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completely superseded by the Companies act of 1913.These were mainly based on the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