Unit – 2

Business Law

2.1 CARRIAGE OF GOODS ACT:

INTRODUCTION:

Due to the globalization of various markets, international economic integration, removal of the barriers in business and the trade and also due to increase in the completion that has had significantly increased the dependency of business on transportation.

Transportation these days has become crucial game changer in the field of business.

Goods, articles need to be transferred from one place to another.

The association or organizations that carry out the job of transportations termed as multimodal transportation.

There are four modes of carriage transportation in India:

• Roadways
• Railways
• Sea
• Airlines

CARRIAGE OF GOODS BY LAND:

The carriage of goods by land is governed by two laws-

The carriage of goods by land is governed by two laws in India i.e.                                        The Carriage by Road Act, 2007                                                                                                                the Railways Act, 1989

According to the Carriage by Road Act,

Who is Carrier?

Carrier means any person or corporation “Carrier” engaged in the business of a common carrier of goods for hire, whether by Land, or by sea, from one part of the Island to another for the purpose of raising money.

• The carrier shall be liable for the loss of or injury to any article or articles or property. So Carrier is exempted from the liability in respect of certain articles unless value declared and for extra charge.
• A private carrier can be defined as an entity which carries its own goods or the goods of the selected person.
• Private carrier are governed by the Indian contract act rather than the Carriage by road act,2007
• Laws has been revise the then obsolete Carriers Act,1985
• Except Jammu and Kashmir, the act applies to the whole of India.

CARRIAGE OF GOODS BY RAIL

The railways Act, 1989, govern the carriage by railways.

Some of the important aspects of the act are follows:

• According to section 61 of the act, every railway administration should maintain rate books, which displays the authorized rates for the carriage of goods from one destination to another and make them available for the reference of any person during all reasonable hours without making demand of any sort of fees.
• According to section 63, if the goods are entrusted to a railway admin for the carriage, then such type of carriages shall be at railway risk rate, except where owner’s risk rate is applicable in respect of such goods. The goods shall be deemed to have been entrusted at the owner’s risk rate, if no rate is opted.
• According to section 64, a forwarding note should be executed by each and every person entrusting any goods to the railway administration for carriage in the form as specified by the Central Government.
• According to section 65, a railway receipt shall be issued by the railways administration, in case the goods are to be loaded by a person or on the acceptance of the goods. There should be properly described the weight and number of packages on the receipt.
• According to section 67, dangerous and offensive carriage should not be carried by any person unless it has been approved by the railway administration as a response to a notice containing the risk involved in the transportation. Such packages should be mark distinctly on the package.

CARRIAGE OF GOODS BY SEA

The law of carriage of goods by sea is a body of law that governs the rights and duties of shippers, carriers and consignees of marine cargo.

It is primarily concerned with cargo claims; this body of law is an aspect of international commercial law and maritime law.

1. The indian bills of lading act,1856
2. The carriage of goods by sea act,1925
3. The merchant shipping,1958

The typical obligations of a carrier by sea to a shipper of cargo are as follows:

• To issue a bill of lading
• To provide a seaworthy ship
• To proceed with “reasonable dispatch”
• To “properly and carefully load, handle, carry, keep care for and discharge the goods carried.
• To follow the agreed route
• At the time of sue, the seller, the shipper, or the carrier they may claim from their own insurance policy
• If the cargo is damaged where the shipper without fault (if the goods have been properly packed and stowed, a cargo –owner will have to claim on his own cargo policy.
• A suit will lie against the seller if the seller has insuffient title, inferior quality or not matching with the sample or description.

CARRIAGE OF GOODS BY AIR

The carriage of goods by air act 1972

Carriage by air act, 1972 came into force on May 15, 1973, superseding the erstwhile Indian carriage act,1934. The act makes provision for applying the rules contained in the said conventions to international and non-international carriage by air and for matters therewith.

• The regulations and conventions tend to evolve from a consideration of the liability to passengers; note, “cargo” is the word used in the Warsaw and other conventions as a category distinct from passengers and baggage.

There are three possible legal regimes, in so far as carriage by air is concerned:

1. Carriage governed by the original Warsaw Convention
2. Carriage governed by the amended Warsaw Convention
3. Non- Convention carriage

ORIGINAL WARSAW CONVENTION:

According to the contract between the parties, the places of departure and destination are located:

• Either in the territories of two state parties to the original convention: or
• In the territory of a single such state with an agreed stopping place anywhere outside that state.
• Provisions were also made where the carriage involves several successive carriers.
• The documents of carriage are called the air consignment note. It includes receipt of the goods, the conditions of carriage, the weight, the dimensions, packing and no.of goods. It comes with one the carrier, second the consignee and the third is the carrier and handed to the consignor after the goods have been accepted for carriage.

AMENDED WARSAW CONVENTION

According to the agreement between the parties, the places of departure and destination is located.

• The territories of two states both of which are parties to the amended convention
• Territory of a single state, party to amended convention with agreed stopping places anywhere outside the state.
• The document of carriage is called an air waybill. The provisions pertinent for the air consignment note and also air waybill. In case of damaging t the goods, complaint must be made in writing to the carrier immediately after delivery or not later than 14 days after delivery. In case delays, the complaint must be put in writing within 21days.

NON – CONVENTION RULES

When the carriage of cargo is governed neither by the original nor by the amended convention, and there is no agreed stopping place in another state then, whatever the location of departure, no part of the carriage would, as a matter of law, be regulated by either of the two conventions, and in an action before the English courts the carriage would be governed by the non –convention rules.

2.2 JOINT STOCK COMPANY ACT 2013

The long awaited new companies bill 2013 is finally passed in Lok Shabha on 18 December 20012 and in Rajya Sabha on 8 august 2013. After having obtained the assent from the president on 29 august 2013, it has now become much awaited COMPANIES ACT 2013 which has replaced the oOld Companies’ Act 1956.

INTRODUCTION

1. No of schedules: 7
2. No of chapters: 29
3. No of sections:470

KEYS DEFINITIONS AND CONCEPTS:

The new companies act introduces several new concepts some of them are as follows:

• One man company: the companies act 2013, has introduced new concept of “one person company” (OPC) apart from forming public or private company, which requires only a member.
• Dormant company: the act 2013, has inserted a new concept of dormant company, the company which established only to hold assets or intellectual property or for project office, having no other accounting transaction. Such company or inactive one may apply to the ROC for such status of the dormant company.
• Small company: small company means company which is other than public company. The provision does not apply to following companies i.e. holding and subsidiary company, company registered under section 8, company registered under special act.
• Private company: the act 2013, has introduce little change in the definition, just increase the limit of members from 50 to 200.

ROLES AND RESPONSIBILITIES:

• Officers: the definition of officer has been including the promoters and key managerial personnel.
• Promoters: the  person who named as such in the prospectus or is identified by the company having regards to the annual return or who has control over the affairs of the company being a director, shareholder or otherwise. The person with who’s instruction or direction or advice the board is accustomed to act.
• Independent director: under section 149(6) of the act 2013, and some new requirements has been added regarding there appointment and role and responsibility.

INVESTMENTS:

• Subsidiary: under the act 2013, states that the certain class or classes of the holding companies shall not have the layers of the subsidiaries beyond the limit in numbers specified. The restrictive definition states that holding companies from now will not be able to hold subsidiaries beyond the number specified under the act.

FINANCIAL STATEMENTS:

• Financial year: under the act 2013 as the period ending on the date 31st march of the respective year or where the company is incorporated on or after the first day of the January then the 31st march of the following year.
• Consolidated financial statements: the act 2013 has mandated the consolidation of the financial statements for all the companies having subsidiaries, association or joint stock companies.

AUDIT AND AUDITORS:

• Mandatory rotation and joint audit: the act 2013, has made the rotation of auditor after the specified time period (refer act) as mandatory requirement and apply the enabling provisions on the joint audit as well.
• Non audit services: the act 2013 has stated that the services rendered by the auditor should be approved by the BOD or audit committee. The auditor also cant provide certain specific services. ( refer act)
• Standards of auditing: standards have been subjected to the notification of NFRA.
• Secretarial audit for big companies: the act 2013, has made it mandatory for the listed companies or public having paid up share capital >100 crores. The secretarial audit report by the practicing company secretary to the board.
• Secretarial standards: act 2013, requires that all companies to follow and apply the standards as given the ICSI. But the same standards have not given any cognizance under the Companies Act 1956.
• Internal audit: the act 2013 has widened scope of the internal audit. The importance of the internal audit is well acknowledged in CARO 2003, it requires the internal auditor to comment upon the fact that the internal audit system of the company is commensurate with the size and nature of the business.

Act 2013 has taken a step forward it has mandatory the appointment of an internal auditor being a CA. Or cost accountant or any other professional person from the board.

It is compulsory for every listed company, every public companies having paid up share capital of more than INR 10 crores , and any other companies having borrowings more than INR 25 crores from the banks or public financial institutions.

• Audit of items of cost: The CG order that the production of such goods or services related to such goods, direct that such companies shall include in the financial report utilization of the material or labor or any other item as may be prescribed.

REGULATORS:

• National company law tribunal
• National financial reporting authority
• Serious fraud investigation office

MERGERS AND ACQUISITION:

Act 2013, has stream lined as well as introduced the new concepts of reverse merger (foreign companies with the Indian companies) and squeeze out provisions which are significant. The act has also introduced the valuation in several cases including merger and acquisition by the registered value.

CORPORATE SOCIAL RESPONSIBILITY:

The Act 2013 has made great efforts to introduce the culture of corporate social responsibility in the Indian corporate by requiring the companies to formulate the CSR policy. Also company so set up aside the minimum expenditure for the CSR.

CLASS ACTION SUITS:

The act 2013, has introduced the new concept of class action suits now shareholders can initiate suit against company and auditors.

POWERS TO REMOVE DIFFICULTIES:

• CG with its order shall have the power to exempt or notify the provisions of the act for such class or classes of the companies as deem fit in public interest. Relevant notification shall be laid in the draft form in the parliament for 30days. The Act 2013 has stated that no such order shall be passed after the expiry of 5 years from the date of commencement of the section 1 of the Act 2013.             
• Prohibition on Association or Partnership of persons exceeding certain numbers:
• The Act 2013 has put restrictions on number of partners that can be admitted to are 100.
• To be specific Act 2013, also states that no association or partnership can be formed having the members or partners more than the prescribed unless it is formed as the company under the Act 2013 or any other law for the time being in force.
• As an exception the following provision shall not apply to the followings: An HUF carrying on any business.  AOP or Partnership formed by the professionals under the special acts like The Chartered Accountants Act 1949.

INSIDER TRADING AND PROHIBITION ON FORWARD DEALING:

• The Act 2013, has first time defines the Insider Trading and Forward dealings.
• The Act put prohibition on any person including director or key managerial person to enter into any such kind of activity.
• Further the Act 2013, also put restrictions on the director or Key managerial person to enter into any kind of forward dealings.

2.3 THE NEW COMPANIES ACT 2013

SETTING UP OF A COMPANY THE NEW COMPANIES ACT 2013:

The 2013 Act introduces a new form of entity ‘one-person company’ and incorporates certain new provisions in respect of memorandum and articles of association. For instance, the concept of including entrenchment provisions in the articles of association has been introduced.

INCORPORATION OF THE COMPANY

1. One-person company:

The 2013 Act introduces a new type of entity to the existing list i.e. apart from forming a public or private limited company, the 2013 Act enables the formation of a new entity ‘one-person company’ (OPC). An OPC means a company with only one person as its member [section 3(1) of 2013 Act. The draft rules state that only a natural person who is an Indian citizen and resident in India can incorporate an OPC or be a nominee for the sole member of an OPC.

2. Memorandum of association:

The 2013 Act specifies the mandatory content for the memorandum of association which is similar to the existing provisions of the 1956 Act and refers inter-alia to the following:  

• Name of the company with last word as limited or private limited as the case may be.
• State in which registered office of the company will be situated.
• Liability of the members of the company.

However, as against the existing requirement of the 1956 Act, the 2013 Act does not require the objects clause in the memorandum to be classified as the following:

• The main object of the company
• Objects incidental or ancillary to the attainment of the main object
• Other objects of the company [section 4(1) of 2013 Act

The basic purpose in the 1956 Act for such a classification as set out in section 149 of the 1956 Act, is to restrict a company from commencing any business to pursue ‘other objects of the company’ not incidental or ancillary to the main objects except on satisfaction of certain requirements as prescribed in the 1956 Act like passing a special resolution, filing of declaration with the ROC to the effect of resolution.

• Reservation of name: The 2013 Act incorporates the procedural aspects for applying for the availability of a name for a new company or an existing company in sections 4(4) and 4(5) of 2013

3.) Article of Association:

The 2013 Act introduces the entrenchment provisions in respect of the articles of association of a company. An entrenchment provision enables a company to follow a more restrictive procedure than passing a special resolution for altering a specific clause of articles of association. • A private company can include entrenchment provisions only if agreed by all its members or, in case of a public company, if a special resolution is passed [section 5 of 2013 Act].

4.) Incorporation of Company:

The 2013 Act mandates inclusion of declaration to the effect that all provisions of the 1956 Act have been complied with, which is in line with the existing requirement of 1956 Act.

Additionally, an affidavit from the subscribers to the memorandum and from the first directors has to be filed with the ROC, to the effect that they are not convicted of any offence in connection with promoting, forming or managing a company or have not been found guilty of any fraud or misfeasance, etc., under the 2013 Act during the last five years along with the complete details of name, address of the company, particulars of every subscriber and the persons named as first directors.

The 2013 Act further prescribes that if a person furnishes false information, he or she, along with the company will be subject to penal provisions as applicable in respect of fraud i.e. section 447 of 2013 Act [section 7(4) of 2013 Act; Also refer the chapter on other areas] The New Companies Act 2103

5.) Formation of the Company

An OPC with charitable objects may be incorporated in accordance with the provisions of the 2013 Act. New objects like environment protection, education, research, social welfare etc., have been added to the existing object for which a charitable company could be incorporated.

As against the existing provisions under which a company’s license could be revoked, the 2013 Act provides that the license can be revoked not only where the company contravenes any of the requirements of the section but also where the affairs of the company are conducted fraudulently or in a manner violate of the objects of the company or prejudicial to public interest. The 2013 Act thus provides for more stringent provisions for companies incorporated with charitable objects [section 8 of 2013 Act].

6.) Commencement of Business:

The existing provisions of the 1956 Act as set out in section 149 which provide for requirement with respect to the commencement of business for public companies that have a share capital would now be applicable to all companies.

The 2013 Act empowers the ROC to initiate action for removal of the name of a company in case the company’s directors have not filed the declaration related to the payment of the value of shares agreed to be taken by the subscribers to the memorandum and that the paid-up share capital of the company is not less than the prescribed limits as per the 2013 Act, within 180 days of its incorporation and if the ROC has reasonable cause to believe that the company is not carrying on business or operations [section 11 of 2013 Act]. The New Companies Act 2013

7.) Registered office of the Company:

Where a company has changed its name in the last two years, the company is required to paint, affix or print its former names along with the new name of the company on business letters, bill heads, etc.

However, the 2013 Act is silent on the time limit for which the former name needs to be kept [section 12 of 2013 Act].

8.) Subsy not to hold shares:

The existing provision of section 42 of the 1956 Act which prohibits a subsidiary company to hold shares in its holding company continues to get acknowledged in the 2013 Act.

Thus, the earlier concern that if a subsidiary is a body corporate, it may hold shares in another body corporate which is the subsidiary’s holding company continues to apply [section 19 of 2013 Act].

9.) Alteration of Memorandum:

The 2013 Act imposes additional restriction on the alteration of the object clause of the memorandum for a company which had raised money from the public for one or more objects mentioned in the prospectus and has any unutilized money.

The 2013 Act specifies that along with obtaining an approval by way of a special resolution, a company would be required to ensure following if it intends to alter its object clause:

Publishing the notice of the aforesaid resolution stating the justification of variation in two newspapers

Exit option can be given to dissenting shareholders by the promoters and shareholders having control in accordance with the regulations to be specified by the Securities and Exchange Board of India (SEBI) [section 13 of 2013 Act]

2.4 PROSPECTUS & PUBLIC OFFER

The 2013 Act has introduced a new section [section 23] to explicitly provide the ways in which a public company or private company may issue securities. This section explains that a public company may issue securities in any of the following manners:

• To public through prospectus. ▫
• Through private placement .
• Through rights issue or a bonus issue.

For private companies, this section provides that it may issue securities through private placement, by way of rights issue or bonus issue.

Section 23 also provides that compliance with provisions of part I of chapter III is required for the issue of securities to public through prospectus. For private placement compliance, with the provisions of part II of chapter III are required.

The 2013 Act also introduces certain changes with respect to prospectus and public offers aimed at enhancing disclosure requirements as well as streamlining the process of issuance of securities.

1. Issue of Prospectus:

Currently, the matters and the reports to be included in the prospectus are specified in the parts I & II of the Schedule of the 1956 Act. In the 2013 Act, the matters are included in the section 26 of the act. The act mandates certain additional disclosures:

• Any litigation or legal action pending or taken by a government department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company.
• Sources of Promoter’s Contribution.

The 2013 Act has also relaxed the disclosure requirements in some areas. Examples of certain which are not included in the 2013 Act are as follows. Particulars regarding the company and other listed companies under the same management, which made any capital issues during the last 3 years. - Export possibilities and export obligations. - Details regarding collaboration.

The 2013 act states that report by the auditors on the assets & liabilities of business shall not be earlier than 180 days before the issue of the prospectus.[section 26 (1) (b) (iii) of 2013 Act ].

The 1956 currently requires that report will not be 120 days earlier than the issue of the prospectus.

2. Variation in terms of contracts and obligation:

The 2013 Act requires Special resolution to be passed to vary the terms of the contract and obligations referred to in the prospectus or objects for which the prospectus was issued. [Section 27 (1) of 2013 Act] .

The 1956 Act requires the approval in the general meeting by way of an Ordinary resolution.

The 2013 Act also requires the dissenting shareholders to be given exit offer by promoters or controlling shareholders.

3. Offer of sale of shares by certain members of the company:

The Act 2013 includes a new section under which members of a company, in consultation with the BOD, may offer a part of their holdings to the public.

The document by which the offer for sale shall be made to the public shall be considered as the prospectus. The members shall reimburse all the expenses to the company incurred by it.

4. Shelf Prospectus:

The 2013 Act has extends the facility of the shelf prospectus by enabling SEBI to prescribe the classes of companies that may file a shlef prospectus. The Act 1956 currently limits the facility of shelf prospectus to the Public financial institutions, public sector banks or scheduled banks. [Section 31 (1) of 2013 Act]

5. GDRs:

The 2013 Act includes a new section to enable the issue of depository receipts in any foreign country subject to the prescribed conditions [section 41 of 2013 Act].

Currently the provision of section 81 of the 1956 Act relating to the further issue of shares are being used in conjunction with requirements mandated by SEBI for the issuance of depository receipts.

In several aspects across the 2013 Act , it appears that the 2013 act supplements the powers of SEBI by incorporating requirements already mandated by the SEBI.

6. Private Placement:

The 2013 Act requires that certain specified conditions are complied with in order to make an offer or invitation of offer by way of private placement or through the issue of a prospectus.

The offer of securities or invitation to subscribe securities in a financial year shall be made to such number of persons not exceeding 50 or such higher number as may be prescribed {excluding qualified institutional buyers, and employees of the company being offered securities under a scheme of employees stock option in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed}. This provision of the 2013 Act is in line with the existing provision of the 1956 Act.

The allotments with respect to any earlier offer or invitation may have been completed.

All the money payable towards the subscription of securities shall be paid through cheque, demand draft or any other banking channels but not by cash.

The offers shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name. • The company offering securities shall not release any advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer [section 42 of 2013 Act].

2.5 SHARE CAPITAL & DEBENTURES

The 2013 Act introduce some key changes on shares and debentures. In other words, the 2013 act doesn’t give any cognizance to the existing requirements of 1956 act,that is currently giving some relaxation to the private companies. There fore the provisions of the 2013act are no longer applicable only to the public companies and private companies which are subsy of the public companies and now are applicable to the private companies also.

• Two kind of shares capital.
• New issues of share capital to be only of two kinds.
• Voting rights.

1. Voting Rights:

The provisions of the 2013 act regarding voting rights are similar to the existing provisions of section 87 of the 1956 Act.

The only change noted in the 2013 Act is removal of distinction provided by the 1956 Act with respect to the entitlement to vote in case the company fails to pay dividend to its cumulative and non-cumulative preference shareholders [section 47 of the Act 1956].

The provisions regarding private placements and additional disclosures in prospectus will also help to strengthen the capital markets.

The 2013 Act proposes to reinstate the existing concept of shares with differential voting rights. Pursuant to this section the company may face hardships with regards to computation of proportionate voting rights.

2. Variation of shareholder’s right:

Similar to the other provisions of the 1956 Act, the 2013 Act acknowledges the requirements of section 106 of the 1956 Act with an additional requirement in respect of those classes of shareholders whose rights are affected pursuant to any variation. The proviso to section 48 (1) of the 2013 Act, states that rights attached to the different classes of the shares may be varied by written consent of 3/4th shareholders or by way of special resolution in the separate meeting of the issued shareholders of that class.

3. Application of premiums received on issue of shares:

The 2013 Act has laid down the similar requirements in section 52 as that of section78 of the 1956 Act, in respect of the premiums on applications received on the issue of the shares.

However, the section of 2013 Act has a non-obstante provision in respect of certain class of companies which would be prescribed at a later date. The 2013 Act states that these classes of companies would not be able to apply the securities premium towards the below specified purposes, unless the financial statements are in compliance with the accounting standards issued under section 133 of 2013 Act:

• Paying up unissued equity shares of the company as fully paid bonus shares
• Writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company
• Purchase of its own shares or other securities.

The 2013 Act restricts the application of securities premium for a certain class of companies if they fail to comply with the accounting standards. The 2013 Act continues to state that securities premium amount can be utilized for purpose of writing off preliminary expenses. However, in view of the requirements of accounting standard 26, intangible asset, the requirement of this sub-section appears to be superfluous. 23

4. Prohibition on issue of shares at a discount:

The 2013 Act states that companies will no longer be allowed to issue the shares at a discount [section 53].

Notwithstanding anything contained in the section 53, companies can issue sweat equity shares as per the following conditions prescribed:

• Authorization through SR.
• SR must specify the details of no. Of shares, current market price, consideration & the class (es) of the employees or directors to whom issued.
• 1 year must have been elapsed from the date of commencement of business by co.
• SEBI guidelines to be followed in case the shares are listed on a stock exchange.  In case of any contravention of provisions some penal provisions are also prescribed [section 53].

5. Issue and redemption of preference shares:

The 2013 Act continue to acknowledge the existing requirements as per1956 act with respect to the issue and redemption of prefrence shares.

The act states the existing provision that a company cannot issue prefrence shares with redemption date of beyond 20 years except in case of shares are issued related to the infrastructure project, those projects which specified in schedule VI. These shares would be subject to redemption at such percentage as prescribed on an annual basis at the option of such preference shareholders.

The 2013 Act also specify that SR is required in case the company is not in the position to redeem its preference shares.

The 2013 act gives option to the companies, in case, where the company is not in a position to redeem its preference shares, as per the terms of the issue, it may, with the consent of three-fourths in value of such preference shares and with the approval of the Tribunal issue further redeemable preference shares equal to the amount due, including the dividend thereon, with respect to the unredeemed preference shares. On the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

6. Refusal of registration and appeal against registration:

The provision relating to refusal of registration of transfer or transmission of securities by private and public companies has been separately clarified in the 2013 Act. The private and public companies are required to send notice of refusal within 30 days of the receipt of instrument of transfer, and aggrieved party may appeal to the Tribunal against the refusal within the specified number of days [section 58(2) of 2013 Act].

7. Further issue of share capital:

The existing requirement of section 81 of the 1956 Act in regard to further issue of capital would no longer be restricted to public companies and would be applicable to private companies also, since sub-section 3 of section 81 of the 1956 Act has not been acknowledged in the 2013 Act.

Further, the 2013 Act provides that a rights issue can also be made to the employees of the company who are under a scheme of employees’ stock option, subject to a special resolution and subject to conditions as prescribed. Further, the price of such shares should be determined using the valuation report of a registered value, which would be subject to conditions as prescribed [section 62 of 2013 Act].

8. Issue of bonus shares:

The existing 1956 Act does not have any specific provision dealing with issue of bonus shares although it has referred to the concept of bonus shares at many places. The 2013 Act includes a new section that provides for issue of fully paid-up bonus shares out of its free reserves or the securities premium account or the capital redemption reserve account, subject to the compliance with certain conditions such as authorization by the articles, approval in the general meeting and so on [section 63 of 2013 Act].

9. Unlimited company to provide for reserve share capital on conversion into limited company:

This section is similar to section 32 of the 1956 Act and seeks to provide that an unlimited company having a share capital may be re-registered as a limited company by increasing the nominal amount of each share, subject to the condition that no part of the increased capital shall be capable of being called up, except in the event and for the purposes of the company being wound up. The 2013 Act further provides that a specified portion of its uncalled share capital shall not be capable of being called up except in the event and for the purposes of the company being wound up[section 65 of 2013 Act].

10. Reduction of share capital:

The 2013 Act gives cognizance to one of the amendments made in the listing agreement by SEBI. A new clause 24(i) was inserted to the listing agreement which provided that a scheme of amalgamation or merger or reconstruction, should comply with the requirements of section 211(3C) of the 1956 Act. A similar requirement has been introduced in section 66 of 2013 Act, which states that no an application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such a reduction is in conformity with the accounting standards specified in section 133 or any other provision of the 2013 Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal.  Further, the 2013 Act clarifies that no such reduction shall be made if the company is in arrears in repayment of any deposits accepted by it, either before or after the commencement of the 2013 Act, or the interest payable thereon.

11. Power of the company to purchase its own securities:

The existing provision of section 77A of the 1956 Act has been acknowledged by the 2013 Act. The only difference is that the option available to company for a buy-back from odd lots is no longer available [section 68].

The 2013 Act provides flexibility in management and administration by recognizing the electronic mode for notices and voting, which is in line with the MCA’s efforts to give cognizance to use of electronic media as evident from a number of green initiatives’ introduced recently, maintenance of registers and returns at a place other than the registered office.

BUSINESS MANAGEMENT AND ADMINISTRATION

The 2013 Act also intends to improve the corporate governance by requiring the disclosure of nature of concern or interest of every director, manager, any other key managerial personnel and relatives of such a director, manager, or any other key managerial personal and reduction in the threshold of disclosure of 20% to 2%. The term key managerial personnel now has been defined under the 2013 Act and means the CEO, MD, Manager, CS, WTD,CFO and any such officer as may be prescribed

• Annual Return:

The 2013 Act states that requirement of the certification by CS in practice of annual return will be extended on to those companies having the paid up capital of five crores INR or more and the turnover 25 crore INR or more or the Listed Companies. Annual return to be filed by the companies will be included more information than before, including particulars of holding, subsidiary and associate companies, remuneration of directors and key managerial personnel, penalty or punishment imposed on the company, its directors or officers [section 92(1) of 2013 Act].

• Place of keeping registers and returns:

The 2013 Act allows registers of members, debenture-holders, any other security holders or copies of return, to be kept at any other place in India in which more than one-tenth of members reside [section 94(1) of 2013 Act]. The flexibility in the 1956 Act is limited to a place within the city, town or village in which the registered office is situated.

• General Meetings:

Every company other than an OPC shall hold AGM in addition to its other meetings through the notices calling it. And not more than 15 months shall elapse between the date of current meeting and the next. The 2013 act requires that first general meeting to be held with in 9 months from the closure of the first financial year where as 1956 Act requires the first Annual General Meeting to be held within 18 months from the date of incorporation. Currently the existing provisions of the 1956 act doesn’t defines the business hours , but the 2013 Act now defines as 9am to 6 pm. The 2013 Act requires that the AGM can’t be held on a national holiday but the current provisions states that AGM can’t be held on a public holiday as per section 166 of 1956 Act.(Contradiction was also there in section 166 of 1956 Act).

The 2013 Act states that a 21 days clear notice required to be given for calling an AGM either written or through electronic mode, however AGM can be call at a shorter notice provided consent of 95% members as against the consent of 100% members as the existing requirement of 1956 Act.[section 101 of 2013 Act ]

The 2013 states that besides the director & manager, the nature of the concern or interest of every director, manager, key managerial personnel and the relative of the persons mentioned respectively in each item of the special business will also be need to be mentioned in the notice of the AGM.

The 2013 act has reduced the threshold limit from 20% to 2% of the the disclosure of share holding interest in the company to which it relates of every promoter, director, manager, key managerial personnel.[section 102 of 2013 Act ]

The 2013 Act states that in case of a public company, the quorum will depend on number of members as on the date of meeting. The required quorum is as follows:

• Five members if number of members is not more than one thousand.
• Fifteen members if number of members is more than one thousand but up to five thousand.
• Thirty members if number of members is more than five thousand [section 103 (1) of 2013 Act].

A limit has been introduced on the number of members which a proxy can represent. The 2013 Act has introduced a dual limit ▫ in terms of number of members, prescribed as 50 members and ▫ a limit in terms of number of shares holding in the aggregate not more than 10 % of the total share capital of the company carrying voting rights* [section 105 (1) of 2013 Act].

Further, it is relevant to note that private companies cannot impose restrictions on voting rights of members other than due to unpaid calls or sums or lien [section 106 (1) of 2013 Act].

Listed companies will be required to file with the ROC a report in the manner prescribed in the rules on each annual general meeting including a confirmation that the meeting was convened, held and conducted as per the provisions of the 2013 Act and the relevant rules [section 121 of 2013 Act].

Other matters:

Listed companies will be required to file a return with the ROC with respect to the change in the number of shares held by promoters and top ten shareholders within 15 days of such a change [section 93 of 2013 Act]. This requirement again demonstrates the effort made towards synchronizing the requirements under the 2013 Act and the requirements under SEBI. Additionally, on an annual basis, companies are also currently required to make the disclosures with respect to top shareholders under the Revised Schedule VI the 1956 Act.

The 2013 Act requires every company to observe secretarial standards specified by the Institute of Company Secretaries of India with respect to general and board meetings [section 118 (10) of 2013 Act], which were hitherto not given cognizance under the 1956 Act. Additionally, it is also pertinent to note that these standards do not have a mandatory status for the practicing company secretaries.

2.6 DIRECTORS

GENERAL

1. Woman director

• The category of companies which need to comply with the requirement of having at least of one woman director are as follows: * [section 149(1) of 2013 Act]
• Every listed company, within one year from the commencement of second proviso to sub-section
• Every other public company that has paid–up share capital of one hundred crore rupees or more, or a turnover of three hundred crore rupees or more within three years from the commencement of second proviso to sub-section
• While this new requirement will go a long way in encouraging gender diversity, it has already created quite a stir in the manner in which companies will ensure compliance.

2. Number of directorship

The 2013 Act increases the limit for number of directorships that can be held by an individual from 12 to 15 [section 149(1) of 2013 Act]

A new requirement with respect to directors is that at least one director to have stayed in India for at least 182 days in the previous calendar year [section 149(3) of 2013 Act]. This requirement appears to be a departure from the focus given in the 2013 Act towards use of electronic mode such as use of video conferences for meetings and electronic voting. With the increasing use of electronic media, the need, for a director to be resident in India for a minimum amount of time, becomes redundant.

3. Independent directors

One of the significant aspects of the 2013 Act is the effort made towards incorporating some of the salient requirements mandated by the SEBI in clause 49 of the listing agreement in the 2013 Act itself. To this effect, the 2013 Act requires every listed public company to have at least one-third of the total number of directors as independent directors. Further, the central government in the draft rules has prescribed the minimum number of independent directors in case of the following classes of public companies* [section 149(4) of 2013 Act]. (i) Public companies having paid up share capital of 100 crore INR or more; or (ii) Public companies having turnover of 300 crore INR or more (iii) Public companies which have, in aggregate, outstanding loans or borrowings or debentures or deposits, exceeding 200 crore INR

The 2013 Act also states that companies will have a period of one year to ensure compliance with the 2013 Act and the Rules that are framed.

Conflicting Requirements:

While the attempts has been made to harmonies the requirements of the SEBI & the 2013 act, but still there are several aspects relating to the independent directors where the requirements of the SEBI and the 2013 act differs from the requirements of the clause 49 of equity listing aggreement.The following are the differences:

Clause 49 does not require the board to exercise its judgment and opine on whether the independent director is a person of integrity or has relevant expertise or experience. This requirement poses difficultly in terms of the manner in which integrity hof an individual can be assessed by the board.

Clause 49 does not require examination of the independence of the relatives of independent directors. Extending the disqualification of the independent directors to consider the pecuniary relationship of the relatives would pose unnecessary hardship for the independent directors.

The qualification of the independent director has been left to be specified later.

The 2013 Act brings the constitution of the board in India at par with other international capital markets i.e., by mandating at least one-third of the board to be independent directors in case of listed companies. Whereas, the SEBI requirements are where the chairman of the board is a non-executive director, at least one-third of the board should comprise of independent directors and where the non- executive chairman is a promoter of the company or is related to any promoter or person occupying management positions at the board level or at one level below the board, at least one-half of the board of the company shall consist of independent directors.

Differing compliance requirements with respect to the appointment of independent directors, remuneration thereto, imposed by multiple regulators will lead to hardship as well increased cost of compliance for companies 32

The 2013 Act states that subject to the section 197 & 198, an independent director shall not be entitled to any stock option & may receive remuneration by way of fee, reimbursement of expenses & other meetings & profit related commissions. [section 149(9) of 2013 Act], which is again in contradiction with the sebi requirements whereby for granting stock options employees includes the independent directors also.

The 2013 act provides that subject to the provisions of section 152 an independent director shall hold office for a term upto 5 consecutive years on the board of the company, can be reappointed subject to the passing of special resolution at the board meeting.

The 2013 Act limits the tenure of office of an independent director to a maximum of two tenures of five consecutive years, with a cooling-off period of three years between the two tenures. During the cooling-off period of three years, should not be appointed in or be associated with the company in any other capacity, either directly or indirectly [proviso to section 149(11) of 2013 Act].

It is also relevant to note that the MCA had released the corporate governance voluntary guidelines in 2009, which permitted three tenures (with other conditions similar to those discussed above) for an independent director while as per the clause 49 of the equity listing agreement, an independent director cannot serve for more than nine consecutive years.

DATA BANK OF INDEPENDENT DIRECTORS:

The 2013 act states that subject to the provisions of section 149(5), the independent directors shall be selected from the data bank maintained by the body or association, having expertise in that are, prescribed by the CG in this behalf, the directors who met the eligibility criteria and are willing to be the independent directors shall get their name registered in the the data bank.

And the data shall be put on the company website from where the names of the independent directors can be selected to be appointed at the board meeting.

The proposal has its origins in the report of the 21st Standing Committee on finance, wherein it was acknowledged that preparation of a databank of independent directors would vest with a regulatory body that may comprise of representatives of MCA, SEBI, Reserve Bank of India, professional institutions, Chambers of Commerce and Industry etc [section 150 of 2013 Act]

CODE FOR INDEPENDENT DIRECTORS:

The 2013 Act includes Schedule IV ‘Code for Independent Directors’ (Code) which broadly prescribes the following for independent directors:

• Professional conduct
• Role and functions
• Duties
• Manner of appointment
• Reappointment
• Resignation or removal
• Holding separate meetings
• Evaluation mechanism

• The code appears to be mandatory which would lead to some of the following concerns: 
• The code states that an independent director shall uphold ethical standards of integrity and probity, however what would constitute ethical behaviour is not defined and is open to interpretation.
• The code does not give any cognizance to the need for training for the independent directors.
• The code refers to appointment of independent directors by the board after evaluating certain attributes. The concern that remains unaddressed is the manner in which companies need to carry out an assessment of the attributes of an independent director as specified under ‘manner of appointment’ in the code from the databank maintained by the MCA.

LIABILITY OF INDEPENDENT DIRECTOR:

The 2013 act has distinguish the liability of an independent director & non executive director from the rest of the board by inserting the separate provisions under the act which describes as follows: “Both independent director & non executive director not being the promoter & key managerial person shall be held liable only in respect of those acts or omissions or commissions by a company which had occurred with his knowledge, attributable thorug the board process with his consent or connivance or where he had not acted diligently.”

The section seeks to provide immunity from civil or criminal action against independent directors in certain cases. Further, in accordance with the requirement of section 166 (2) of 2013 Act, whole of the board is required to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company, its employees, the shareholders, the community and for the protection of the environment. By virtue of this section the duty of independent directors actually goes beyond its normal definition and is not restricted to executive directors only.

It is amply clear that independent directors have little or no defence and their obligations continues to remain a debatable topic since they would still be treated equivalent to the other directors by holding them responsible for decisions made through board processes.

APPOINTMENT OF AN ADDITIONAL DIRECTOR:

The 2013 act states that no person can be appointed as an additional or alternate director if he failed to be elected as an independent director in the broad meeting as per the provisions of the act [section 161 of the 2013 act].

ADDITIONAL COMPLIANCE REQUIREMENT FOR THE PRIVATE COMPANIES:

There are certain increased compliance requirements mandated for private companies which, till now, were mandated only for public companies and private companies which are subsidiaries of public companies. These include the following:

• Appointment of director to be voted individually
• Option to adopt principle of proportional representation for appointment of directors
• Ineligibility on account of non-compliance with section 274(1) (g) now extended for appointment or reappointment as a director in a private limited company also.

MEETING OF THE BOARD AND ITS POWERS.

The 2013 Act has given cognisance to the provisions of the 1956 Act related to the board meetings and its powers. Some of the other significant changes in relation to the board and its functioning include:

1. Audit Committee: The requirements relating to the audit committee was introduced first time by Companies (amendment) Act, 2000. Audit committee is entrusted with the significant responsibilities to have an eye on the management of listed companies, view the financial controls and much more additional responsibilities the 2013 Act recognized.

The following are the major provisions related to the audit committee:

a)      Audit committee should consist of the minimum 3 independent directors which should form majority.

b)     Majority of the members of the audit committee should be able to read the financial statement of the company. i.e should be financially literate.

c)      The existing audit committee prior to the commencement of this act should be reconstituted as per the above mentioned provisions.

d)     Chairman of the audit committee need not be an independent director.

e)     Every listed company or such class (es) of companies as prescribed in the draft rules should establish a vigil mechanism for directors and employees to report genuine concerns such as :

• Companies which accept deposits from the public
• Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees
• Provided that such details of the establishment of such mechanism shall be disclosed by the company on its website if any & in the boards report.

2. Nomination and Remuneration Committee and Stakeholders Relationship Committee:

The 2013 Act includes this new section requiring constituting the nomination and remuneration committee by every listed company and the following classes of companies as prescribed in the draft rules:* (A) Every listed company (B) Every other public company that has a paid-up capital of 100 crore INR or more or which has, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 200 crore INR.

The Nomination and Remuneration Committee is required to formulate and recommend to the Board of Directors, the company’s policies, relating to the remuneration for the directors, key managerial personnel and other employees, criteria for determining qualifications, positive attributes and independence of a director [section 178(1) of 2013 Act].

Further, a board of a company that has more than 1000 shareholders, debenture-holders, deposit- holders and any other security holders at any time during a financial year is required to constitute a Stakeholders Relationship Committee [section 178(5) of 2013 Act].

3. Contributions to charitable funds and political parties :

As per the 2013 Act the power of making contribution to ‘bona fide’ charitable and other funds is proposed to be available to the board subject to certain limits [section 181 of 2013 Act].As per the existing requirement of section 293 of the 1956 Act, such power could only be exercised in the general meeting in case of public companies and subsidiaries of public companies as per the 1956 Act.

Further, the limits of contribution to political parties is proposed to be increased to 7.5% of the average net profits during the three immediately preceding financial years [section 182 of 2013 Act] from the existing limit of 5% under the 1956 Act. 38

4. Disclosure of interest:

The 2013 Act prescribes similar requirements with respect to the disclosure of interest by the director as contained in the existing section 299 of the 1956 Act. The only change that could be identified is where a contract or arrangement entered into by the company without disclosure of interest by director or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company [section 184 of 2013 Act].

5. Loan to directors:

The 2013 Act states that no company whether directly or indirectly shall advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director has is interested or give any guarantee or provide any security in connection with the loan taken by him or such other person. • Earlier restrictions was only on the public companies but the2013 Act has extended the restrictions on to the private companies also.

The 2013 act also provides for the exception to this particular above mentioned provision: a.) Loan to the Managing director in order to pursue his duties. b.) Loan to any director in the ordinary course of the business. In case of the contravention of the provision of the act the 2013 Act has provided for the penal provisions from INR 5 Lakh to INR 25 lakhs. 39

6. Loan & Investment by the companies:

The 2013 Act has specified in details provision regarding the loan and investment by the companies. Earlier section 372 A of 1956 Act was dealing with the same regarding loan and investment by the companies. “Without prejudice to the provisions of the act, no company shall unless otherwise prescribed, make investment through not more than two companies.” No company shall directly or indirectlty : i.) Give loan to any person or any body corporate. Ii.) Give any Gaurantee or provide security to any person or body corporate in connection with the loan. Iii.) Acquire by way of subscription or purchase the securities of any other body corporate. Subject to Limit not exceeding 60 % of its paid up capital, free reserves & securities premium account OR 100 % of its Free reserves or Securities Premium

The 2013 Act states that companies can make investments only through two layers of investment companies subject to exceptions which includes company incorporated outside India [section 186 of 2013 Act]. There are no such restrictions which are currently imposed under the 1956 Act.

Further, the exemption available from the provisions of section 372A of the 1956 Act to private companies as well as loans or investment given or made by a holding company to its subsidiary company are no longer available under the 2013 Act. 40

7. Related party transactions:

The 2013 Act states that no company can enter into any related party transactions except with the consent of the board by passing a resolution in respect to the same. The following can be the related party transactions: a) Sale, purchase or supply of the goods and material. b) Leasing of any property. c) Sale of or disposing and buying of property of any kind. d) Availing or rendering of any services. e) Penalty for the contravention of the provision of the section is covered under this section itself. f) Central government may prescribe additional conditions as well.

2.7 APPOINTMENT AND REMUNERATION OF THE MANAGERIAL PERSONNEL

The 2013 Act has made the significant changes as compare to the existing requirement of the 1956 Act with respect to the appointment and managerial remuneration of the managerial personnel. One of the major changes that is noteable is that the applicability of these provisions, as now these are applicable to “all of the companies”. However the overall ceiling in respect to the payment of managerial remuneration by a public company remains the same 11% of the profit of the financial year computed as per the manner laid down in the 2013 Act. 41

1.) Appointment of MD, WTD or Manager:

No company shall make an appointment or reappointment of the MD or Manager at the same time.

The re-appointment of a managerial person cannot be made earlier than 1 year before the expiry of his term instead of the 2 years as per the existing provisions of the 1956 Act, however the term of a managerial person cannot exceed more than 5 years.

The eligibility criteria has been revised as per the 2013 Act, as a person below the age of 21 years can’t be appointed as the managerial person as against the existing requirement of 25 years.

Further the 2013 act has also lifted the upper limit up to 70 years and person of 70 above can be appointed after passing a SR against the same.

Provisions of Schedule V and under section 196 are required to be complied with for the appointment of the Managerial person.

2.) Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits:

As against the existing requirement of section 198 of the 1956 Act, which specifically provides that the provisions of managerial remuneration would be applicable to both public companies and private companies which are subsidiaries of public companies; the 2013 Act states that such provisions would be applicable only to public limited companies.

Listed companies have been mandated to disclose in their board report, the ratio of remuneration of each director to median employee’s remuneration and such other details which are quite extensive as proposed in the draft rules.

In case any director withdraws any amount by way of remuneration which has been exceeding the limit specified under the act, then such amount is refundable to the company and company can not waive the recovery of such amount untill permitted by the CG.

The following slide includes a table of a comparative analysis of the provisions of the acts

3. Calculation of profits [section 198 of 2013 Act]

The 2013 Act sets out in detail about the allowances and deductions that a company should include while computing the profits for the purpose of determining the managerial remuneration. To illustrate, the 2013 Act states that while computing its profits, credit should not be given for any change in the carrying amount of an asset or of a liability recognized in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.

4. Recovery of remuneration in certain cases [section 199 of 2013 Act]

The 2013 Act contains stringent provisions in case the company is required to restate its financial statements pursuant to fraud or non-compliance with any requirement under the 2013 Act and the Rules made there under. As against the existing requirement of section 309 of the 1956 Act which only refers to the fact that excess remuneration paid to managerial personnel cannot be waived except with the previous approval of the central government, the 2013 Act moves a step forward and enables the company to recover the excess remuneration paid (including stock options) from any past or present managing director or whole time director or manager or chief executive officer who, during the period for which the financial statements have been restated, has acted in such capacity.

5. Appointment of key managerial personnel [section 203]

The 2013 Act provides for mandatory appointment of following whole time key managerial personnel for every listed company and every other company having a paid-up share capital of five crore INR or more*: (i) Managing director, or chief executive officer or manager and in their absence, a whole-time director (ii) Company secretary (iii) Chief financial officer

Further, the 2013 Act also states that an individual cannot be appointed or reappointed as the chairperson of the company, as well as the managing director or chief executive officer of the company at the same time except where the articles of such a company provide otherwise or the company does not carry multiple businesses

2.8 NEGOTIABLE INSTRUMENTS ACT, 1881

INTRODUCTION

The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India, and the present Act is also based on the English Act with certain modifications.

It extends to the whole of India except the State of Jammu and Kashmir. The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934.

NEGOTIABLE INSTRUMENTS

What is negotiable?

• Negotiable means transferable.
• The negotiation that goes on refers to the transfer of the instrument between two people, or from one bank to another, or even from one country to another.

What is an instrument?

• In the broadest sense, almost any agreed-upon medium of exchange could be considered a negotiable instrument.
• In day-to-day banking, a negotiable instrument usually refers to checks, drafts, bills of exchange, and some types of promissory notes.

According to Section 13 (1) of the Negotiable Instruments Act, 1881

“A negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer”. “A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees” [Section 13(2)].

FORMS OF NEGOTIABLE INSTRUMENTS

• A negotiable instrument is a written, order promising to pay a sum of money.
• A document becomes negotiable when it contains an unconditional promise to pay money and is payable to a bearer or payable on demand.

FEATURES OF A NEGOTIABLE INSTRUMENT

• It is a written document by which certain rights are created and or/ transferred to a certain person.
• It must be signed by the maker or the drawer as the case may be.
• There must exist the unconditional order or promise to pay.
• There must be a time mentioned for such payment.
• In particular cases, the drawer’s name should be specifically mentioned.

TYPES OF NEGOTIABLE INSTRUMENT

1. Promissory note
2. Cheque
3. Bills of exchange

1. 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.”

The person who makes the promissory note and promises to pay is called the maker. The person to whom the payment is to be made is called the payee.

Examples:

A Signs instruments in the following terms

a)      I promise to pay B or order Rs. 500."

b)     I promise to pay B Rs. 500 which shall be due to him.

CHARACTERISTICS OF A PROMISSORY NOTE

• It is an Instrument in Writing
• It is a Promise to Pay
• Signed by the Maker
• Other Formalities
• Definite and Unconditional Promise
• Promise to Pay Money Only
• Maker must be a Certain Person
• Payee must be Certain
• Sum Payable must be Certain
• It may be Payable on Demand or After a Definite Period of Time
• It cannot be Made Payable to Bearer on Demand

PARTIES TO A PROMISSORY NOTE

• Maker:

Maker is the person who promises to pay the amount stated in the note.

• Payee:

Payee is the person to whom the amount of the note is payable.

• Holder:

He is either the payee or the person to whom the note may have been endorsed.

2. CHEQUE

According to Section 6 of the act, 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 also, therefore, a bill of exchange with two additional qualifications:

• It is always drawn on a specified banker.
• It is always payable on demand.

Special Benefits of Bill of Exchange :

• A bill of exchange is a double secured instrument.
• In case of immediate requirement, a Bill may be discounted with a bank.

ESSENTIAL ELEMENTS OF A CHEQUE

• In writing
• Express Order to Pay
• Definite and Unconditional Order
• Signed by the Drawer
• Order to Pay Certain Sum
• Order to Pay Money Only
• Certain Three Parties
• Drawn upon a Specified Banker
• Payable on Demand

PARTIES TO A CHEQUE

• Drawer:

Drawer is the person who draws the cheque.

• Drawee/Banker:

Drawee is the drawer’s banker on whom the cheque has been drawn.

• Payee:

Payee is the person who is entitled to receive the payment of a cheque. 15

Crossing of Cheques

• It is a direction given by the customer to the banker that payment should not be made across the counter.
• Crossing is affected by drawing two parallel transverse lines with or without particular abbreviations.  
• A cheque that is not crossed is an open cheque.
• It serves as a measure of safety against theft or loss of cheques in transit.

TYPES OF CROSSING

• Special
• General

3.  BILL OF EXCHANGE

According to Section 5 of the act, 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”. It is also called a Draft.

SPECIAL BENEFITS OF BILL OF EXCHANGE:

• A bill of exchange is a double secured instrument.
• In case of immediate requirement, a Bill may be discounted with a bank.

ESSENTIAL ELEMENTS OF BILL OF EXCHANGE

• It must be in Writing
• Order to pay
• Drawee
• Signature of the Drawer 
• Unconditional Order
• Parties
• Certainty of Amount
• Payment in Kind is not Valid  
• Stamping  
• Cannot be made Payable to Bearer on Demand

PARTIES TO A BILL OF EXCHANGE

• Drawer:

The maker of a bill of exchange is called the drawer.

• Drawee:

The person directed to pay the money by the drawer is called the drawee.

• Payee:

The person named in the instrument, to whom or to whose order the money are directed to be paid by the instruments are called the payee.

TYPES OF BILLS OF EXCHANGE

1. Inland
2. Foreign bills

1. Inland bill:

• It is drawn in India on a person residing in India, whether payable in or outside India, or
• It is drawn in India on person residing outside India but payable in India

.The following are the inland bills:

a)      A bill is drawn by a merchant in Delhi on a merchant in Chennai. It is payable in Mumbai the bill is an inland bill.

b)     A bill is drawn by a Delhi merchant on a person in London but is made payable in

2.  Foreign bill

• A bill drawn outside India & made payable in India.  
• A bill drawn outside India on any person residing outside India.
• A bill drawn in India on a person residing outside India and made payable outside India.

CLASSIFICATION OF BILL OF EXCHANGE

Inland and Foreign Bills

Inland Bill:

• It is drawn in India on a person residing in India whether payable in or outside India; or
• It is drawn in India on a person residing outside India but payable in India. ◦

Foreign Bill: 

• A bill drawn in India on a person residing outside India and made payable outside India. 
• Drawn upon a person who is the resident of a foreign country.

Time and Demand Bills:

Time Bill:

A bill payable after a fixed time is termed as a time bill. A bill payable “after date” is a time bill. ◦

Demand Bill:

A bill payable at sight or on demand is termed as a demand bill.

Trade and Accommodation Bills:

Trade Bill:

A bill drawn and accepted for a genuine trade transaction is termed as “trade bill”.

Accommodation Bill:

A bill drawn and accepted not for a genuine trade transaction but only to provide financial help to some party is termed as an “accommodation bill”.

BASIS OF DIFFERENCE BILLS OF EXCHANGE AND CHEQUES

NEGOTIATION:

According to section 14 of the Act, ‘when a promissory note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder thereof, the instrument is said to be negotiated.’ The main purpose and essence of negotiation is to make the transferee of a promissory note, a bill of exchange or a cheque the holder there of.

Negotiation thus requires two conditions to be fulfilled, namely:

• There must be a transfer of the instrument to another person.
• The transfer must be made in such a manner as to constitute the transferee the holder of the instrument.

MODES OF NEGOTIATION

1. Negotiation by delivery (Sec. 47):

Where a promissory note or a bill of exchange or a cheque is payable to a bearer, it may be negotiated by delivery thereof. Example: A the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep it for B. The instrument has been negotiated.

2. Negotiation by endorsement and delivery (Sec. 48):

A promissory note, a cheque or a bill of exchange payable to order can be negotiated only be endorsement and delivery. Unless the holder signs his endorsement on the instrument and delivers it, the transferee does not become a holder. If there are more payees than one, all must endorse it.

ENDORSEMENT [SECTION 15]

The word ‘endorsement’ in its literal sense means, writing on the back of an instrument. But under the Negotiable Instruments Act it means, the writing of one’s name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein. Thus, endorsement is signing a negotiable instrument for the purpose of negotiation. The person who effects an endorsement is called an ‘endorser’, and the person to whom negotiable instrument is transferred by endorsement is called the ‘endorsee’.

WHO MAY ENDORSE / NEGOTIATE [SECTION 51]:

Every Sole maker, drawer, payee or endorsee, or all of several joint makers, drawers, payees or endorsees of a negotiable instrument may endorse and negotiate the same if the negotiability of such instrument has not been restricted or excluded as mentioned in Section 50.

ENDORSEMENT

Essentials of a Valid Endorsement:

• It must be on the back or face of instrument or on a slip of paper annexed thereto.
• It must be signed by the endorser.
• It must be completed by the delivery of the instrument
• It must be made by the holder of the instrument.

Kinds of Endorsement:

• Blank or General Endorsement
• Full or Special Endorsement
• Partial Endorsement
• Restrictive Endorsement
• Conditional Endorsement

HOLDER

According to sec. 8, Holder of a negotiable instrument is the person:

Who is entitled in his own name to the possession of the instrument?

Who has the right to receive, or recover the amount due thereon from the parties thereto?

In case the instrument (note, bill or cheque) is lost or destroyed, the person who has entitled in his own name to the possession of it or to receive or recover the amount due on it from the parties thereto is the holder of

Who can be a Holder?

• Payee:

The payee is usually the original holder of an instrument. He remains holder till he endorses the instrument.

• Endorsee :

The person to whom an instrument is endorsed becomes holder of in place of the endorser. An instrument, when endorsed and delivered, the endorsee becomes the holder.

• Bearer :

In the case of a bearer instrument, the person to whom the instrument is delivered becomes the holder. But every bearer of an instrument cannot become the holder.

Example: a thief or a finder of a bearer instrument or a servant possessing an instrument on behalf of his employer cannot become holder.  

• Legal representative or heir- a legal representative or heir of a deceased person can become holder by operation of law even though he is not the payee or the bearer or the endorsee of the instrument.

HOLDER IN DUE COURSE:

Holder in due course is a person who came into possession of the instrument on payment of consideration and without knowledge of the fact that the erstwhile owner had a defective title.

The holder in due course has a better title than the holder. Therefore, according to sec. 9 of the Negotiable Instrument Act, holder in due course mans any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.[sec. 9].

PRIVILEGES OF A HOLDER IN DUE COURSE

• He can sue every prior party to the negotiable instrument if the instrument is not duly satisfied.
• When the holder endorses such instrument further, the new owner has a good title unless he is party to fraud.
• The burden of proving his title does not lie upon the holder in due course.

INSTRUMENTS OBTAIN BY UNLAWFUL

• Lost instruments:
• The holder of a lost instrument should give notice of the loss to all the parties through public advertisement.
• The finder of the lost instrument is not entitled to sue thereon in his own name.
• The true owner can recover the instrument from the finder if it is with him but he has parted with the instrument and has received payment thereon and cannot return the instrument to the owner, he must compensate the owner.
• An acceptor, maker or drawee who makes payment in due course of a lost instrument gets a valid discharge for it.

STOLEN INSTRUMENT

• The thief does not get any title to the instrument, but if the instrument is payable to the bearer and it is negotiated to a holder in due course; he will get a good title to it not only against the thief but also against any party prior to him.
• Good title : ownership of real property which is totally free of claims against it and therefore can be sold, transferred, or put up as security (placing a mortgage or deed of trust on the property).

INSTRUMENTS OBTAIN BY FRAUD

• Valid contracts must be brought about by the free consent of the parties competent to contract. Therefore, the person guilty of fraud not only gets no valid title to the thing obtained but also liable to damages.
• Forged instruments: Forged instruments in the eyes of law have no existence whatsoever. There is a complete absence of title from the very beginning and a forged signature is altogether inoperative.

DISHONOR & DISCHARGE OF NEGOTIABLE INSTRUMENT

Dishonor can be done by two ways:

• By non- acceptance
• By non- payment
• Notice of dishonor is mandatory
• Noting of dishonor is also necessary