continued:-

• Directors' Liabilities and Protections:-

Breach of Duties - Section 166 (7)
• Directors who breach their duties may face consequences such as legal actions
and personal liability.
• Shareholders or other affected parties can seek remedies for damages caused by
a director's misconduct, negligence, or breach of fiduciary duties.
• Legal provisions and case law regarding director liability vary across jurisdictions,
but they generally aim to hold directors accountable for their actions and provide
remedies to those affected.
Indemnification and Insurance - Section 463
• Companies may indemnify directors, protecting them from personal liability
arising from their duties.
• Indemnification provisions can be included in the company's articles of
association, bylaws, or separate indemnification agreements. These provisions
ensure directors can carry out their duties without undue personal risk.
 6. Lifting of the Corporate Veil:-

• At times it may happen that the corporate personality of

the company is used to commit frauds and improper or
illegal acts. Since an artificial person is not capable of doing
anything illegal or fraudulent, the façade of corporate
personality might have to be removed to identify the
persons who are really guilty. This is known as ‘lifting of
corporate veil’.
• This explains if shareholders can be held liable for
corporate veil. This operation helps to identify the real
culprit behind illegal work conducted in company and
separate false accused or shareholders of company. This
also explains the real personality of the company by
exposing personality of culprit performing illegal tasks
 Continued:-

Statutory Provisions dealing with Lifting of Corporate Veil of the Companies in India:-
• Sec. 2(60) of the Companies 2013 Act provides that ‘officer who is in default‘ i.e. "any officer or
member of the company who has committed any wrong or illegal offence, shall be liable for
punishment or penalty in the form of imprisonment or fine, as prescribed by the law for that
particular offence. The section also provides all portfolios who shall be held liable under the term
‘officer who is in default‘.
• Sec. 7(7) of the Act provides that, "when a company has been incorporated by furnishing false or
incorrect information, or has actively concealed any material fact or information or documents filed in
the process of incorporating such company, using fraudulent means and tactics, then the tribunal has
the power to take action and pass such orders, as it may think fit for regulation of the management
of the company.
• As per Sec. 7(6) of the Act, if it is proved that during the incorporation process, the company had
furnished false and incorrect information or has actively concealed or suppressed any vital material
fact or information fraudulently, then the promoters, the persons named as first directors of the
company, and the persons making declaration under 7(1)(b), will be held liable as per Sec. 447 of
the Act. Sec. 447 lays down the penalties and punishments for any wrongful, fraudulent or illegal
activity done by any person associated with the company.
• Criminal liabilities for providing wrong and misleading statements in the prospectus of the company,
has been duly highlighted in Sec. 34 of the Act, whereas Sec. 35 highlight the civil liabilities that
arise in the same circumstance.
 Continued:-

Judicial Interpretations:-
• Courts can lift the veil to determine the true character and intent of the
company, in the interest of public policy. A company is an independent entity,
and cannot be an enemy or a friend. In Daimler Co. Ltd v. Continental Tyre
and Rubber Co. Ltd., the House of Lords lifted the corporate veil of the
company to examine its character and found out that it is a foe organization,
and if it is permitted to continue doing business, it may be used to generate
cash for the enemies, and that will be against the public interest of the country.
• Companies often misuse the corporate veil to evade taxes. However, courts
have the ability to infer the corporate substances in such cases to determine if
it has been used for tax avoidance or to conceal expense commitments. The
Supreme Court has applied this principle to lift the veil in the case Re:
Dinshaw Maneckjee Petit.
 Continued:-

• In Jones v. Lipman, the veil was lifted to examine if the company has
committed fraud or improper conduct.
• The rule was also applied in Gilford Motor Company v. Horne, on
the ground that the company was a sham, and was incorporated for
carrying fraudulent activities.
• Company being a separate entity, cannot act as an agent of its
shareholders or members. In Re: R.G Films Ltd., court applied the
doctrine and found that the company was merely an agent of another
company.
Though the principle is still an evolving law in many jurisprudences, it
has yet proved to be a great watchdog for the companies. However, the
principle should not be applied consistently but only in rare case.
7. Majority Rule and Minority Protection:-

• In corporate world, all democratic choices and control of an organization are

made with the majority rule that is deemed to be truthful and justified. The
majority rule of decision making, quite often than not overlooks the views of
minority shareholders. Majority power has exquisite importance in the
running of a corporation and the “Courts will now not generally interfere at
the instance of the shareholder in matters of internal management.
• It follows that the general public of the participants enjoy the splendid
authority to exercising the powers of the organization and commonly to
govern its affairs and the minority shareholders must concede to most
people choice. This, however, may result in an opportunity that the
individuals having majority vote may additionally have a tendency to be
oppressive towards the minority shareholders misusing their majority
strength.
 Continued:-

• Majority Rule-According to section 47 of the companies act, 2013, holding any equity shares
shall have a proper to vote in respect of such capital on every decision placed before the
company. Member’s proper to vote is recognized because the proper of assets and the
shareholder can also workout it as he thinks in shape consistent with his interest and preference.
The Principle of Non-Interference (RULE IN FOSS V. HARBOTTLE)
• The principle that the will of the majority should prevail over the will of the minority in matters of
internal administration of the company was founded in the case of Foss v. Harbottle which is
today known as the rule in Foss v. Harbottle.
• According to this principle, the courts will not, intervene at the instance of the shareholders, in
the management of a company it’s direct so long as they are acting within the powers conferred
on them by the articles of the company.
• In nutshell, the company cannot confirm, Any act which is ultra vires the company or illegal, Any
act which is fraud on the minority, Any act passed with simple majority which requires special
majority, Any wrong act done by those who are in control, Any act infringes the personal
membership rights, Any act which amounts to breach of duty by directors, Any act which
amounts to oppression of minority or mismanagement of the company.
 Continued:-

Rights of Minority:-
• Many provisions of Companies Act, 2013 deals with the situations
where minority shareholders rights have been protected and the
same can be divided into various major heads.
• Under Companies Act, 2013, the relief from the oppression and
mismanagement has been provided under Section 241-246.
• Under the section 245, companies Act, 2013, the new concept of
class action has been introduced which was non-existent in
companies Act, 1956 wherein it provides for class movement suits
to be instituted against the company as well as towards the auditors
of the company.
 8. Winding up Procedures:-

• Company winding up, or liquidation refers to the formal process

through which a company concludes its operations, ultimately
leading to its dissolution. This process entails the systematic
closure of the company's affairs, including the sale of assets,
settlement of debts from the proceeds, and distribution of any
remaining surplus to the shareholders according to their stake in
the company.
• The initiation of winding up occurs either by a court order or
through a voluntary resolution passed by the company. Once the
winding-up proceedings are complete, the company is officially
dissolved and ceases to exist, marking the end of its corporate
existence through this legal procedure.
 Continued:-

• There are several grounds on which a company may be wound up in India. The two
major laws governing winding up of a company are the Insolvency and Bankruptcy
Code (IBC), 2016 and the Companies Act, 2013.
Winding Up Of A Company Under IBC, 2016:-
• The ground for winding up ‘inability to pay debts’ was earlier covered under Section
271 of the Companies Act, 2013 and was one of the six grounds for winding up under
that section. However, after the passing of IBC, 2016, the said ground has been
omitted from Companies Act, 2013 and is now exclusively covered under IBC, 2016.
• Hence, if an entity is unable to pay debts and has committed a default of the
minimum amount prescribed, it will have to undergo a process called ‘Corporate
Insolvency Resolution Process’ (CIRP) under IBC,2016. The application can be filed by
the creditors of the entity or by the entity itself. An attempt will be made to rescue
the entity (corporate debtor) and revive it.
• If the revival / rescue / rehabilitation is not possible within the prescribed timelines,
then the entity will have to undergo winding up and a liquidator will be appointed to
execute the process. Hence, the entity may or may not have to undergo liquidation,
depending upon the result of insolvency resolution.
Voluntary Winding Up Of A Company Under IBC, 2016:-

• Apart from the inability to pay debts, there is another mode of winding
up a company under IBC called “Voluntary Winding Up.” Section 59 of
IBC, 2016 provides that “A corporate person who intends to liquidate
itself voluntarily and has not committed any default may initiate
voluntary liquidation proceedings under this chapter”.
• The Code mandates a ‘Declaration of Solvency’ by majority of the
directors of the company by passing a resolution verified by an
affidavit stating that the liquidation is not for the purposes of
defrauding anyone. This mode is applicable when the reason for
winding up is other than insolvency like completion of the business /
project of the company, completion of the duration for which the
company was incorporated etc.
Winding Up Of A Company Under Companies Act, 2013:-

• This is also referred to as ‘Compulsory Winding Up’ / ‘Winding Up by National

Company Law Tribunal (NCLT)’ and Section 271 of the Companies Act, 2013 has
provided 5 grounds for the same. As stated before, there was one more
ground “Inability to pay debts” earlier, which has now been omitted from the
Companies Act, 2013. The grounds prescribed are:
• Special Resolution (SR) passed by the members for winding up by NCLT;

• Actions against the sovereignty, integrity of India or security of the State or against
public order / decency / morality;

• Affairs conducted in a fraudulent manner or there is misconduct / misfeasance;

• Default in filing financial statements or annual returns for 5 consecutive financial

years;

• Other just and equitable ground for winding up.

Thank You…!!