Business law deals with commercial matters and whatever happens in a business. It is a body of law governing commerce and business and is deemed to be a branch of civil law. Business law comprises both private and public law. Commercial law mainly regulates the following aspects:
Manufacture and sale of commercial goods
The business laws have evolved and changed with the advent of technology and society. In this article, we will find an introduction to business law and learn about its types and features.
An introduction to business law entails learning first about what is meant by a company. Forming an organization means a huge amount of investments. With huge investments also come huge risks. A partnership is often constrained by limited resources and a lot of liabilities for the partners. To overcome the issues of the partnership business, the company form of business came into existence. The famous multinational companies have their investors spread all over the world.
The companies act of 1956 defines a company as a voluntary association of people which is formed for a common purpose. The capital invested in the company is divisible by parts, called shares. The liability of partners is limited in a company. A company is often regarded as an artificial person or a human being created by the law but without any physical existence.
All companies must register under the companies' act. Some of the most common types of companies are:
Private Company – The shareholders of this type of company are not allowed to transfer their shares. In case any transfer of shares is allowed, the number of shareholders gets limited to under 50 (excluding employees and shareholders). An individual can gain full control of private companies. The minimum paid capital in private companies is one lakh INR.
Public Company – In a public company, the minimum capital paid up is five lakh INR. A minimum of seven people can form a public company, and it must have three directors. There is no curtailment on the maximum number of people in a public company.
Government Companies – A company is defined as a government company under section 617 when more than 50% of the share capital is owned by the central government or any state government(s). It could also be partly owned by the central government and partly by one or more state governments.
The origin of company laws in India is intricately linked with English company laws. The various Companies acts passed from time to time in India have followed the British laws with slight modifications.
The Companies act of 1956 followed the company's act of the U.K in 1948.
In London, the most ancient existence of business associations dates to the 11th and 13th centuries. Back then, businesses were called “merchant guilds”.
These guilds would obtain charters from the crown using which they could obtain a monopoly over any trade or commodity.
There were mainly two kinds of companies in that era:
Commenda – This was like a partnership where the financer was a sleeping partner with limited liability. The working partners bore the liability mostly.
Societas – In this type of business, all the members of the partnership took part in managing the business. They had unlimited liability, and this was more like the present partnership.
In India, the first legislative enactment for registration of Joint stocks company was passed in 1850 which recognized companies as distinct entities. The concept of limited liability was not recognized at that time.
The companies act of 1956 enabled companies in India to be formed by registration. It outlines the responsibilities of a company, its executive director and secretaries. It also provided the process by which a company could wind up its operations.
Major amendments were done to the company law in 2002. The company law board was replaced by the National Company Law Tribunal (NCLT) and appellate tribunal. Setting up NCLT reduced the burden on courts as it became a specialized institution for corporate justice.
The final major changes to the company law happened in 2013 and 2017, and its highlights were:
It defined a related party with respect to a company to include an investing company.
It changed the definition of a subsidiary as a company where the holding company controls how its board of directors is formed.
The associate company definition changed to mean a company in which the other company has a big influence, but it is not a subsidiary of the company.
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The personality of a corporation is disparate from the personality of its shareholders. This is the concept behind the principle of the veil of incorporation. It is like a fictitious veil between the company and its members but not a wall. This concept came from the limited liability principle. However, this concept has led to fraudulent use of the veil by the company’s members and directors. Due to this, the court may lift or shatter the veil and treat the company and its owners as the same. This issue is most significant when the company is insolvent and creditors wish to pursue the assets of the owners. Few scenarios under which courts would pierce the corporate veil and disregard the corporate entity are:
Where it is essential to restore justice in the public interest
For the benefit of revenue
To find the character of a company, whether it is a friend or an enemy.
If a company is trying to avoid legal obligations
If a company is formed for fraudulent activities or to defeat the law
If the company is formed to act as agents of either its members or another company
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As per the Companies secretaries act of 1980 (sec2(1)c), a company secretary or CS in law is defined as a person who is a member of the institute of company secretaries in India (ICSI). The Companies act of 1956 has defined a secretary as a person who has the prescribed qualifications that are necessary to be performed by the secretary and the law also imposed certain statutory obligations on the role of a company secretary. The law, however, does not define the exact position of a CS.
Referring to the law of the land, the secretary is a servant of the company who is under full control of the board of directors of the company. As per the company act, it is mandatory for companies to have a minimum paid-up share of five crores INR for appointing key managerial positions of:
Managing Director, CEO, or Whole-time Director
Chief Financial Officer
Q1. What are the characteristics of a Company?
Ans: A company has the following key features:
It is created by law and considered as a person in the eyes of the law.
It is an artificial person with no eyes and mind of its own. It solely operates by the people elected for this purpose.
The life of a company is separate from the life of its members. Hence removal or death of any person does not mean the death of the company.
The members’ liability is limited to the face value of the shares held by them.
Except for a private company, the shares of other companies can be easily transferred.
A company can buy or sell assets based on its discretion.
A company can be sued and can sue the third party.
Members of the company select a board of directors who manage the company. The members have no role in the day to day activities of a company.
Like the signature of an individual, a company must also have its seal.
The company can only be dissolved by the people who created it.
Q2. What are the responsibilities of a Company Secretary?
Ans: A CS is responsible for the following operations:
Organize meetings of the board of directors
Keep the members of the board aware of their legal responsibilities and any changes in it
Organize general meetings
Issue capitals, shares and restructure
Ensure that the company and its directors are in line with the specified legal framework
Register shareholders, shares, and interact with them
Making sure dividends are distributed without fail
During acquisitions, mergers, or disposal of a company, the secretary sees the company’s conformance with relevant legalities
Formulate and certify memorandum and articles of association
Keep the company seal in safe custody
Q3. What is meant by “promoters” of a Company?
Ans: Before forming a company, there are some preliminary decisions to be taken. Some of the important decisions are:
What type of company should it be, a private or public?
What should be its capital?
Should a new company be formed, or it is a wiser decision to acquire an existing established concern?
Such decisions are taken by people known as “promoters” of the company. The promoters finish all the preliminary work, which is incidental to the formation of the company.