legal aspects of business 2

8/6/2019 Legal Aspects of Business 2

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1. What do you understand by the Offer of Proposal? What are the essentials of a

Valid Offer?

Offer or Proposal

Sec. 2 (a) defines offer as follows: "When one person signifies to another his willingness to do or to abstainfrom doing anything with a view to obtaining the assent of that other person to such act or abstinence, he is

said to make a proposal."

The person making the proposal is called 'promisor' and the person accepting it is called 'promisee'.

Essentials of a Valid Offer:

a) An offer may be general or specific: According to Sec. 2 (a) an offer must be made to a specific

person. An offer may be made to the world at large. But the contract is made only with the person

who accepts and fulfills the conditions of the proposal. In the words of Anson, 'An offer need not be

made to an ascertained person, but no contract can arise until it has been accepted by an ascertained person'. In Carlill Vs Carbolic Smoke Ball Co. (1893), a Company offered by advertisement to pay

£100 to anyone who contacts the increasing epidemic influenza, cold or any disease caused by takingcold after having used the ball as per printed directions. It was added that '£1000 is deposited with

the Alliance Bank showing our sincerity in the matter'. The plaintiff used the smoke moveable as per

the directions but subsequently suffered from influenza. She was held entitled to recover the promised reward.

b) An offer should be made with an intention of creating legal obligation : This principle of English

law though not incorporated specifically under Section 10, is generally accepted as vital to form alegal agreement. Social, moral or religious agreements are not legally enforceable. For example, Mr.

A invites Mr. B to dinner. Mr. B fails to attend. Mr. A cannot sue Mr. B for unconsumed food.Whether the offeror intended to enter into legal obligations or not could be known from the nature of the agreement and the surrounding circumstances. The court has to ascertain the intention of the

parties. The test of contractual intention is objective and not Subjective. What is considered is not

what the parties had in mind but what a reasonable person would think in the circumstances their intentions to be?

c) An offer must be definite and certain: The terms of an offer should not be uncertain andambiguous. Anson expressed 'The law requires the parties to make their own contract; it will not

make a contract for them out of terms which are indefinite or illusory'. This is so because the courts

cannot say what the parties to the contract are to do and whether there is violation of the contract.

However, all the terms of an offer need not be expressed. If some of the essential terms of a bargainmay not be specified but are capable of being determined by some method other than by a future

agreement there will be a good contract between the parties.

d) A statement of intention and an invitation to offer are not offers : Preliminary negotiations are

likely to take place before entering into an agreement. In the course of such negotiations one party

may make some declarations regarding his intention of doing something. Such a declaration by itself does not become an offer. e.g., A tells B 'I want to sell my car'. This is not an offer. An invitation to



offer is not an offer. An advertisement for tenders for sale of goods by auction, an announcement

about the stock of goods for sale, display of goods in shop windows, prospectus of a company,

catalogue, price-lists, loudspeaker announcements etc. are merely invitations to offer or offers.

e) An offer must be communicated to the offeree: An offer becomes operative only when it has been

communicated to the person to whom the offer is made. Communication is necessary whether theoffer is specific or general. Under Section 4 'the communication of a proposal is complete when it

comes to the knowledge of the person to whom it is made'. However, mere knowledge of a proposal

does not amount to communication unless the offeree acquires it with express or implied intention of the offeror.

The Act does not indicate the mode of communication. The offeror may communicate the offer by choosing

any available means. However, a letter containing an offer which is never mailed is not an offer even if thecontents are known by the offeree in some manner.

General offers are communicated to public through notice and advertisements. But as regards reward cases

the question arises whether the person performing the conditions of the offer can claim the reward even if heis ignorant of the offer. In Lalman Shukla Vs. Gour; Duff case it was held that knowledge of the offer is

essential. There can be no acceptance unless there is knowledge of the offer.

When the offer is not communicated silence on the part of the offeree does not amount to consent since he

does not have the opportunity to reject the offer. E.g., A works for B without the request or knowledge of B.

A can't sue B for remuneration since B's consent can't be presumed from his silence.

f) The terms and conditions of offer should also be communicated: An agreement is a two-sided

bargain based on freedom of contract. However, in modern times the buyer of an article is in anunfavorable position. Freedom of contract becomes one-sided in the case of agreements with

common carriers, dry cleaners, tailors, insurance companies, landlords, public utilities etc. It is also

difficult to draw up a separate agreement with each individual. Therefore, printed forms of agreements known as 'standard form contracts' are used. Such forms contain large number of terms

and conditions very often small in print absolving the dominant party of all liability. The

economically weaker party has to accept all such terms and conditions irrespective of whether helikes them or not. The Court too finds it difficult at times to protect the interest of the weaker party.

Therefore the courts have evolved certain methods. When the offer contains special terms and

conditions the offeror must communicate all the terms and conditions either before or at the time of

contracting in order to bind the acceptor.

On the other hand if the acceptor knew that there was writing and knew or believed that the writing

contained conditions he is then bound by the conditions even though he did not read them. It is enough if theofferor has done all that can be considered necessary to give notice to the acceptor.

g) Two identical offers do not make a contract: An offer made by a person may cross a similar onemade by another person of course in the course of transit. They are just two identical or cross offers,

though there seems to be identity of mind.



h) An offer should not contain any term the non-compliance of which amounts to acceptance: There

may be any number of terms and conditions in an offer. The acceptor can accept or reject them.

While the offeror can prescribe mode of acceptance, he can't prescribe the form or time of refusal soas to fix a contract upon the acceptor. He can't say, for example, that if the offeree does not

communicate before a given time, he is deemed to have accepted the offer.



2. What are the effects of Minor’s Agreement? State in details.

Contract of Guarantee

Definition of Contract of Guarantee: It is a contract to perform the \"/promise or discharge the

liability of a third person in case of his default (S .. 126). Surety is a person who gives the guarantee.The person in respect of whose default the guarantee is given is called 'principal debtor.' The person to

whom the guarantee is meant for is called the 'Creditor'.

Essential of Contract of Guarantee:

1. From: A contract of guarantee is just like any other contract which may be either oral or in

writing.2. Tripartite agreement: Every contract of guarantee involves three agreements between (i) the

creditor and principal debtor, (ii) the surety and the creditor, and (Hi) the surety and the

principal debtor.

Consent of the parties: There must be consent of all the three parties. Example: X sells and delivers

goods to Y. X afterwards requests Z to pay in default of Y. Z agrees to do so. Here, Z cannot becomesurety without the consent of Y.

3. Secondary Liability: The test which applied to determine whether the contract is one of guarantee or indemnity is whether the obligation has been undertaken at the debtor's request

in which case the contract is one of guarantee. If the obligation is undertaken without any

request of the debtor, the contract is one of indemnity. The intention of the parties is also

important whether one making oneself primarily or collaterally liable. Hence, the promise to be primarily and independently liable is not a guarantee, though it may be an indemnity.

Hence in a contract of guarantee, the primary liability is with the principal debtor.

4. Existing liability: It is not necessary that the principal contract must be in existence at the

time the contract of guarantee is made; the original contract by which the principal debtor

undertakes to repay the money to the creditor may be about to come into existence.

Example: X took a loan of Rs.1 0,000 from Y on 1 st Jan. 1999 and paid nothing on account of interest

and principal. On 2nd Jan. 2002, Z gave the guarantee to Y for the payment of RS.1 0,000 due from X.

This is not a valid contract of guarantee because the primary liability between X and Y is a time barreddebt which is not enforceable by law.

5. The promise to pay must be conditional: In other words, the liability of the surety shouldarise only when the principal debtor makes a default.

6. Consideration: Something done for the benefit of the principal debtor is considered asconsideration for the guarantee to make the contract valid. The legal detriment incurred by

the promisee at the promise’s request is sufficient to constitute the element of consideration.



7. Competency: The principal debtor, surety and creditor must be a person competent to

contract. However, under certain circumstances, a surety is liable though the principal debtor

is not Le. The original contract is void as is the case of a contract with a minor in which thesurety is liable not only as surety but also as principal debtor. A person of unsound mind or

an undercharged insolvent cannot give a valid guarantee.

8. Consent: There must be free consent; otherwise the contract of guarantee may become void

or avoidable. Generally a contract of guarantee is not the contract of utmost good faith Le.

Begrime flied, but it is sometimes a first cousin to it. Mere non-disclosure will not affect thecontract of surety unless there is an intentional concealment. Example: I: A engages B as

clerk to collect money from him. B fails to account for some of his receipts, and an in

consequence calls upon him to furnish security for his duty accounting. C gives his guarantee

for B's duty accounting. A does not acquaint C with B's previous conduct. B afterwardsmakes a default. The guarantee is invalid.

Example: II: A guarantees to C payment for iron to be supplied by him to B to the amount of 2000 tons.

Band C have privately agreed that we should pay Rs.500 per ton beyond the market price, such excess to be applied on liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.



3. What do you understand by Consideration? What are the rules governing

Consideration?

Consideration: Something done for the benefit of the principal debtor is considered as consideration for

the guarantee to make the contract valid. The legal detriment incurred by the promisee at the promise’s

request is sufficient to constitute the element of consideration

Rules governing Consideration

A contract of guarantee may be either 'retrospective' e.g., for an existing debt or 'prospective' Le. For a

future debt. Guarantee are further divided into 'specific' also known as simple or single guarantee and

'continuing'. When the guarantee is given for a single or particular debt, it is called a 'specific guarantee'and it comes to an end when the debt guaranteed has been paid. A guarantee which extends to a series of

transactions is called a continuing guarantee. (Sec. 129 of the Indian Contract Act).

Guarantee may be for a part of a whole debt or for the whole debt subject to a limit: When the intention

of the parties is not explicit it will be presumed that where a portion of a floating balance is guaranteed itis for a part of it only. When portion of a fixed and ascertained debt is guaranteed the guarantee applied

to the whole debt subject to the limit.

Distinction between Indemnity and Guarantee

Indemnity Guarantee

1 Number of parties: There are two parties:Indemnifier and Indemnified

1 There are three parties to it viz. the principal debtor,the surety & the creditor.

2 Number of Contracts: There is only onecontract between the indemnified and

Indemnifier.

2 Three contracts: (i) between the principal debtor andthe creditor, (ii) between the surety and the creditor,

and (iii) between the surety and the principal

debtor (implied)

3 Form: May be written or oral in both Indian andEnglish Law.

3 According to section of the Statute of Frauds (inEngland) it should be in writing: in Indian Law it may

be written or oral.

4 Interest In the transaction: The indemnifier has

interest in the transaction apart from the indemnity

i.e., apart from his promise to pay the loss.

4 The guarantee is totally unconnected with the contract

but the only interest in the contract is his promise to

the loss.

5 Nature of risk: it is possibility of risk of any 1055

happening in future against which the indemnifier

undertakes to indemnify Le., continuing risk.

5 There is an existing debt the discharge or performance

of which is guaranteed by the surety Li., it is the

absolute and subsisting risk.

6 Nature of liability: The indemnifier is primarily

and independently liable

6 In a guarantee the liability of the surety is co-extensive

with that of the principal debtor (ancillary liability).

The guarantor if secondarily liable except where the

principal debtor is incapable of contracting}.

7 Subrogation: An indemnifier cannot havesubrogation unless there is an assignment.

Otherwise he must bring the suit in the name of the

indemnified.

7 If a surety pay the debt or perform the obligation hecan file a suit in his own name against the principal

debtor to reimburse the amount 50 paid.

8 Request: It is not necessary for the indemnifier to

act the request of the indemnified.

8 It is necessary for the surety to give his guarantee at

the request of the debtor.



Continuing Guarantee

Definition of Continuing Guarantee: A guarantee which extends to a series transactions is calledContinuing Guarantee (Sec. 129). A guarantee may be ordinary guarantee or a continuing guarantee. In

the former, the guarantee is in respect of one single transaction while in the case of continue guarantee,

the guarantee extends to a series of transactions.

Illustration: A in consideration that B will employ C in collecting the rents of B's shopping complex

promises B to be responsible, to the amount of 3,000 rupees, for the due collection of payments by C of those rents. This is a continuing guarantee.

1. Notice of Revocations: A continuing guarantee is revoked when the surety gives a notice to the

creditor for the revocation of guarantee. Notice will be applicable only for future transactions andnot those transactions which had already taken place. (Sec. 130).

2. Death: The continuing guarantee is revoked by the death of the surety provided such a notice had

been received by the creditor. (Section 131)

3. Variation in Contract: If any variation has been made in the terms of contract of guarantee betweenthe creditor and the principal debtor without the knowledge or concurrence of the surety, the contract

of guarantee is revoked. (Sec. 133)4. Creditor's act of Omission: Any act or omission by the creditor which impairs the eventual remedy

of the surety against the debtor amounts to revocation of the contract of guarantee (Sec. 139).

5. Novation: When the parties agree to substitute a new contract for the old contract or rescind or alter

the old contract of guarantee, it will amount to revocation. (Sec. 62)6. Release or discharge of principal debtor (Section 134)

7. When the creditors enter into an arrangement with the principal debtor (Section 135).

8. Loss of Security (Section 141)



4. What do you understand by the ‘Negotiable Instruments Act’? What are the

different characteristics of the Negotiable Instruments?

Negotiable Instruments Act the law relating to "Negotiable Instruments" is contained in the Negus

Instruments Act, 1881, as amended up-to-date. It deals with therein'.' negotiable instruments, Le.Promissory Notes, Bills of Exchange Cheque. The provisions of the Act also apply to 'hundis' (an

intrude oriental language), unless there is a local usage to the contrary documents like treasury bills,

dividend warrants, share warrants debentures, port trust or improvement trust debentures, railway 'k: payable to bearer etc., are also recognized as negotiable instruments by mercantile custom or under other

enactments like the Companies and therefore, Negotiable Instruments Act is applicable to them.

Characteristics of Negotiable Instruments:

An examination of the above definition reveals the following essential characteristics of negotiable

instruments which make them different from an ordinary chattel:

1. Easy negotiability: They are transferable from one person to another without any formality. In other

words, the property (right of ownership) in these instruments passes by either endorsement or delivery (in case it is payable to order) or by delivery merely (in case it is payable to bearer), and no

further evidence of transfer is needed.

2. Transferee can sue in his own name without giving notice to the debtor: A bill, note or a cheque

represents a debt, Li., an "actionable claim" and implies the right of the creditor to recover

something from his debtor. The creditor can either recover this amount himself or can transfer his

right to another person. In case he transfers his right, the transferee of a negotiable instrument isentitled to sue on the instrument in his own name in case of dishonuour, without giving notice to the

debtor of the fact that he has become holder.

3. Better title to a bonfire transferee for value : A bonfires transferee of a negotiable instrument for

value (technically. called a holder in due course) gets the instrument I free from all defects.' He is not

affected by any defect of title of the transferor or any prior party. Thus, the general rule of the law of transfer applicable in the case of ordinary chattels that 'nobody can transfer a better title than that of

his own' does not apply to negotiable instruments.

Examples of Negotiable Instruments: The following instruments have been recognized as negotiable

instruments by statute or by usage or custom: (i) Bills of exchange; (ii) Promissory notes; (Hi) Cheque;

(iv) Government promissory notes; (v) Treasury bills; (Vi) Dividend warrants; (Vii) Share warrants;

(viii) Bearer debentures; (ix) Port Trust or Improvement Trust debentures; (x) Hundis; (Xi) Railway bonds payable to bearer, etc.

Examples of Non-negotiable Instruments: These are: (i) Money orders; (ii) Postal orders; (Hi) Fixeddeposit receipts; (iv) Share certificates; (v) Letters of credit. d



5. What do you understand by Company? What are the characteristics of a

Company? What are the different types of company?

Companies Act, 1956 Definition:

The term 'company' implies an association of a number of persons for some common objective e.g. tocarry on a business concern, to promote art, science or culture in the society, to run a sport club etc.

Every association, however, may not be a company in the eyes of law as the legal import of the word

'company' is different from its common parlance meaning. In legal terminology its use is restricted toimply an association of persons, 'registered as a company' under the law of the land. The following are

some of the definitions of company given by legal luminaries and scholars of law:

"Company means a company formed and registered under till, (Act or an existing company /existing

company means a company formed and registered u~/ the previous company laws." - Companies Act,

1956 Sec. 3(i & ii)

"A joint stock company is an artificial person invisible, intangible and existing only in the eyes of law.Being a mere creature of law, it possesses only those properties which the charter of its creation confers

upon it, either expressly or as incidental to its very existence." - Justice Marshall

"A company is an association of many persons who contribute money or money's worth to a common

stock and employs it in some common trade or business and who share the profit or loss arising therefrom. The common stock so contributed is denoted in terms of money and is the capital of the company.

The persons who contribute it or to whom it belongs are members. The proportion of capital to which

each member is entitled is his share. Shares are always transferable although the right to transfer them is

often more or less restricted." - Lord Lindley

From the above definitions it is clear that a company has a corporate and legal personality. It is anartificial person and exists only in the eyes of law. It has an independent legal entity, a common seal and perpetual succession.

Sometimes, the term 'corporation' (a word derived from the Latin word 'corpus' which means body) isalso used for a company.

At present the companies in India are incorporated under the Companies Act, 1956.

Characteristics of Company

The various definitions reveal the following essential characteristics of a company:

1. Artificial Person: A company is an association of persons who have agreed to form the company

and become its members or shareholders with the object of carrying on a lawful business for profit.It comes into existence when it is registered under the Companies Act. The law treats it as a legal

person as it can conduct lawful business and enter into contracts with other persons in its own name.

It can sell or purchase property. It can sue and be sued in its name. It cannot be regarded as an



imaginary person because it has a legal existence. Thus company is an artificial person created by

law.

2. Independent corporate existence: A company has a separate independent corporate existence. It is

in law a person. Its entity is always separate from its members. The property of the company belongs

to it and not to the shareholders. The company cannot be held liable for the acts of the members andthe members can not be held liable for the acts or wrongs or misdeeds of the company. Once a

company is incorporated, it must be treated like any other independent person. As a consequence of

separate legal entity, the company may enter into contracts with its members and vice-versa.

3. Perpetual existence: The attribute of separate entity also provides a company a perpetual existence,

until dissolved by law. Its life remains unaffected by the lunacy, insolvency or death of its members.

The members may come and go but the company can go on for ever. It is created by law and the lawalone can dissolve it.

4. Separate property: A company, being a legal entity, can buy and own property in its own name.

And, being a separate entity, such property belongs to it alone. Its members are not the joint ownersof the property even though it is purchased out of funds contributed by them. Consequently, they do

not have even insurable interest in the property of the company. The property of the company is notthe property of the shareholders; it is the property of the company.

5. Limited liability: In the case of companies limited by shares the liability of every member of the

company is limited to the amount of shares subscribed by him. If the member has paid full amountof the face value of the shares subscribed by him, his liability shall be nil and he cannot be asked to

contribute anything more. Similarly, in the case of a company limited by guarantee, the liability of

the members is limited up to the amount guaranteed by a member. The Companies Act, however, permits the formation of companies with unlimited liability. But such companies are very rare.

6. Common seal: As a company is devoid of physique, it can't act in person like a human being. Henceit cannot sign any documents personally. It has to act through a human agency known as Directors.

Therefore, every company must have a seal with its name engraved on it. The seal of the company is

affixed on the documents which require the approval of the company. Two Directors and theSecretary or such other person as the Board may authorize for this purpose, witness the affixation of

the seal. Thus, the common seal is the official signature of the company.

7. Transferability of shares: The shares of a company are freely transferable and can be sold or purchased through the Stock Exchange. A shareholder can transfer his shares to any person without

the consent of other members. Under the articles of association, even a public limited company can

put certain restrictions on the transfer of shares but it cannot altogether stop it. A shareholder of a public limited company possessing fully paid up shares is at liberty to transfer his shares to anyone

he likes in accordance with the manner provided for in the articles of association of the company.

However, private limited company is required to put certain restrictions on transferability of itsshares. But any absolute restriction on the right of transfer of shares is void.

8. Capacity to sue and be sued: A company, being a body corporate, can sue and be sued in its own

name.



Types of Companies

Companies may be classified into various categories as shown in the chart below:

Royal or Chartered Companies: These companies are incorporated under a special charter such as theEast India Company, the Bank of England. A chartered company is regulated by the charter

incorporating it and the Companies Act does not apply to it. These companies are created and regulated

by the king or queen in exercise of an ancient prerogative vested in the crown. Such companies are

formed in England and do not exist in India.

Statutory Company: These companies are formed under a special Act of Parliament or the state

legislature e.g. the Reserve Bank of India, the State Bank of India, IFCI, Life Insurance Corporation,

Unit Trust of India. The powers which are to be exercised by such companies are defined by the Actsconstituting them and therefore, they are not required to have a memorandum of association. Although

each statutory company is governed by the provisions of its special Act, the provisions of the CompaniesAct, 1956 also apply to them, in so far as the said provisions are not inconsistent with the provisions of

the Special Acts under which these companies are formed.

These companies are mostly public undertakings and are formed with the main object of public utilities

and not for profit. They also need not use the word limited with their names.

Registered Companies: A registered company is one which is formed and registered under the IndianCompanies Act, 1956 or under any earlier Companies Act in force in India. The two basic types of

companies which may be registered under the Act are:

(a) Private Companies; and (b) Public Companies. These companies may be:

(i) Companies limited by shares;(ii) Companies limited by guarantee;

(iii) (iii) Unlimited companies.



Companies may also be classified as:

(1) Association not for profit having license under Section 25 of the Act;(2) Government companies;

(3) Foreign companies;

(4) Holding and Subsidiary companies-

A brief description of each type of company is given below:

1. Private Company: A 'Private Company' is defined by Section 3(1) (iii) of the Act as a company

which, by its articles of association:

(a) Restricts the right of the members to transfer shares, if any,(b) Limits the number of its members to fifty, excluding members who are or were in

the employment of the company and

(c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of

the company.

Section 26 of the Companies Act, provides that a private limited company must necessarily have articlesof its own.

2. Public Company: The Companies Act does not provide any positive definition of a 'Public

Company'. Section 3(1) (IV) defines it as; "A public company means a company which is not a private company". Elaborating the above definition, a 'Public Company' is one which:

(i) does not have any restriction on the transfer of shares;(ii) does not limit the maximum number of members and

(iii) Can invite public for the subscription of its shares and debentures.

The minimum number of members required to form a public company is seven. There are no restrictions

with regard to the maximum number of members in a public company.

3. Companies Limited by Shares: When the liability of the members of a company is limited up to

the unpaid value of their shares, it is called a limited liability company or a company limited by

shares. This liability or unpaid amount may be called up at any time during the life time of the

company or at the time of its winding up. Such a company must have share capital since the extentof liability is determined on the basis of the face value of shares. This company may be a public

company or a private company.

4. Companies Limited by Guarantee: The liability of a member in these companies is limited to the

amount undertaken to be contributed by him at the time of winding up of the company. The amount

of guarantee is mentioned in the memorandum of association. Such companies are formed for non-trading purposes such as charity, promotion of sports, science, art, culture etc. These companies

mayor may not have any share capital. If these companies do not have any share capital, the

members can be required to pay the amount of guarantee undertaken by them and that too in the

event of liquidation. But if these companies have any share capital, the members are liable to pay the



amount which remains unpaid on their shares together with the amount payable under the guarantee.

A company limited by guarantee and having a share capital may be a public company or a private

company.

5. Unlimited Companies: An unlimited company is that company which has no limit on the liability of

its members. It means that its members are liable to contribute to the debts of the Company in proportion to their respective interests. In case a member is unable to contribute his share, his

deficiency is shared by the rest of the members in proportion to their capital in .the Company. If the

assets of such a company are not sufficient to payoff its liabilities, the private assets of the memberscan be utile sad for this purpose. Such a company mayor may not have share capital. In case, it has a

share capital, it can be either a public company or a private company. It is essential for this type of

company to have its Articles of Association which must state the number of members with which the

company is to be registered. However, under Section 32 of the Act, it is provided that an unlimitedcompany can be converted into a limited company by passing a special resolution for this purpose.

6. Holding Company & Subsidiary Company: A company which controls another company is

known as 'holding company' and the company so controlled is termed a 'subsidiary company'.

7. Government Company: The Companies Act defines a government company as a company inwhich not less than 51 percent of ' the paid up share capital is held by:

(a) The Central Government

(b) Any State Government(c) Partly by the Central Government and partly by one or more State Government. A

company which is a subsidiary of a government company shall be considered a

government company.

8. Foreign Companies: Foreign companies are those companies which are incorporated outside India

but which have a place of business within India. Place of business here means an identifiable placewhere it carries on business such as office, store house, go down, etc.

If 50 percent or more of the paid up share capital of a foreign company is held by Indian citizens and or by companies incorporated in India whether singly· or jointly, it shall be treated as an Indian company in

respect of its business in India. It means that such a company has to comply with the provisions of the

Companies Act as if it were an Indian Company.

9. Licensed Companies or Associations not for profit: The Companies Act permits the registration

under a license granted by the Central Government of an association not for profit with limited

liability. However, such a company can not use the word 'Ud.' or the words 'Pvt. Ltd.' with its name.This type of association or company is formed for the promotion of charity, science, commerce,

sports, art or culture etc. Naturally, such associations are not of a commercial nature and do not aim

at earning profits.



6. What do you understand by Cyber Crime? Explain the importance of the IT Act

2000.

Definition of Cyber Crime:

Cyber crime refers to all the activities done with criminal intent in cyberspace or using the medium of Internet. These could be either the criminal activities in the conventional sense or activities, newly

evolved with the growth of the new medium. Any activity, which basically offends human sensibilities,

can be included in the ambit of Cyber crimes.

Because of the anonymous nature of Internet, it is possible to engage in a variety of criminal activities

with impunity, and people with intelligence, have been grossly misusing this aspect of the Internet tocommit criminal activities in cyberspace. The field of cyber crime is just emerging and new forms of

criminal activities in cyberspace are coming to the forefront each day. For example, child pornography

on Internet constitutes one serious cyber crime. Similarly, online pedophiles, using Internet to induce

minor children into sex, are as much cyber crimes as any others.

Categories of cyber crimes:

Cyber crimes can be basically divided in to three major categories:

• Cyber crimes against persons;

• Cyber crimes against property; and

• Cyber crimes against government. V

Overview of the Act:

According to the said Act:

• Electronic contracts will be legally valid.

• Legal recognition of digital signatures.

• Digital signature to be affected by use of asymmetric crypto system and hash function.

• Security procedure for electronic records and digital signature.

• Appointment of Certifying Authorities and Controller of Certifying Authorities, including

recognition of foreign Certifying Authorities.

• Controller to act as repository of all digital signature certificates.

• Certifying authorities to get License to issue digital signature certificates.

• Various types of computer crimes defined and stringent penalties provided under the Act.

•Appointment of Adjudicating Officer for holding inquiries under the Act.

• Establishment of Cyber Appellate Tribunal under the Act.

• Appeal from order of Adjudicating Officer to Cyber Appellate Tribunal and not to any Civil

Court.

• Appeal from order of Cyber Appellate Tribunal to High Court.

• Act to apply for offences or contraventions committed outside India.

• Network service providers not to be liable in certain cases.



• Power of police officers and other officers to enter into any public place and search and arrest

without warrant.

• Constitution of Cyber Regulations Advisory Committee who will advice the Central Governmentand Controller.

What does IT Act enable? The Information Technology Act:

• Enables Legal recognition to Electronic Transaction I Record

• Facilitates Electronic Communication by means of reliable electronic record

• Provides for acceptance of contract expressed by electronic means

• Facilitates Electronic Commerce and Electronic Data interchange.

• Facilitates Electronic Governance.

• Facilitates electronic filing of documents.

• Enables retention of documents in electronic form.

• Where the law requires the signature, digital signature satisfies the requirement.

• Ensures uniformity of rules, regulations and standards regarding the authentication and integrity

of electronic records or documents.

• Facilitates Publication of Official Gazette in the electronic form.

• Enables interception of any message transmitted in the electronic or encrypted form.

• Prevents Computer Crime, forged electronic records, international allegation of electronic

records fraud, forgery or falsification in Electronic Commerce and electronic transaction.

Digital Signature: Any subscriber may authenticate an electronic record by affixing his digital signature.

[section 3(1 )]. "Subscriber" means a person in whose name the Digital Signature Certificate is issued.

[section 2(1 )(zg)]. "Digital Signature Certificate" means a Digital Signature Certificate issued under section 35(4) [section 2(1)(q)].

"Digital signature" means authentication of any electronic record by a subscriber by means of anelectronic method or procedure in accordance with the provisions of section 3. [Section 2(1)(p)].

"Affixing digital signature" with its grammatical variations and cognate expressions means adoption of any methodology or procedure by a person for the purpose of authenticating an electronic record by

means of digital signature. [Section 2(1)(d)].

Authentication of records: The authentication of the electronic record shall be effected by the use of asymmetric crypto system and hash function which envelop and transform the initial electronic record

into another electronic record. [Section 3(2)].

Verification of digital signature: Any person by the use of a pUblic key of the subscriber can verify the

electronic record. [Section 3(3)]. The private key and the public key are unique to the subscriber and

constitute a functioning key pair. [Section 3(4)].

The idea is similar to locker key in a bank. You have your "private key' while bank manager has 'public

key'. The locker does not open unless both the keys come together match.



Electronic records are acceptable unless specific provision to the contrary: Where any law provides

that information or any other matter shall be in writing or in the typewritten or printed form, then,

notwithstanding anything contained in such law, such requirement shall be deemed to have beensatisfied if such information or matter is - (a) rendered or made available in an electronic form; and (b)

accessible so as to be usable for a subsequent reference. [Section 4]. - - Unless there is specific,

provision in law to contrary, electric record or electronic return is acceptable. - - Soon, it will be possibleto submit applications, income tax returns and other returns through internet.

Department or Ministry cannot be compelled to Accept Electronic Record - Section 8 makes it clear that no department or ministry can be compelled to accept application, return or any communication in

electronic form.

Legal recognition of digital signatures: Where any law provides that

information or any other matter shall be authenticated by affixing the signature or any document shall be

signed or bear the signature of any person then, notwithstanding anything contained in such law, such

requirement shall be deemed to have been satisfied, if such information or Matter is authenticated bymeans of digital signature affixed in such manner as may be prescribed by the Central Government. - -

"Signed", with its grammatical variations and cognate expressions, shall, with reference to a person,mean affixing of his hand written signature or any mark on any document and the expression "signature"

shall be construed accordingly. [Section 5].

Secure digital signature: If, by application of a security procedure agreed to by the parties concerned, itcan be verified that a digital signature, at the time it was affixed, was - (a) unique to the subscriber

affixing it (b) capable of identifying such subscriber (c) created in a manner or using a means under the

exclusive control of the subscriber and is linked to the electronic record to which it relates in such amanner that if the electronic record was altered the digital signature would be invalidated, - - then such

digital signature shall be deemed to be a secure digital signature. [Section 15].

Certifying digital signature: The digital signature will be certified by 'Certifying Authority'. The

certified authority' will be licensed, supervised and controlled by 'Controller of Certifying Authorities.

legal aspects of business 2

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