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MODULE - 3
LEGAL AND REGULATORY ASPECTS
3.1 HISTORY on a regular basis to suit the change in time and
development of the Indian Economic Market.
In England the first Royal Charter was established by
the East India Company in the year 1600, after which The Indian Companies Act of 1956 consisted of 658
in the year 1884, Joint Stock Companies act was sections and 14 schedules.
passed in England .This act mandated compulsory
registration of the companies. Following the suit in After getting approval from the then President of
the year 1850 the registration of company related India the Companies Act of 2013 on 29th august of the
regulations were brought to the Indian companies. same year. The Companies act of 2013 was different
from the Companies Act of 1956 as it included and
Joint Stock Companies act came into existence from covered more new business aspects such as e-
the year 1857 after which in the year 1866. The first commerce,-management, amalgamations, mergers,
Companies Act was enacted in India and major acquisitions, new financial statements disclosure
amendments and regulations were brought into methods and about international business ventures
aspects such as the incorporation of the companies, .It also spoke about the corporate social
registration of companies, winding up of trading responsibility and various other aspects that are a
companies and other associates. But this act was part of the modern business world.
completely superseded by the Companies act of
1913.These were mainly based on the English laws 3.2 DIFFERENCE BETWEEN COMPANIES ACT OF
and were purely used English cases and regulations 1956 AND COMPANIES ACT OF 2013
Companies Act,2013 Companies Act,1956
But after India obtained its Independence based on
the report submitted by H.C. Bhaba committee in the It has financial It has financial
year 1952 the Indian Companies act of 1956 was statement of schedule statements of
enacted. After this the Companies Act was amended III Format. schedule VI Format.
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Maximum no. of Maximum no. of must be avoided and everybody must be
partners is 50 partners is 10 in case treated equally.
of banking businesses c. Transparent disclosure of the high quality
and 20 in case of financial statements that are required to be
other businesses. prepared by the accountants of the company.
d. Proper methods of accounting and auditing.
The companies must It does don’t have any e. A proper check on the distribution of profit
have their financial such regulations. and the compensation paid to the employees.
year ending on 31st f. There are special provisions of the company
March to investigate the works and issues of the
company in case if there is any exploitation of
One person being the One person being the the shareholders.
member of the member of the g. Sanctions and penalties for those people who
company was included company did not exist violate the provisions of companies act.
and many new aspects at all.
of the business world We could summarise that the companies act of 1956
were included. was enacted keeping in mind the problems faced by
the business people in various aspects. Also it was a
Section 53 prohibits the Section 79 permitted brave initiative to keep the business people who try
to cheat and exploit their employees, other
issue of shares at a issue of share at stakeholders and their consumers in order to earn a
great fortune to themselves in order to fulfil their
discount. discount. selfish needs.
Maximum interest Maximum interest 3.4 ADVANTAGES OF COMPANIES ACT, 2013
payable on calls in payable on calls in a. The company act of 2013 states that the
advance is 12 % p.a. advance was 6 %p.a. companies are separate legal entity. Here the
company is considered as the independent
3.3 ADVANTAGES OF COMPANIES ACT, 1956 body and the members of the company are
a. It established a basic manner of business considered to be distinct from it. The
ethics and regarding development of the
company and management of the company.
b. Recognition of rights and interests of the
shareholders and other creditors of the
company and to protect it .Also bias decisions
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members of the company will not be blamed h. The act also came up with provisions for
or held liable for the acts of the company. speedy process and simplified procedure in
b. The company act also states that the company the case of amalgamation.
never comes to an end even if the members of
the company give up. Until the company i. It introduced a new form of company which
undergoes all the legal procedure for has only one member and one shareholder.
dissolving, the company will continue to exist.
Irrespective of whether the members change j. The act also stated that there must be
or leave the company it will not affect the rotation of auditors and the auditing firms in
company. the case of a publicly traded company. This
c. A company that is registered has the right to was to ensure fairness of practice.
sue any other person or other companies
have the right to sue this company because 3.5 SOME IMPORTANT CASES
the company is considered as a separate legal 3.5.1 State Trading Corporation of India Vs. C.T.O
d. According to Law the company is a separate 1963 AIR 1811, 1964 SCR (4) 89
legal entity and hence it can own properties in
its own name. We all know that writ petitions are usually filed by
e. The act also specified that the company must those whose fundamental rights are violated. Here
spend an ample amount of its profit in social State Trading Corporation filed a case against C.T.O
responsibilities. for abusing its fundamental rights. It was a case
f. The act in a way to empower women stated regarding sales tax Corporation against the state
that at least one woman director must be governments.
appointed in the Board.
g. National Company Law Tribunal was created But the court held that although a company is viewed
for speeding up the process of the cases as a person with separate legal entity, it cannot be
related to company and to help their given the fundamental rights that are guaranteed by
problems get solved in a faster way the Indian Constitution because it cannot be
considered as a citizen of the country.
3.5.2 Bates Vs Standard Land Co.
In this very famous case a question was raised asking
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if the company was a person or not. The court business and they started withdrawing from the
responded to this stating that a company was an business. Question was raised by the plaintiff if the
artificial person which functioned through the Board company was ready to be wound up.
of Directors who acted as its brains. A company can
obviously act only through them. The Court held that since the company did not have
enough funds and even if it is run the company will
3.5.3 Balfour Vs Balfour  2 KB 571 only run in loss .Moreover the basic dictum of the
establishment of the company was disturbed and the
A business was carried out by a couple. They had to company could no longer work to meet the objectives
enter into an agreement for the business purpose. and has considerably failed in its venture. Even if the
Since they constituted a family the biggest question assets of the company are sold it would be impossible
was that whether the agreement constituted a to clear the debts. Hence, it was held that it was
contract. appropriate to wind up the company.
But the court clearly responded to this stating that a 3.5.6 Saloman Vs. Saloman  UKHL 1 
contract is a one bound by law and not through AC 22
In this case a person with the name Saloman sold his
3.5.4 New Brunseic Etc. Co. Vs. Muggeridge business to the company named Saloman &Company
(1860) 1 Dr. & Sm. 363 Ltd. Saloman had taken 20000 shares and the price
payable by the company to Saloman was 30000
The true nature of the business must be revealed and euros. But the company instead of fully paying him
in case if the statements in the prospectus do not through cash decided and gave him 20000 fully paid
comply and in case the directors of the company shares of 1 euro each and for 10000 euros they gave
intentionally hide anything then in such cases it will him debenture.
be considered as mis-statements.
When the company dissolved the total assets of the
3.5.5 Seth Mohan Lal Vs Grain Chambers Ltd 1968 company amounted only to a sum of 6000 Euros. But
AIR 772, 1968 SCR (2) 252 The company owed 10000 Euros to Saloman whose
debt was secured through debentures and another
The company was completely bankrupt and did not sum of 7000 Euros to unsecured creditors. The
have further funds to run the business. The members
of the company did not want to be a part of the
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unsecured creditors claimed the money stating that functioning of the company would become
Salamon & Co belonged to Saloman so both were one impossible.
and the same. But the court held that company and its
members are always considered distinct from each Any policies and change of regulations will affect
other and moreover the debt of Saloman was secured these people directly or indirectly. They are
through a Debenture and Thereby declared that completely different from the shareholders of the
Saloman had the rights to receive the 6000 Euros and company and not all stakeholders are treated equally.
not the unsecured creditors. The different stakeholders of the company include
the employees of the company, customers of the
3.5.7 Lee Vs Lee’s Farming Company Ltd.  company, distributors, research funders, other
UKPC 33 vendors and money lenders to the company.
Lee was the managing director of the company that The Stakeholders of a company will be affected
he had incorporated. He also appointed himself as the drastically when the company decides to reduce the
pilot of the company and during one of the flights he cost of expenditure and plans rounds of lay-offs.
was lost in a tragic accident. His widow claimed for
compensation stating that he had lost his life during Stakeholders mainly depend on the profitability of
the course of business. But there was an opposition the company. They do not usually have any voting
stating that Lee’s farming company was his own rights or decision taking ability in the organisation.
establishment and hence there is no point in
awarding compensation but the court held that the Stakeholders are important part of the company
company was distinct from its members and gave the therefore it is essential for looking into the interest of
widow her compensation under the Workmen them because the development of the company is in
compensation Act. their hands. If they are not treated properly then the
company cannot develop.
3.6 STAKEHOLDER RIGHTS
3.6.1 Who are the stakeholders of the company? a. Shareholders
Stakeholders are people who are concerned about c. Customers
the functioning of the company. They also form the d. Creditors
main part of the organisation without whom the e. Financial Institutions
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g. Employees 3.6.2 Rights of the stakeholders
h. Depositors a. To learn about the objective of the business.
i. Suppliers b. To expect the company to know about their
j. Borrowers full requirements
k. Directors c. To be updated about the work progress in the
l. Management company.
m. Auditors d. To be treated with respect.
n. Competitor e. To express their ideas and exhibit their skills
o. Society for the development of the company
p. Government f. To be provided with adequate and high
q. Future generations quality information regarding the position of
r. Environment the company.
s. Stock Brokers and Stock g. To be able to access the financial statements
t. Exchanges and records of the company.
u. SEBI (securities h. To be provided fair opportunities and not to
v. exchange board of India) be exploited.
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