DBA1607 LEGAL ASPECTS OF BUSINESS.pdf

DBA 1607 LEGAL ASPECTS OF BUSINESS

1Anna Universtiy Chennai

1.1 Introduction

Nature of Contract (Sections 1.2)

Taking a seat in a bus, putting a coin in the slot of a weighing machine,going to a restaurant and taking snacks - all these actuities are based oncontracts: We do not even realize that we are making a contract. Peoplewho are engaged in trade, commerce and industry, carry on business byentering into contracts. The law relating to contracts is to be found in theIndian contracts Act 1872. It contains principles, subject to which partiesmay assign / form rights and duties for themselves and the law will upholdtheir rights and duties.

The sale of goods is the most common of all commercial contracts.Knowledge of its main principles is of the utmost importance to all classesof the community. The law relating to it is contained in the Sale of GoodsAct, 1930. Contracts for the sale of goods are subject to the generallegal principles applicable to all contracts, such as ,offer and itsacceptance, the capacity of the parties, free and real consent,consideration and legality of the object.

There are certain documents which are freely used in commercialtransactions and monetary dealings. These documents, if they satisfycertain conditions, are known as “negotiable instruments”. The word“for consideration” and “instrument” means a “written document bywhich a right is created in favour of some person.” Thus a negotiableinstrument is a document which entitles a person to a sum of money andwhich is transferable from one person to another by mere delivery or byendorsement and delivery.

The complexities of modern business are such that it is not possible forany man to transact all his business by himself. He cannot personallyattend to all matters in which it is necessary for him to be brought into

MERCANTILE ANDCOMMERCIAL LAW

UNIT - I


2 Anna Universtiy Chennai

legal relations with other people. Of necessity he has to depend on theservices of other persons in order to run day-to-day business affairs.Such other persons are called agents.

1.2 Learning ObjectivesAfter studying this unit you should be able to:• Define a contract• Understand the essentials of contract.• Describe the differences between the void, voidable and null void

contracts.• Implementing the formalities in forming a contract• Analyze the performance of contracts• Understand the breach of contract and its remedies

1.3 The Indian Contract Act 1872

What is a contract?

Contract: An agreement enforceable by law (sec 2 (b))

Agreement: Every promise and every set of promises formingconsideration for each other (sec 2 (e))

Promise: When the person to whom the proposal is made signifies hisascent thereto, the proposal is said to be accepted. A proposal whenaccepted becomes a promise.

Agreement: Accepted proposal. The two elements are :(i) offer or a proposal and(ii) An acceptance of that offer or proposal.

The contract act is the law of those agreements which create obligationsand in case of a breach of a promise by any other party to the agreement;the other party will have a legal remedy.

There are some agreements, which are not enforceable in the court oflaw. Such agreements which do not give rise to contractual obligations,then it will not be a contract.

Example:1. A invited B for a dinner in a restaurant. B accepts the invitation. On

the appointed day, B goes to the restaurant. A does not turn up or Ais there but refuses to entertain B. B has no remedy against A. Incase A is present but B fails to turn up, A has no remedy against B.

2. A promises his son a pocket allowance of Rs. 500 a month. In caseA fails or refuses to give his son the promised amount, his son has noremedy against A. A contract is an agreement but an agreementneed not necessarily be a contract. What obligations arecontractual in nature? Only a legal obligation having its source inan agreement will give rise to a contract.



Example: A agrees to sell his car to B for Rs. 50,000. The agreementgives rise to a legal obligation on the part of A to deliver the car to B andon the part of B to pay Rs. 50,000 to A. The agreement is a contract. IfA does not deliver the car, then B can go to a court of law and file a suitagainst A for non-performance of the promise on the part of A. On theother hand, if A has already given the delivery of the car and B refuses tomake the payment of price, A can go to a court of law and file a suitagainst B for non-performance of promise on the part of B.

Agreements to do an unlawful, immoral or illegal act for example,smuggling, or murdering a person cannot be enforceable by law.Certain agreements have been declared void or unenforceableunder the Indian Contracts Act. An agreement to betting (wageringagreement), an agreement in restraint of trade, an agreement to do animpossible advertisement are a few such examples.

An obligation which does not have its origin in an agreement does notgive rise to a contract. Some of such obligations are tort or civil wrongs,quasi contract, judgment of courts, Relation between husband and wife,Relation between trustee and location. These obligations are notcontractual in nature but are enforceable in a court of law.

1.3.1 Essential elements of a valid contract

1. Agreement

2. Intention to create legal relationship

3. Free and Genuine consent

4. Parties competent to contract

5. Lawful consideration

6. Lawful Object

7. Agreements not declared void or illegal

8. Certainity of meaning

9. Possibility of performance

10. Necessary legal formalities

1. Agreement-[Offer and Acceptance]• Party making the offer - Offeror• Party to whom the offer is made – Offeree• There are two parties to an agreement• They both must be thinking of the same thing in the same sense• There must be Consensus – ad – idemExample: Where ‘A’ owns two cars X and Y and wishes to sell his car‘X’ for Rs. 30,000.B an acquaintance of ‘A’ does not know that ‘A’



owns car ‘Y’ also. He thinks that ‘A’ owns only car ‘X’ and is offering tosell the same for the stated price. He gives him acceptance to buy thesame. There is no contract because the contracting parties have not agreedon the same thing at the same time. There is no consensus – ad - idem.2. Intention to create Legal Relationship: An agreement of a purely

social or domestic nature is not a contract.A husband agreed to pay Dollar 30 to his wife every month while he wasabroad. As he failed to pay the promised amount, his wife sued him forthe recovery of the amount.

Held: It was a social agreement and the parties did not intend to createany legal relations.

Example 1 : One of the clauses included in an agreement was, “Thisagreement is not a formal legal agreement and shall not be subject tolegal jurisdiction in the law courts”.

Held that this agreement was not a legally binding contract as the partiesintended not to have legal consequences (Rose and Frank Co U J.R.Crompton and Bus Ltd., (1925) A.C 445).

Example 2 : An agreement containing a clause, states “It does not giverise to any legal relationships or be legally enforceable, but binding inhonour only”.

Held: The agreement did not give rise to legal relations and therefore wasnot a contract. (Jones V verton’s Pools Ltd (1938) 2 AIR.

Example 3 : An aged couple (C and his wife) held out a promise bycorrespondence to their niece and her husband (Mrs. and Mr. P.) that Cwould sell them a portion of his estate in his will, if Mrs. P and Mr. Pwould sell their cottage and come to live with the aged couple and toshared the household and other expenses. The young couple sold theircottage and started living with the aged couple and shared the householdand other expenses. The two couples subsequently quarrelled and theaged couple repudiated the agreement by requiring the young couple tostay somewhere else. The young couple filed a suit against the aged couplefor the breach of promise.

Held: That there was intention to create legal relations and the youngcouple could recover damages (Parker V Clarke (1960) 1 W.L.R. 286)3. Free and genuine consent: The consent of the parties to the agreement

must be free and genuine. The consent of the parties should not beobtained by misrepresentation, fraud, undue influence, Coercion ormistake. If the consent is obtained by any of these flaws, then contractis not valid.

4. Parties competent to contract: Every person is competent to contractif he is (i) of the age of majority (ii) is of sound mind and (iii) is notdisqualified from contracting by any law to which he is subjected.



5. Lawful consideration: Each party of an agreement must give orpromise something and receive something or a promise in return.Consideration is the price for which the promise of the other is sought.However, the price need not be in terms of money. In case the promiseis not supported by consideration, the promise will be nudum pactum(a bare promise) and not enforceable by law. The consideration mustbe real and lawful.

6. Lawful object: The object of the agreement must be lawful and notone which the law disapproves.

7. Agreement not declared illegal or void: There are certain agreementswhich have been expressly declared illegal or void by the law. Insuch cases, even if the agreement possesses all the elements of avalid agreement, the agreement will not be enforceable by law.

8. Certainty of meaning: The meaning of the agreement must be certainor must be capable of being made certain. Otherwise the agreementwill not be enforceable by law. For e.g. ‘A’ agreed to sell 10 metersof cloth. There is nothing to show, what type of cloth was intended.The agreement is not enforceable for want of certainty of meaning.

9. Possibility of performance: The terms of the agreement should becapable of performance. An agreement to do an act impossible initself cannot be enforced. For instance, A agrees with B to discovertreasure by magic. The agreement cannot be enforced.

10. Necessary Legal formalities: A contract may be in oral or in writing.If however, a particular type of contract is required by law to be inwriting, it must comply with necessary formalities as to writing,registration and attestation if necessary. If these legal formalities arenot carried out, then the contract is not enforceable by law.

1.3.1.2 Classification of contracts: Contracts are classified on thebasis of,

I- Terms of validity or enforceabilityII- Mode of formationIII- PerformanceI - Terms of validity or enforceability

II - Mode of formation

VALID

VOIDABLE

VOID

ILLEGAL

VALIDITY OR ENFORCEABILITY

UNENFORCEABLE

EXPRESS

IMPLIED MODE OF FORMATION

QUASI – CONTRACTS



III-Performance

1.3.2 VOID AGREEMENTS.

To constitute a valid contract it should have all the essential elementsdiscussed earlier. If one or more of these elements is / are found missing,the contract is voidable, void, illegal or unenforceable.

Voidable contract is one which may be repudiated at the will of one ofthe parties, but until it is repudiated it remains valid and binding. If it isaffected by a flaw (e.g. simple misrepresentation, fraud, coercion, undueinfluence) and the presence of anyone of these defects enables the partyaggrieved to take steps to repudiate the contract, it shows that the consentof the party who has the discretion to repudiate was not free.

Example: ‘A’ a man enfeebled by disease or age is induced by B’s influenceover him as his medical attendant to agree to pay ‘B’ an unreasonable sumfor his professional services. ‘B’ employs undue influence. A’s consent isnot free, he can take steps to set the contract aside.

An agreement which is not enforceable by either of the parties to it isvoid. Such an agreement is without any legal effect ab initio (from thevery beginning). Under the law, an agreement with a minor is void.

A contract, which ceases to be enforceable by law, becomes void whenit ceases to be enforceable.

Example:

(1) A and B contract to marry each other. Before the time fixed for themarriage A goes mad. The contract becomes void. (Subsequentimpossibility)

(2) A contracts to take B to a foreign port by indigo ship. Governmentafterwards declared war against the country in which port is situated.The contract becomes void when war is declared. (Subsequentillegality) An illegal agreement is one the consideration or object ofwhich is: (1) forbidden by law (2) defeats the provision of any lawor (3) is fraudulent or (4) involves or implies injury to the person orproperty of another or (5) Court regards it as immoral or opposedto the public policy. (1) Illustration, A, B and C enter into anagreement for the division among them of gains acquired or to beacquired by them through gambling which is prohibited by law. Theagreement is illegal.

EXECUTED

EXECUTORY

UNI-LATERAL ACCORDING TO PERFORMANCE

BI – LATERAL



(2) A promises to obtain for B an employment in the public service, andB promises to pay Rs. 1, 00,000 to A. The agreement is illegal.

In Mumbai, the wagering agreements have been declared unlawful bystatute.

A lets with B in settlement of A’s losses. ‘C’ cannot recover from A becausethis is money paid “under” or “in respect of” of a wagering transactionwhich is illegal in Mumbai. An unenforceable contract is neither void norvoidable but it cannot be enforced in the court because it lacks someitems of evidence such as writing, registration or stamping. For instancean agreement which is required to be stamped, will be unenforceable ifthe same is not stamped at all or is under stamped.

Contracts which must be in writing:(a) A negotiable instrument(b) Memorandum and Articles of Association of a company.(c) An application for shares in a company.(d) An application for transfer of shares in a company.(e) A promise to pay time barred debt.(f) A lease, gift, sale or mortgage of immovable property.Some of the contracts and documents evidencing contracts are in additionto be in writing, required to be registered also. These are:(a) Documents coming within the preview of Section 17 of the

Registrations Act 1908.(b) Transfer of immovable property under the Transfer of property Act.(c) Contracts without consideration but made on account of natural love

and affection between parties standing in near relation to each other.(d) Memorandum of Association and Articles of Association of a

company.1.3.3 Formation of a Contract

Classification According to Mode of Formation

Express-The terms of a contract may be stated in words (written orspoken)

Implied-Terms of a contract may be inferred from the conduct of partiesor from the circumstances of the case – Taking a seat in a Public TransportBus.

Offer and Acceptance (sections 3-9)

Offer / proposal

When one person signifies to another about his willingness to do or toabstain from doing anything with a view to obtaining the consent of otherto such act or abstinence, he is said to make a proposal.(1) A offers to sell his book to B. A is making an offer to do something

i.e. to sell his book. It is a positive consent on the part of the proposer.



(2) A offers not to file a suit against B, if the latter pays A the outstandingamount of Rs. 200. Here the act of A is a negative one i.e. he isoffering to abstain from filing a suit.

How an offer is made?By any act or omissionBy Act – By words (written or oral) – In person or over telephone etc.By Conduct – By positive acts or signs – silence cannot amount to offerby conduct.By omission – Includes such conduct or forbearance on one’s part (notthe other person takes it as his willingness or absent).E.g.(1) “A” proposes by letter to sell a house to B at a certain price.

This is an offer by an act by written words (i.e. letter). This is also anexpress offer.

(2) “A” proposes over telephone to sell a house to B at a certain price.This is an offer by an act (by oral words). This is an express offer.

(3) “A” owns a motor boat for taking people from Mumbai to Goa. Theboat is in the waters at the Gateway of India. This is an offer by ‘B’to take passengers from Mumbai to Goa. He had not spoken orcalled the passengers. The very fact is that this motor boat is in thewater near Gateway of India and this signifies his willingness to doan act with a view to obtain the consent of the other. This is an exampleof an implied offer.

(4) “A” filed a suit against Note : Whom ? mention if the latter pays “A”the amount of Rs. 200 outstanding. This is an offer by abstinence oromission to do something.

Carlill Vs Carbolic Smoke ball co.:The patent medicine company advertised that it would give a reward of$100 to any one who contracted by influence after using the smoke ballsof the company for a certain period according to the printed directions.Mrs. Carlill purchased the advertised smoke ball and contracted influenzain spite of using the smoke ball according to the printed instructions. Sheclaimed the reward of $100. The claim was resisted by the company onthe ground that the offer was not made to law and in any case she hadnot communicated her acceptance of the offer. She filed a suit for therecovery of the reward.



Held:- She could recover the reward as she had accepted the offer bycomplying with the terms of the offer.

1.3.4 Essential requirements of a valid offer1. The offer must be made with a view to obtain acceptance.2. The offer must be made with a view to create legal relation.3. The terms of offer must be definite, unambiguous and certain or

capable of being made certain. The terms of the offer must not beloose, vague or ambiguous.Ex.1. “A” offers to sell B a “hundred quintals of oil”. There is nothingwhatever to show what kind of oil was intended. The offer is notcapable of being accepted for want of certainty.Ex.2. “A” who is a dealer in coconut oil only offers to sell to B ‘onehundred quintal of oil’. The nature of A’s trade offers an indication ofthe meaning of the words and this is a valid offer.

4. An offer must be distinguished from a) mere declaration of intentionor (b) an invitation to offer or to treat.

5. The offer must be communicated to the offeree.6. The offer must not contain a term of the non-compliance of which

may be assumed to amount to acceptance.Ex. A tells B that he will offer to sell his dog to B for Rs. 4500; if Bdo not send his reply, A shall assume that B has accepted the offer.Here the offer is not a valid one.

7. A tender is an offer as it is in response to an invitation to offer.8. The special terms forming part of the offer must be duly brought to

the notice of the offeree at the time when the offer is made. Theterms may be brought to his notice either by drawing his attention tothem specifically or by inferring that of ordinary prudence could findthem by exercising ordinary intelligence. If the conditions are containedin a document which is delivered after the contract is complete, thenthe offeree is not bound by them.When two parties make identical offers to each other, in ignoranceof each other’s offer, the offer is known as cross offer and neitherof the two can be called an acceptance of the other and thereforethere is no contract.

Termination or lapse of an offer:-1. The offer lapses after stipulated or reasonable time.2. An offer lapses by the insanity of the offeror or the offeree before

acceptance.3. An offer terminates when rejected by the offeree.4. An offer terminates when revoked by the offerer before acceptance.5. An offer terminates by not being accepted in the mode prescribed or

if no mode is prescribed in some usual and reasonable manner.6. A conditional offer terminates when the condition is not accepted

by the offeree.7. An offer terminates by counter offer by the offeree.



Acceptance• Acceptance - Act of giving consent to the proposal• How it is Made - Express - oral or written

Implied (Carlill Vs Carbolic Smoke Ball Co.)• Who can accept - Specific offer – Only by the person to

whom it is made.General offer – By anyone complying with the terms of the offer (Carlill Vs Carbolic

Smoke Ball Co.)Essentials of a valid acceptance

1. Acceptance must be absolute and unqualified.2. It must be communicated.3. It must be according to the mode prescribed.4. It must be given within the time specified or within the reasonable time.5. It must be in response to an offer.6. It must be made before the offer lapses.7. It must be given by the person to whom the offer is made.

Communication of offer, acceptance and revocation• Offer must be communicated to the offeree and the acceptance must

be communicated to the offeror.• Revocation of offer by the offeree to the offeror and revocation of

the acceptance by the offeree to the offeror must be communicated.• Communication of the proposal is complete when it comes to the

knowledge of the person to whom it is made.• Completion of communication of acceptance has two aspects, they

are:(i) as against the proposer

and(ii) as against the acceptor

The communication of acceptance is complete(i) As against the proposer when it is put into a couple of transmission

to him so as to be out of the power of the acceptor.(ii) As against the acceptor when it comes to the knowledge to the

proposer.The communication of a revocation (of an offer or an acceptance) iscomplete-(i) as against the person who make it, when it is put into a course of

transmission to the person to whom it is made, so as to be out of thepower of the person who makes it.

(ii) as against the person to whom it is made when it comes to hisknowledge.

A proposal may be revoked at any time before the communication of theacceptance is complete as against the acceptor but not afterwards.



1.3.5 Performance of Contracts

Classification according to Performance

Executed – Wholly performed.

A creates a contract to buy a bicycle from B for cash. A pays cash and Bdelivers the bicycle.

Executory – Wholly unperformed or partly performed.1) On June 1, A agrees to buy a bicycle from B. The contract i.e., to

be performed on June 15th – and A has to pay the price on July 1.Aagrees to buy the bicycle from B. The contract is to be performed onJune 15th. On 15th June, if both perform their obligations, then wecan say that contract becomes executed.

(2) On June 1, A agrees to buy a bicycle from B. B has to deliver thebicycle on June 15th and A has to pay the price on July 1. B deliversthe bicycle on June 15. The contract is still executory as somethingremains to be done in terms of the contract.

Unilateral - At the time when the contract is concluded, if there is anobligation to be performed only by one party then it is called as unilateral.

A makes payment for bus journey from Mumbai to Pune. He hasperformed his promise. It is now for the transport company to performthe promise.

Bilateral - There is an obligation on the part of both to do or to refrainfrom doing a particular thing similar to the executory contracts.

Contract is a contract from the time it is made and not from the time itsperformance is due.

1.3.6 Discharge of contract

Discharge of contract means termination of the contractual relationshipbetween the parties. A contract is said to be discharged when it ceasesto operate, i.e., when the rights and obligations created by it comes to anend. In some cases, other rights and obligations may arise as a result ofdischarge of contract but they are altogether independent of the originalcontract.

A contract may be discharged:1. by performance.2. by mutual agreement or consent.3. by impossibility.4. by lapse of time.5. by operation of law.6. by breach of contract.The above said methods of discharge of contract are explained below:



1. PerformanceDischarge by performance takes place when the parties fulfill theirobligations arising under the contract within the time and in the mannerprescribed. In such a case, the parties are discharged and the contractcomes to an end. If only one party performs the promise then it isconsidered that only one is discharged. He gets his right against the otherparty who is guilty of breach.

The Performance of a contract is usually operated in two modes.1. Actual performance- when both the parties performed their promises,

the contract is discharged. Performance should be complete, preciseaccording to the terms of the agreement.

2. Attempted performances (or) tender are not actual performance but it’sonly an offer to perform the obligation under the contract.

2. Mutual Agreement or Consent.The contract makes a contractual obligation which is discharged byagreement which may be expressed or implied. The various cases ofdischarge of a contract by mutual agreement are dealt within sections 62and 63 as discussed below:a. Novation – it takes place when (i) a new contract is substituted for

an existing one between the same parties, or (ii) a contract betweentwo parties is rescinded in consideration of a new contract beingentered into on the same terms between one of the parties and athird party.

Example: A owes B Rs 10,000/. A enters into an agreement with B andgives B a mortgage of his (A’s) estate for Rs 5,000/ in place of the debtof Rs.10, 000/. This is a new contract which extinguishes the old one.Novation should take place before expiry of the time of the performanceof the original contract.b. Rescission- Rescission of a contract takes place when all or some of

the terms of the contract are cancelled. It may occur: (i) by mutualconsent of the parties, or (ii) where one party fails in the performanceof his obligation. In such a case, the other party may rescind thecontract without prejudice to his right to claim compensation for thebreach of contract.Example: A promises to supply certain goods to B six months afterdate. By that time, the goods go out of fashion. A and B may rescindthe contract.

c. Alteration- Alteration of a contract may take place when one or moreof the terms of the contract is / or altered by the mutual consent ofthe parties to the contract. In such a case, the old contract isdischarged.Example: A enters into a contract with B for the supply of 100 balesof cotton at his godown by the first of the next month. A and B mayalter the terms of the contract by mutual consent.



d. Remission- Remission means acceptance of a lesser fulfillment ofthe promise made i.e., acceptance of a lesser sum than, what wascontracted for, in discharge of the whole of the debt. It is not necessarythat there must be some consideration for the remission of the partof the debt [Harichand Madangopal Vs State of Punjab, A.I.R.(1973 S.C.381].Example: A owes B Rs.5000/. A pays to B and B accepts insatisfaction of the whole debt, Rs.2000/ paid at the time and placeat which Rs. 5000/ is payable. The whole debt is discharged.

e. Waiver - waiver takes place, when the parties to the contract agreethat they shall no longer be bound by the contract. This amounts to amutual abandonment of rights by the parties to the contract.Consideration is not necessary for waiver.

f. Merger - Merger takes place if an inferior right accruing to a partyunder a contract merges into a superior right accruing to the sameparty under the same or some other contract.Example: P holds a property under a lease. He later buys theproperty. His rights as a lessee is merged into his rights as an owner.

3. Impossibility

If an agreement contains an undertaking to perform impossibility, it isvoid ab initio. It falls into two categories they are:1. Impossibility existing at the time of agreement. The facts of

impossibility may be (i) known to the parties, also called as absoluteimpossibility. (ii) Unknown to the parties by the ignorance or anyother reason.

2. Impossibility arising subsequent to the formation of contract. It isalso called as post contractual or supervening impossibility likedestruction of subject matter, non-existence or non-occurrence of aparticular state of things, death or incapacity for personal service,change of law or stepping in of a person with statutory authority oroutbreak of war.

3. Impossibility of performance- not an excuse- a contract is notdischarged on the ground of supervening impossibility like difficultyof performance, commercial impossibility, impossibility due to failureof a third person, strikes, lock-out and civil disturbances and failureof one of the objects.

4. Lapse of time

If the contract is not performed in time, then the contract will beconsidered as discharged.

5. Operation of law

This includes discharge – by death, by merger, by insolvency, byunauthorized alteration of the agreement and rights and liabilities becomevested in the same person.



6. Breach of contractBreach of contract means a breaking of the obligation which a contractimposes. It confers a right of action for damages on the injured party.Breach of contract may take place by (i) actual breach of contract whichtakes place when the performance is due, during the performance of thecontract. (ii) anticipatory breach of contract.

1.3.7 Remedies for Breach of Contract

A remedy is the means given by law for the enforcement of a right. Whena contract is broken the injured party is entitled to the following remediesaccording to the law:1. Rescission of the contract.2. Suit for damages.3. Suit upon quantum meruit.4. Suit for specific performance of the contract.5. Suit for injunction.The above said remedies are explained as follows:

1. Rescission

When a contract is not performed by one party, the other party may sueto treat the contract as rescinded and refuse further performance. Insuch a case, he is absolved of all his obligations under the contract.

Example: A promises B to supply ten bags of cement on a certain day, Bagrees to pay the price after the receipt of the goods. A does not supplythe goods. B is discharged from liability to pay the price.

2. Damages

Damages are a monetary compensation allowed to the injured party bythe court for the loss or injury suffered by him by the breach of thecontract. The object of awarding damages for the breach of a contract isto put the injured party to the same (original) position. This is called thedoctrine of restitution. The foundation of modern law of damages both inIndia and England, is to be found in the judgment in the case of HadleyVs Baxendale, (1854) 9 EX.341.The rules relating to damages may now be considered as follows:i. Damages arising naturally-ordinary damages

When the damages are proximate consequence occurred by naturaland direct by the usual course of things then it is called as ordinarydamages.

ii. Damages in contemplation of the parties- special damagesAny damage arising as other than the reason of normal damage thenit will be considered as special damages but special damages cannotbe claimed as a matter of right.



iii. Vindictive or exemplary damagesThis damage can be given away as compensation for the loss sufferedand not by way of punishment for wrong inflicted, but in case ofbreach of a promise to dishonor of a cheque by a banker wrongfullywhen he possesses sufficient funds to the credit of the customer, thecourt may award exemplary damages.

iv. Nominal damagesEven though the injured party has not in fact suffered any loss byreason of the breach of a contract, the damages recoverable by himare nominal. These damages merely acknowledge that the plaintiffhas proved his case and won. [Brace Vs Calder (1895) 2 Q.B.253]

v. Damages for loss of reputationvi. Damages for inconvenience and discomfortvii. Mitigation of damagesviii. Difficulty of assessmentAlthough damages, which are incapable of assessment, cannot berecovered, the fact that they are difficult to assess with certainty or precisiondoes not prevent the aggrieved party from recovering them.ix. Costs of decree-In addition to the damages, the aggrieved party is

entitled to get the cost of getting the decree for damages. The cost ofsuit for damages is at the discretion of the court.

x. Damages agreed upon in advance in case of breach - LiquidatedDamages

If a sum is named in a contract as the amount to be paid in case of itsbreach, or if the contract contains any other stipulation by way of a penaltyfor failure to perform the obligations, the aggrieved party is entitled toreceive from the party, who has broken the contract, a reasonablecompensation not exceeding the amount so named. This is known asLiquidated Damages.

3. Quantum meritIt means “as much as earned”. This claim arises when one party partlyperforms, has become discharged by the breach of the contract by theother party.

4. Specific PerformanceIn certain cases of breach of a contract, damages are not in adequateremedy. In such cases the court may direct the party in breach to carryout his promise according to the terms of the contract. In some cases,specific performance will not be granted where (i) damages are in or asadequate remedy (ii) the contract is not certain (iii) the contract in itsnature revocable (iv) the contract is made by the trustees in breach oftheir trust (v) the contract is of a personal nature (vi) the contract is madeup by a company in excess of its power as laid down in its memorandumof association (vii) the court cannot supervise the procedure that is beingcarried out during the time.



5. InjunctionWhere a party is in breach of a negative term of a contract, the court mayissue an order, restraning him from doing what he has promised not todo. Such an order of the court is known as injunction.

1.3.8 Quasi ContractSometimes obligations are created by law whereby an obligation isimposed on a party and an action is allowed to be brought by anotherparty. These obligations are known as Quasi-contracts.1) A supplied B, a minor and / or the wife and children of B with

necessaries suitable to his / their condition of life. A is entitled to bereimbursed from B’s property

2) A is a tradesman; leaves goods at B’s house by mistake. B treats thegoods as his own. B is bound to pay A for them.

The Quasi-contract - Discuussion :1. Supply of necessaries-if a person, incapable of entering into a

contract, or anyone whom he is legally bound to support, is suppliedby another with necessaries suited to his condition of life, the personwho has furnished such supplies is entitled to be reimbursed fromthe property of such incapable person.Example; A supplies B, a lunatic, with necessaries suitable to hiscondition of life. A is entitled to be reimbursed from B’s property.

2. Payment by an interested person- A person who is interested inthe payment of money which another is bound by law to pay andwho therefore pays it is entitled to be reimbursed by the other.Example; P left his carriage on D’s premises. D’s landlord seizedthe carriage as distress for rent. P paid the rent to obtain the releaseof his carriage.Held: P could recover the amount from D [ Exail v. Patridge, (1799)8 Term 308].

3. Obligation to pay for non-gratuitous acts-When a personlawfully does anything to another person or delivers anything to him,not intending to do so gratuitously and such other person enjoys thebenefit thereof, the latter is bound to make compensation to theformer in respect of, or restore, the thing so done or delivered.Example: A, a tradesman, leaves goods at B’s house by mistake. Btreats the goods as his own. Then B is bound to pay for them to A.

4. Responsibility of Finder of Lost goodsA person, who finds goods belonging to another and takes them intohis custody, is subject to the same responsibility as a bailee. He isbound to take as much care of the goods as a man of ordinaryprudence would, under similar circumstances, should take care as ofhis own goods of the same bulk, quality and value.Examples: F picks up a diamond on the floor of S’s shop. He handsit over to S to keep it till true owner is found . No one appears toclaims it for quite some weeks in spite of the wide advertisements in



the newspapers. F claims the diamond from S who refuses to return.S is bound to return the diamond to F, who is entitled to retain thediamond against the whole world except the true owner.

5. Mistake or coercionA person to whom money has been paid, or anything delivered, bymistake or under coercion, must repay or return it to the person whopaid it by mistake or under coercion.Examples: A and B jointly owe Rs.100 to C. A alone pays the amountto C, and B, not knowing this fact, pays Rs.100 over again to C, Cis bound to pay the amount to B.Have you under stood Questions?A- Objective questions

1. A is engaged by B to write a book to be published sequentially in aweekly magazine. The magazine is abandoned after a few issues. Isthere a quantum merit is in this case?

2. The goods belonging to A are wrongfully attached in order to realizearrears of Government revenue due by B. A pays the amount to savethe goods from sale. Is he entitled to recover the amount from B?

3. X saves Y’s property from fire intending to do so gratuitously.Subsequently he claims compensation from Y on the ground that Yenjoyed the benefit of X’s act. Will he succeed?

4. A left his carriage on B’s premises. B’s landlord seized the carriageas distress for rent. A paid the rent to obtain the release of his carriage.Can A recover the amount from B?

5. A pays some money to B by mistake. It is really due to C. Can Crecover the amount from B?

Answers:1. Yes 2. Yes 3. No 4.Yes 5.No

B-Short questionsQ.1.3.a. What is contract?Q.1.3.b. Distinguish between void and voidable contracts.Q.1.3.c. Write a short note on “Minors contract for necessities”.Q.1.3.d. What is undue influence? State its legal effect.Q.1.3.e. Distinguish between general and specific offer.Q1.3.f. What is quasi-contract?

B- Long questionsQ.1.3.g. State the essential elements of a valid contract.Q.1.3.h. Discuss the law relating to competency of parties to enter into a

valid contract.Q.1.3.i. State whether all void agreements are illegal.Q.1.3.j. Discuss about the essentials of discharge of contracts.Q.1.3.k. Explain briefly.

(a) Stranger to a contract(b) Offer and invitation to offer(c) An agreement without consideration



Q.1.3.l .State whether a contract is valid even if there is no propercommunication of acceptance.

Q.1.3.m. Discuss the role of “offer” and “acceptance” in the formation ofa valid contract.

1.4 The Sale of Goods Act 1930

A contract of sale of goods is a contract, whereby the seller transfers oragrees to transfer the property in the goods to the buyer for a price.There may be a contract of sale between one part-owner and another. Acontract of sale may be absolute or conditional.

The term ‘contract of sale’ is a generic term and includes both a sale andan agreement to sell

1.4.1 Sales Contract

1.4.1.1 Definitions

Sale:

A contract of sale of goods is a contract whereby the seller transfer oragrees to transfer the property in goods to the buyer for a price.1. There must be at least 2 parties.2. Transfer or agreement to transfer the ownership of goods should

take place.3. Subject matter: Goods.4. Consideration: Price.5. May be absolute or conditional.6. All other essentials of a valid contract must be present.

Example for Sale:

A sells his Yamaha Motor Bicycle to B for Rs.10,000 Ownership hasbeen transferred from A to B.

Agreement to Sell:

A agrees to sell certain goods to B. The goods are on the way fromLondon to Mumbai in a ship. Property of the goods will pass to thebuyer when the goods come to the port; the agreement is subject to thecondition that the ship arrives in the port with goods.

Sale and Hire - Purchase :

Hire Purchase – Agreement for hire with an option to purchase. Hirerwill become owner of the good on the payment of last instalment ofhire charges. Owner can terminate the contract.Instalment sale & Hire Purchase are different – In Hire purchase,hirer has option to purchase. In Installment sale – buyer has bought oragreed to buy the goods.



1.4.1.2 Difference between sale and agreement to sell

What is called as goods?

Goods-Every kind of moveable property other than actionable claimsand money• Money itself (legal tender) cannot be the subject for sale.• Foreign Currency may however be bought or sold.

Actionable Claim:

Things which a person cannot make use of but which can be claimed byhim by means of legal action of a debt.

1.4.2 Transfer of title and risk of loss

A document of title to goods is one, which enables its possessor to dealwith the goods described in it as if he were the owner; it is used in theordinary course of business as proof of the possession or control of goods.It authorizes, either by endorsement or by the delivery, its possessor totransfer or receive goods by it. It symbolizes the goods and confers aright on the purchaser to receive the goods or to further transfer suchright to another person. This may be done by mere delivery or by properendorsement and delivery.Conditions to be fulfilled by a document of title of goods:i) It must be used in the ordinary course of businessii) The undertaking to deliver the goods to the possessor of the document

must be unconditional.

SL.

NO. SALE AGREEMENT TO SELL

1. Executed Contract Executory Contract

2. Seller can sue the buyer for price of goods. Seller can only sue for damages with

reference to the price that was payable

at a stated date.

3. In case of loss of goods, the loss will fall on

the buyer, even if goods are in possession of

seller. Risk is associated with the ownership.

Loss to be owned by the seller even if

goods are in possession of the buyer.

4. In case buyer pays the price & the seller

thereafter becomes an insolvent, the buyer

can claim the goods from official receiver

or assignee.

Buyer cannot claim the goods, but only

rateable dividend for the price paid

5. Buyer recovers in solvent without paying

the price; the seller will have to deliver the

goods to official assignee or receiver except

where he has lien on the goods.

Seller can refuse to deliver the goods to

the official assignee or receiver.



iii) The possessor of the document, by virtue of holding such document,must be entitled to receive the goods unconditionally.

Here we will discuss some of the documents of titles as given below:

1.4.2.1 Document of title of Goods:

The goods can be called as goods based on the below said form of titles:1. Bill of lading - It is the document which acknowledges receipt of

goods on board a ship and is signed by the captain of the ship or hisduly authorized representative.

2. Dock warrant-It is a document issued by a dock owner, giving detailsof the goods and certifying that the goods are held to the order of theperson named in it or endorsee. It authorizes the person holding it toreceive possession of the goods.

3. Warehouse keeper’s certificate/Harbinger’s certificate -It is adocument issued by a warehouse-keeper or a wharfinger stating thatthe goods specified in the document are in his warehouse or in hiswharf.

5. Railway or lorry receipt - It is a document issued by a railway foracknowledging the receipt of goods. It is to be presented by theholder or consignee at the destination to take delivery of the goods.

6. Warrant/Order for the delivery of goods-It is a documentcontaining an order by the owner of the goods to the holder of thegoods on his behalf, asking him to deliver the goods to the personnamed in the document.

1.4.1.2 Transfer of property

Transfer of property in goods from the seller to the buyer is the mainobject of a contract of sale. The term property in goods must bedistinguished from possession of goods. Property in goods means theownership of goods, whereas possession of goods refers to the custodyor control of goods. An article may belong to A, although it may not be inhis possession. B may be in possession of that article though he is not itsowner.

It is important to know the precise moment of time at which the propertyin goods passes from the seller to the buyer for the following reasons:i) Risk follows ownership- Unless otherwise agreed, risk follows

ownership whether delivery has been made or not and whether pricehas been paid or not.

ii) Action against third parties- When the goods are in any waydamaged or destroyed by the action of third parties, it is only theowner of the goods who can take action against them.

iii) Insolvency of the seller or the buyer- In the event of insolvency ofeither the seller or the buyer, the question whether the official receiveror assignee can take over the goods or not depends on whether theproperty in the goods has passed from the seller to the buyer.

iv) Suit for price- The seller can sue for the price, unless otherwise agreedonly if the goods have become the property of the buyer.



1.4.2.3 Passing of PropertyThe primary rules for ascertaining, when the property in goods passes tothe buyer is as follows;i) Goods must be ascertained- When there is a contract for the sale of

unascertained goods, no property in the goods is transferred to thebuyer unless and until the goods are ascertained.

ii) Intention of the parties- Where there is a contract for the sale ofspecific or ascertained goods, the property in them passes to thebuyer at the time when the parties intend it to pass.

Transfer of property based on the classification of goods:1. Existing – a) Specific and ascertained –The rules relating to transfer

of property in specific goods are as follows:i) Passing of property at the time of contract- Where there is an

unconditional contract for the sale of specific goods in a deliverablestate, the property in the goods passes to the buyer when the contractis made.

ii) Passing of property delayed beyond the date of the contract-a) Goods not in a deliverable state. - Where there is a contract for the

sale of specific goods not in a deliverable state.b) When the price of goods is to be ascertained by weighing.-Where

there is a contract for the sale of specific goods in a deliverablestate, but the seller is bound to weigh, measure, test or do someother act or thing with reference to the goods for the purpose ofascertaining the price, the property does not pass until such act orthing is done and the buyer has notice thereof.

2. Generic and unascertained- When there is a contract for the sale ofunascertained goods, the property in the goods does not pass to thebuyer until the goods are ascertained. Until goods are ascertainedthere is merely an agreement to sell.

1. Future Goods2. Contingent GoodsExample: A owns an Indica car show room of 50 cars and agrees to sellany one of them to the contract is for unascertained goods. Since whichparticular car shall become the subject matter of sale is not individualizedat the time of the contract of sale.• An agreement to sell future crops of a particular field implies an

agreement to sell future goods.• A agree to sell to B a certain painting, only if C, its present owner

sells it to A. This painting is classified as contingent goods.3. Goods sent on approval or ‘on sale or return’- When goods are

delivered to the buyer on approval or ‘on sale or return’ or othersimilar terms, the property therein passes to the buyer;

i) When he signifies his approval or acceptance to the seller.ii) When he does any other act adopting the transaction.



iii) If he does not signify his approval to the seller but retains the goodswithout giving notice of rejection, beyond the time fixed for thereturn of the goods, or if no time has been fixed, beyond a reasonabletime.

1.4.2.4. Contracts involving sea routesThere are certain special clauses and conditions for the transfer of propertythrough the sea and these are follows;1. F.A.S. contracts- ‘Free alongside ship’. The property in goods sold

under an F.A.S. contract passes from the seller to the buyer whenthe goods delivered alongside the ship. The sold goods will be namedby the buyer under a contract of carriage. Seller’s duties under F.A.Sare as follows:

i) To deliver the goods by alongside the ship.ii) To notify the buyer immediately that the goods have been delivered

alongside the ship.iii) To pay all charges and to bear all risks on the goods delivered

alongside the ship.2. F.O.B. contracts- ‘Free On Board’. Seller sends the goods on a

ship at his selling point at his own expense under a contract by sea,to be made by or on behalf of the buyer, for the purpose oftransmission to the buyer. Seller’s duties under F.O.B are

i) To deliver the goods on board the ship, the name of the buyer will bedocumented. When once the goods are put on board the ship, theyare at the risk of the seller.

ii) To give notice of the shipment to the buyer so as to enable him toprotect himself by insurance against loss during the sea transit.

Buyer’s duties under F.O.B Contracti) To arrange for the contract of affreightmentii) To name the ship to which the goods are to be delivered or to

authorize the seller to select the shipC.I.F. contracts- Cost Insurance and Freight contract - It is acontract performed by the delivery of documents representing the goodsto the buyer, through a bank.Price as influencing factors in sale of goodsMoney consideration for sale of the goods:• Price may be either fixed by the contract.• May be agreed to be fixed in a manner provided by the contract.

e.g., by a value.• May be determined by the course of dealing between the parties.

1.4.3 Conditions and Warranties in sales contractA stipulation in a contract of sale with reference to goods which are thesubject thereof may be a condition or a warranty.



Difference between a condition and warranty

SL.

NO. CONDITION WARRANTY

1. A condition is a stipulation (in a contract)

which is essential to the main purpose of the

contract

A warranty is a stipu lation which is

only collateral or subsidiary to the

main purpose of the contract

2. A breach of condition gives the aggrieved

party a right to sue for damages as well as the

right to repudiate the contract

A breach of warranty gives only the

right to use for damages. The

contract cannot be repudiated

3. A breach of condition may be treated as a

breach of warranty in certain circumstances

A breach of warranty cannot be

treated as a breach of condition

Condition: A condition is a stipulation which is essential to the mainpurpose of the contract. It goes to the root of the contract.

Warranty: A warranty is a stipulation which is collateral to the mainpurpose of the contract. It is not of such vital importance as a condition.

Example:

A man buys a particular horse, which is warranted to ride. If the horseturns out to be vicious, the buyer’s only remedy is to claim damages. Butif instead of buying a particular horse, asks a dealer to supply him with aquiet horse and the horse turn out to be vicious, the stipulation is a conditionand the buyer can reject the horse or keep the horse and claim damages.

When can the condition be treated as a warranty?• A breach of condition can be treated as a beach of warranty under

certain conditions.• A breach of warranty cannot be treated as a breach of condition.

Contract of guaranteeA contact to perform the promise or discharge of liability of a thirdperson in case of default.• The person who gives the guarantee is called the Surety.• The person for whom the guarantee is given is called as principal

debtor.• The person to whom the guarantee is given is called the as creditor.• Two contacts – Principal contract between the principal debtor and

creditor .- Secondary contract between the creditor and the surety.Example: when A requests B to lend Rs.10, 000 to C, that C will repaythe amount within the agreed time and that C failing to do so, A himselfwill pay to B. In this case there is a contract of guarantee.



Express and implied conditions and warranties

In a contract of sale of goods, conditions and warranties may be expressedor implied. Express conditions and warranties are those which areexpressly provided in the contract. Implied conditions and warrantiesare those which the law implies into the contract unless the parties stipulateto the contrary.Express condition: If the terms of contract expressly provide for them.

Implied conditions1. Condition as to title- In a contract of sale, unless the circumstances

of the contract are such as to show a different intention, there is animplied condition on the seller that is : a) in the case of a sale, he hasthe right to sell the goods and b) in the case of an agreement to sell,he will have the right to sell the goods at the time when the propertyis to be passedExample: R bought a car from D and used it for four months. D hadno title to the car and consequently R had to hand it over to the trueowner.Held: R could recover the price paid. [Rowland v. Divail, (1923) 2K.B. 500]

2. Sale by description –Where there is a contract for the sale of goodsby description, there is an implied condition that the goods shallcorrespond with the description.Example; A ship was contracted to be sold as a “copper fastenedvessel” to be taken with all faults, without any allowance for anydefects whatsoever. The ship turned out to be “partially copper-fastened”.Held: The buyer was entitled to reject [Sheperd v. Kain, (1821) 5 B& add.240

3. Conditions as to fitness or quality - Normally, in a contract ofsale there is no implied condition as to quality or fitness of the goodsfor a particular purpose. The buyer must examine the goods thoroughlybefore he buys them in order to satisfy himself that the goods will besuitable for the purpose for which he is buying them.

4. Goods to be of merchantable quality- Where goods are boughtby description from a seller who deals in goods of that description,there is an implied condition that the goods are of merchantable quality.This means that goods should be such that they are commerciallysaleable under the description by which they are known in the marketat their full value.Example: A manufacturer supplied 600 horns under a contract. Thehorns were found to be dented, scratched and otherwise and thereforethe seller’s suit for price was dismissed {Jackson v. Rotax Motor &Cycle Co. (1910) @ k.B.397}

5. Condition implied by custom or trade -An implied condition as toquality or fitness for a particular purpose may be annexed by theusage of trade.Example: A bought a set of false teeth from a dentist. The set did not



fit into A’s mouth.Held- He could reject the set as the purpose for which anybodywould buy it was implicitly known to the seller, i.e., dentist {Dr.Barettov.T.R.Price, A.I.R. (1939) Nag. 19}

6. In case of sale by sample, the(a) Bulk to correspond with sample(b) Buyer to have reasonable opportunity to compare the bulk with

sample(c) Goods to be of merchantable quality

Implied warranties

The implied warranties in a contract of sale are as follows:1. Warranty of quite possession-In a contract of sale; unless there is a

contrary intention, there is an implied warranty that the buyer shallhave and enjoy quiet possession of the goods. If the buyer is in anyway disturbed in the enjoyment of the goods in consequence of theseller’s defective title to sell, he can claim damages from the seller.

2. Warranty of freedom from encumbrances- In a contract of sale;unless there is a contrary intention, there is an implied warranty thatthe buyer shall have freedom from any encumbrance of the goodsobtained from the seller.

1.4.4 Performance of sales contracts

Performance of a contract of sale means as regards the seller, deliver thegoods to the buyer and as regards the buyer, acceptance of the deliveryof the goods and payment for them, in accordance with the terms of thecontracts of sale.

A contract of sale always involves reciprocal promises, the seller promisingto deliver the goods and the buyer promising to accept and pay for them.In the absence of a contract to the contrary they are to be performedsimultaneously and each party should be ready and willing to perform hispromise before he can call upon the other to perform his promise.

1.4.4.1Delivery of Goods

Delivery means voluntary transfer of possession of goods from one personto another. Delivery of goods sold may be made by doing anything, whichif the parties agrees shall be treated as delivery or which has the effect ofputting the goods in the possession of the buyer.

Delivery of the goods may be actual, symbolic, or constructive. This isexplained as follows:1. Actual delivery-Where the goods are handed over by the seller to

the buyer or his duly authorized agent, the delivery is said to beactual. Delivery of goods may also be made by doing anything whichhas the effect of putting the goods in the possession of the buyer.



2. Symbolic delivery- Where the goods are ponderous or bulky andincapable of actual delivery, i.e., haystack in a meadow, the deliverymay be symbolic. Handing over of the key of a warehouse to thebuyer is symbolic delivery of the goods to the buyer and is as effectiveas the actual delivery, eventhough there is no change in the possessionof the goods.

3. Constructive delivery- Where a third person who is in possessionof the goods of the seller at the time of the sale, acknowledges to thebuyer that he holds the goods on his behalf and and there takes placea delivery by the attainment or the constructive delivery.

1.4.4.2 Rules as to delivery of goodsa) Mode of deliveryb) Delivery and paymentc) Effect of part deliveryd) Buyer to apply for deliverye) Place of deliveryf) Time of deliveryg) Goods in possession of a third partyh) Cost of deliveryi) Delivery of correct quantityj) Delivery to a carrier or wharfinger

1.4.4.3 Acceptance of delivery

Receipt of goods by the buyer does not necessarily result in acceptanceof goods by him under and in performance of the contract of sale.Acceptance is something of mere receipt or taking possession of the goodsby the buyer. It means the final assent by the buyer that he has receivedthe goods under and in performance of the contract of sale. If he wrongfullyrefuses to accept the goods under the contract, he is liable for damages.

The buyer is deemed to have accepted the goods-

a) when he intimates to the seller that he has accepted the goods,b) when the goods have been delivered to him and he does any act in

relation to them which is inconsistent with the ownership of the seller.

1.4.4.4 Rights and duties of the buyerRights of the buyer

a) Right to have delivery as per contract

b) Right to reject the goods

c) Right to repudiate

d) Right to notice of insurance

e) Right to examine

f) Rights against the seller for breach of the contract



1.4.4.5 Duties of the buyer

a) Duty to accept the goods and pay for them in exchange for possession

b) Duty to apply for delivery

c) Duty to demand delivery at a reasonable time

d) Duty to accept instalment delivery and pay for it

e) Duty to take risk of deterioration in the course of transit

f) Duty to intimate the seller when he rejects the goods

g) Duty to take delivery

h) Duty to pay price

i) Duty to pay damages for non acceptance

1.4.5 Unpaid sellerA seller of goods is deemed to be an unpaid seller when:

1. the whole of the price has not been paid or tendered,2. a bill of exchange or other negotiable instrument has been received

as a conditional payment and the condition on which it is receivedhas not been fulfilled by the reason of dishonor of the instrument orother wise.The following conditions must be fulfilled before a seller of goodscan be deemed to be an unpaid seller:

1. He must be unpaid and the price is due.2. He must have an immediate right of action for the price3. A bill of exchange or other negotiable instrument was received but

the same has been dishonored.1.4.5.1 Rights of an unpaid seller against the goods

When the property in the form of goods has passed to the buyer, anunpaid seller has the following rights against the goods. They are1. Right to lien- A lien is a right to retain possession of goods until

payment of the price is made available to the unpaid seller of thegoods, who is in possession of them where-

a) The goods have been sold without any stipulation as to credit, b) The goods have been sold on credit, but the term of credit has expired, c) The buyer becomes insolvent.2. Right of stoppage in transit- The right of stoppage in transit is a

right of stopping the goods in transit after the unpaid seller has partedwith the possession of the goods. He has further right of resumingpossession of the goods as long as they are in the course of transitand retaining possession until payment or tender of the price is availableto the unpaid seller-



a) when the buyer becomes insolventb) when the goods are in transit3. Right of resale- The unpaid seller can resell the goods-a) where the goods are of a perishable natureb) where he gives notice to the buyer of his intention to re-sell the goods

and the buyer does not within a reasonable time pay or tender theprice.

1.4.5.2 Remedies for breach of contract of sale1. Buyer’s suitsa) Suit for damages for non-delivery of the goodsb) Suit for breach of warrantyc) Suit for damages for repudiation of contract by the seller before the

due dated) Suit for specific performancee) Suit for interest2. Seller’s suitsa) Suit for priceb) Suit for damages for non-acceptance of the goodsc) Suit for damages for repudiation of contract by the buyer before the

due dated) Suit for interest

1.4.5.3 Unascertained or future goods

Property is not transferred to the buyer unless and until the goods areascertained.

In case of the sale of unascertained goods or future goods by description,property passes to the buyer, when goods of that description in adeliverable state are unconditionally appropriated to the contract, eitherby the seller with the assent of the buyer or by the buyer with the assentof the seller.

1.4.5.4 Sale “on approval” or “Sale or return” basis

Where goods are delivered to the buyer “on approval” or a “sale orreturn” or similar terms, the property passes to the buyer: When ‘A’signifies his approval or acceptance to the seller ‘B’. The seller B doesany act adopting the transaction e.g., pledges the goods with a third partyor B retains the good, without giving notice of rejection, beyond the timefixed for the return of goods or if the time is fixed, beyond a reasonabletime.

1.4.5.5 Transfer of title by non-ownersOwner only can transfer a good title.

Exceptions1. When effected by a mercantile agent in the ordinary course of business,2. When made by a joint owner in possession with the consent of other joint

owners.



1.4.5.6 Rights of an indemnifier

It is the awareness of the entitled benefit of all securities to which thecreditor has against the principal debtor are known or not.

Commencement of the indemnifiers liability

The indemnified may compel the indemnifier to place links in a positionto meet the liability that may be cast upon him without waiting until thepromise (the indemnified) has actually discharged it.

1.4.5.7 Specific guaranteeA guarantee of the repayment of a loan of Rs. 10,000 to B by C (banker)

1.4.5. 8 Continuing guarantee

Eg:1 A B C in consideration that will employ in collecting the rents of B’s property, promises

to B to be responsible to the amount of Rs. 5000/ - for the due collection and payment of

these rents.

Eg:2 A B guarantees payment to , a tea dealer, to the amount of Rs. 10,000 for any tea selling

from time to time supplied to . supplies with tea to the value of Rs. 10,000 and C B C C

pays for it. Afterwards suppliB B es with tea to the value of Rs. 15,000, fails to pay. C C

The guarantee given by was a continuing guarantee and he is accordingly liable to to A B

the extent of Rs. 10,000.

1.4.5.9 Rights and obligations of the creditorThe Rights of a creditor are:

1. The creditor is entitled to demand payment, from the surety as soonas the principal debtor refuses to pay or makes default in payment.

2. Where surety is insolvent, the creditor is entitled to proceed on thesurety’s insolvency and claim the pro- rata dividend.

Obligations1. Not to change any terms of the original contracts.2. Not to release or discharge the principal debtor.3. Not to compound or give time to or agree not to sue the principal debtor.4. Not to do any act inconsistent with the rights of the surety.

1.4.5.10(a) Rights against the creditor

(a) Right of subrogationWhere a surety has paid the guaranteed debts on its becoming due or

Rights against the creditor

Rights against co-sureties

RIGHTS OF SURETY

Rights against the principal debtor



has performed the guaranteed duty on the default of the principal debtor,he is invested with all the rights which the creditor has against the debtor.(b) Right to be indemnified

Surety has the right to recover from the principal debtor, the amountswhich he has rightfully paid under the contract of guarantee.

1.4.5.10(b) Rights against co-sureties

Rights of contribution where a debt has been guaranteed by one or morethan one person, they are called co-sureties.

Example: A, B and C are sureties to D for a sum of Rs. 3000, which hasto be paid to E. If D defaults in making payment to E., then A, B and Care liable as between themselves to pay Rs. 1000 each and if any of themhas to pay his share i.e. Rs. 1000, he can claim contribution from othersfor the amount paid in excess of Rs. 1000.

If one of the sureties become insolvent, the solvent constitutes shall haveto contribute the whole amount equally.

Example: A, B and C are sureties for D; enter into a contract tocontribute each in a different penalty. A in the penalty of Rs. 10,000, B inthat of Rs. 20,000, C in that of Rs. 40,000, conditioned for D’s dulyaccounting to E. D makes default to be extent of Rs. 30,000. A, B & Care each liable to pay Rs. 10,000.

In the example above, if D makes default to the extent of Rs. 40,000, Ais liable to pay Rs. 10,000, B & C Rs. 15,000 each liabilities of surety.

The liability of the surety is co-extensive with that of the Principal Debtor.(The surety is liable for all those amounts which the principal debtor isliable for).

Surety is discharged1. by the notice of revocation (As to future transactions),2. by the death of surety,3. by the variance of the terms of contract,4. by the release or discharge of principal debtor,5. by compounding with or giving time to or agreeing not to the principal

debtor,6. by creditor’s act or omission impairing surety eventually,7. loss of or parting with security given by the principal debtor to the

creditor.1.4.5.11 Finder of Lost Goods -

Rights:1. Right to retain the goods.2. Right to sell: - If the owner cannot with reasonable diligence be found

or if he refuses upon demand to pay the lawful charges of the finder,the finder can sell it.



(i) when the thing is in danger of perishing or the greater part of its value.(ii) when the lawful charges of the finder in respect of the thing found

amounts to 2/3rd of its value.1.4.5.12 Doctrine of ‘caveat emptor’

Let the Buyer Beware

It is not part of the seller’s duty to point out defects of his own goods.The buyer must inspect the goods to find out if they will suit his purpose.

Exceptions:1. Where the seller makes a false representation and the buyer relies

on that representation.2. Seller actively conceals a defect in the goods, so that on a reasonable

examination the same could not be discovered.3. Buyer makes known to the seller, the purpose for which he is buying

the goods and the seller should know to sell the goods of thatdescription.

Have you understood ?

Objective questions:1. A sold 100 quintals of groundnut oil to B. Before he could deliver to

B, the Government of India requisitioned the whole quantity lyingwith A in public interest. B wants to sue A for breach of contract. Isthe contract void?

2. A agrees to sell a horse to B who tells A that he (B) needs the horsefor riding to Mumbai immediately. The horse is ill at the time ofagreement. What are the rights of A and B?

3. A contracts with B to buy 50 easy chairs of a certain quality. Bdelivers 25 chairs of the type agreed upon and 25 chairs of someother type. What are the rights of A?

4. A contracts with B to purchase 30 tons of apple juice. B crushes theapples, put the juice in containers and keeps it ready for delivery. Adelay to take delivery and the juice goes damaged and has to bethrown away. Is liable to pay the price?

5. At a sale by auction without reserve, the auctioneer is instructed notto sell for less than a certain price. The auctioneer accepts the highestbonafide bid which, however, is lower than the reserved price. Is thesale valid?

Answers:1. Void 2. Void 3. May accept the order, may reject the other 4.Yes 5.Yes

Short questions:Q.1.4.a. Define the term ‘goods’Q.1.4.b. What are the different types of goods?Q.1.4.c. Distinguish between the sale and hire purchase.



Q.1.4.d. What is implied warranty?Q.1.4.e. What is F.O.B. contract?Q.1.4.f. When is a seller of goods deemed to be an unpaid seller?

Extended Questions:Q.1.4.g. Explain the nature of a contract of sale of goods and bring out

clearly the distinction between a sale and an agreement to sell.Q.1.4.h. Briefly explain the conditions and warranties implied by the law

in a contract for the sale of goods.Q.1.4.i. State the doctrine of caveat emptor and the exceptions to it.Q.1.4.j.Explain what is meant by the reservation of the right of disposal

in a contract for the sale of goodsQ.1.4.k. What remedies are open to a buyer for a breach of contract by

the seller? What are his liabilities for rejecting or refusing the deliveryof goods?

Q.1.4.l. Distinguish between an unpaid sellers’s right of lien and the rightof stoppage in transit. When can he resell the goods?

1.5 Negotiable Instruments Act 1881

Introduction:-

Negotiable means transferable from one person to another person.

Instrument means – Any written document by which a right is created infavor of some person.

The Reserve Bank of India Act, 1934• Sec 31: No person (other than RBI or the Central Government) can

draw, accept, make or issue any bill of exchange or promissory notepayable to the bearer on demand.

• No person (other than RBI or Central Government can make orissue any promissory note payable to the bearer of the instrument.

Definition of a Negotiable Instrument

A “Negotiable instrument” means a promissory note, bill of exchange orcheque payable either to order or bearer (Section 13)

An instrument may be negotiable either by (1) Statute or (2) by usage.Promissory note, bill of exchange, Cheque – By statute; Bank notes,Bank drafts, share warrants, bearer instruments, dividend warrants, scriptsand treasury bills by usage.

1.5.1 Nature and requisites of negotiable instruments

1.5.1.1 Features of Negotiable instruments(1) Freely transferable – By delivery or by endorsement and delivery.(2) Holder’s title free from defect – Holder in due course acquires a

goods title not withstanding any defect in a previous holder title.



A holder in due course is one who receives the instrument for valueand without any notice as to the defect in the title of the transferor.

(3) The holder can sue in his own name.(4) Can be transferred any number of times (Infinity) till its maturity.(5) It is subject to certain presumptions.

1.5.1.2 Presumptions / Requisites :- (section 118 & 119)1. As to consideration : Every negotiable instrument is deemed to

have been made, drawn, accepted, endorsed, negotiated ortransferred or transformed for consideration (Marimuthu KounderVs Radakrishnan and other AIR 1991, Kerala 39)

2. As to date: Every negotiable instrument bears the date on which it ismade or drawn.

3. As to acceptance: Every bill of exchange is accepted within areasonable time after the date mentioned therein and before the dateof its maturity.

4. As to transfer: Transfer is made before the date of maturity, in thecase of an instrument payable, otherwise than on demand.

5. As to the order of endorsement: The endorsement appearing on itare made in the order in which it appears.

6. As to lost instruments: Where an instrument has been lost ordestroyed, that it was duly stamped and the stamp was duly cancelled.

7. As to the holder in due course: The holder of the instrument is aholder in due course.

8. As to dishonour: Court shall on the proof of protest, presume thefact of dishonour unless it is disproved.

1.5.2 Transfer of negotiable instruments and liability of parties

One of the essential characteristics of a negotiable instrument is that it isfreely transferable from one person to another person. This transfer maytake place either:1. by negotiation2. by presentment1. Transfer by negotiation- When a promissory note, bill of exchange or

cheque is transferred by one party to another, so as to constitute thetransferee the holder thereof, the instrument is said to be negotiated.

There are two methods of transfer by negotiation, namely,a) Negotiation by delivery- An instrument payable to bearer is

negotiable by delivery thereof.Example: A is the holder of negotiable instruments payable to bearer.b) Negotiation by endorsement and delivery - An instrument payable

to order is negotiable by the holder by endorsement and deliverythereof.Example: A owes B Rs.1, 000. He makes a promissory note forthe amount payable to B. He dies and the note is afterwards foundamong his papers and delivered to B. B cannot sue upon the note ifdelivered to him.



2. Transfer by assignment- When a person transfers his right toreceive the payment of a debt, ‘assignment of the debt’ takes place.Thus where the holder of an instrument transfers it to another, so asto confer a right on the transferee to receive the payment of theinstrument, transfer by assignment takes place.

Liability of partiesThe liability of the parties is mentioned below:

a) Liability of drawer- The drawer of a bill of exchange or cheque isbound, in case of dishonour by the drawee or acceptor thereof, tocompensate the holder, provided due notice of dishonour has beengiven to or received by the drawer.

b) Liability of drawee of cheque- The drawee of a cheque havingsufficient funds of the drawer in his hands, properly applicable to thepayment of such cheque, must pay the cheque when duly required todo so. In default of such payment, the drawee, i.e., the banker mustcompensate the drawer for any loss or damage caused by suchdefault.

c) Liability of maker of note and acceptor of bill- The maker of apromissory note and the acceptor of a bill of exchange are the personswho are primarily liable to pay the amount to the holder on demand.

d) Liability of indorser - The indorser of a negotiable instrument beforematurity is liable to all subsequent holders in case of dishonour.

e) Liability of prior parties to a holder in due course- Every priorparty to a negotiable instrument is liable thereon to a holder in duecourse until the instrument is duly satisfied.

f) Acceptor’s liability on a forged endorsement- An acceptor of abill of exchange already indorsed is not relieved from liability byreason that such endorsement is forged, if he knew or had reason tobelieve the endorsement to be when he accepted the bill.

g) Acceptor’s liability for a bill in a fictitious name and payable to thedrawer’s order is not, by reason that such name is fictitious, relievedfrom liability to any holder in due course claiming under endorsementby the same hand as the drawer’s signature and purporting to bemade by the drawer.

1.5.3 Enforcement of secondary liability

Secondary liability – the principle of suretyshipa) Maker, drawer and acceptor principals- In the absence of contract

to a contrary, the maker of a promissory note or cheque, the drawerof a bill of exchange until acceptance, and the acceptor arerespectively the parties primarily liable.

b) Prior party a principal debtor in respect of each subsequentparty- As between the parties liable as sureties, each prior party is inthe absence of a contract to the contrary, a principal debtor in respectof each subsequent party.

c) Suretyship- When the holder of an accepted bill of exchange entersinto any contract with the acceptor which, under sec 134 or 135 of



the Indian Contract Act, 1872 would discharge the other parties,the holder may expressly reserve his rights to charge the other parties,and in such a case they are not discharged.

d) Discharge of endorser’s liability- When the holder of a negotiableinstrument, without the consent of the indorser, destroys or impairsthe endorser’s remedy against a prior party, the indorser is dischargedfrom liability to the holder to the same extent as if the instrument hadbeen paid at maturity.

1.5.4 Holder in due course

Holder:- The holder of a promissory note, bill of exchange or chequemeans any person entitled in his own name : i) to the possession thereof,and ii) to receive or recover the amount due thereon from the partiesthereto. Where the note, bill or cheque is lost or destroyed, its holder isthe person so entitled at the time of such loss or destruction.

Holder in due course:-Who for consideration locate the possessor orthe payee or the endorsee thereof, if payable to order, before the amountmentioned in it, becomes payable and without having sufficient cause tobelieve that any defect existed in the title of the person from whom hederived his title. Holder, in due course, acquires a better title than that ofits transferor. Any person is a holder in due course if he fulfils the followingconditions;a) That, for consideration, he becomes i) the possessor of the negotiable

instrument if payable to bearer, or ii) the payee or endorsee thereof,if payable to order. A holder of a negotiable instrument will not be aholder in due course if-

b) he has obtained the instrument by gift or for and unlawful considerationor by some illegal method,

c) he has obtained the instrument after its maturity,d) he has not obtained the instrument bona fide.

Privileges of a holder in due courseThe special privileges of a holder in due course are as follows:

1. Inchoate stamped instrument- A person, who has signed anddelivered to another person, a stamped but otherwise inchoateinstrument, is precluded from asserting, as against a holder in duecourse, that the instrument has not been filled in accordance with theauthority given by him, the stamp being sufficient to cover the amount.

2. Liability of prior parties- Every prior party to a negotiableinstrument is liable thereon to a holder in due course until the instrumentis duly satisfied.

3. Fictitious payee- where a bill is drawn payable to the drawer’sorder in a fictitious name and is indorsed in the same hand as thedrawer’s signature, the acceptor is not relieved from liability to anyholder in due course, on the plea that the drawer is fictitious.

4. Negotiable instrument without consideration- When a negotiableinstrument is made, drawn, accepted or transferred without



consideration, it creates no obligation of payment between the partiesto the transaction. An agreement made without consideration is void.But if the negotiable instrument gets into the hands of a holder in duecourse, he can recover the amount on it from any of the prior partiesthereto.

5. Conditional delivery- If a bill or note is negotiated to a holder indue course, the other parties to the instrument cannot avoid liabilityon the ground that the delivery of the instrument was conditional orfor a special purpose only.

6. Instrument cleared of all defects- Once a negotiable instrumentpasses through the hands of a holder in due course, it gets cleared ofits defects provided the holder was himself not a party to the fraudor illegality which affected the instrument in some stage of its journey.Thus any defect in the title of the transferor will not affect the rightsof the holder in due course even if he had knowledge of the priordefect provided he himself is not a party to the fraud.

7. Instrument obtained by unlawful means or for unlawfulconsideration- The person liable to pay on a negotiable instrumentcannot, as against a holder in due course, contend that he had lost it,or that it was obtained from him by means of an offence or fraud orfor an unlawful consideration.

8. Estoppels against denying original validity of instrument-. Themaker of a promissory note, the drawer of a bill of exchange orcheque and the acceptor of a bill of exchange for the honor of thedrawer cannot, in a suit thereon by a holder in due course, deny thevalidity of the instrument as originally made or drawn.

9. Every holder is a holder in due course- The law presumes thatevery holder is a holder in due course, although the presumption isreputable.

10. Estoppels against denying capacity of payee to indorse- Themaker of a promissory note and acceptor of a bill of exchange payableto order cannot, in a suit thereon by a holder in due course, deny thepayee’s capacity at the date of the note or bill, to indorse the same.

11. Endorser not permitted to deny the capacity of prior parties-The endorser of a negotiable instrument cannot in a suit thereon by asubsequent holder, deny the signature or capacity to contract of anyprior party to the instrument.

Promissory note

An instrument in writing (not being a bank note of a currency note)containing an unconditional undertaking, signed by the maker to pay acertain sum of money only to or to the order of a certain person or to thebearer of the instrument.

Example of Promissory Notes(a) I promise to pay “B” or order Rs. 500(b) I acknowledge myself to be indebted to B for Rs. 1000 to be paid

on demand for value received.



The following however, are not Promissory Notesa) “Mr. B, I.O.V. (I owe you) Rs. 1000b) I am liable to pay you Rs. 500c) I promise to pay B Rs. 500 and all other sums which shall be due to

him.d) I promise to pay B Rs. 500; first deducting there from any money in

be may owe me.e) I promise to pay Rs. 1500 on D’s death, provided be leaves me

enough to pay that sum.f) I promise to pay ‘B’ Rs. 500 seven days after my marriage with C.g) I promise to pay ‘B’ Rs. 500 and to deliver him my scooter on 1st

January 2004.Essential Characteristics of a Promissory Note

(1) Should be in writing(2) Promise to pay: We have received a sum of Rs. 9000 from Shri R.R.

Sharma. This amount will be repaid on demand. We have receivedthe amount in cash. Use of word promise is not essential to constitutean instrument as ‘Promissory Note’.

(3) Unconditional(4) Signed by the maker(5) Certain parties(6) Certain sum of money only(7) Promise to pay money only(8) Number, place, date etc – usually found – If it is undated it is deemed

to have been made when it was delivered.(9) May be payable in instalments(10)It may be payable on demand or after a definite period (A demand

promissory note becomes times barred on expiry of 3 years fromthe date it bears)

(11)It cannot be made payable to bearer on demand or even payable tobearer after a certain period (sec 31 of RBI Act)

(12) It must be duly stamped under the Indian Stamp Act.

Specimen of a promissory noteRs 1000 Chennai – 600 025

10th Sept 2006

Six months after date I promise to pay X or order the sum of rupees thousand only for value

received .

To X

Address: ______________ Stamp Sd/-

______________



Specimen copy of bill of exchange

Bill of Exchange:

An instrument in writing containing an unconditional order, signed by themaker, directing a certain person to pay a certain sum of money only toor to the order of a certain person or to the bearer of the instrument.

Unconditional order is essential

Please pay Rs. 10,000 to A on demand and oblige - Does not constitutea Bill of Exchange.

Usance bill - Payable after a specified period of time

At sight bill – Payable on demand or payable at sight.

Cheque

Crossing of cheques

Payment cannot be claimed across the counter in a crossed cheque. Itcan only be credited to an account with a bank

Type of crossing(1) General (2) Special.

Rs 1000 Chennai – 600 025

10th Sept 2006

Six months after date pay (PAYEE) to A or orde r the sum of rupees thousand only for value

received.

To X (Drawee)

Address: ______________ Stamp Sd/-

______________

Drawer/Maker

‘B’ Stamp Sd/-

SPECIMEN ABC BANK

Date : _______________

Rs.

PAY ________________________ OR BEARER

RUPEES _____________________

A/c No. LF INTLS

XYZ Bank

ABC Branch

Chennai – 600 xxxx

Cheque no. xxxxxxxxxxx Branch Code xxxxxxxxxxxx



General Crossinga) Not Negotiable crossing -It is not non-transferable- The cheque

having the special feature as these can be no holder – in due course.b) A/c Payee Crossing: Drawer intends the payment to be credited to

payee’s account and none else.Special crossing

a) Not Negotiable,b) A/c Payee Crossing

Who can cross cheque? DrawerHolderBanker

1.5.5 Discharge of negotiable instruments

The term discharge in relation to a negotiable instrument is used in twosenses like:1. Discharge of the instrument2. Discharge of one or more of the parties from liability thereonAn instrument is said to be discharged when all rights of action under itare completely extinguished and when it ceases to be negotiable. Thiswould happen when the party who is ultimately liable on the instrument isdischarged from liability. In such a case, even a holder in due coursedoes not acquire any rights under the instruments. If, on the other hand,one or more of the parties is /are discharged from liability, the instrumentcontinues to be negotiable on it. The discharge of one or more of theparties continues to be liable on it.

1. Discharge of an InstrumentThe different modes of discharge of an instrument are as follows:

a) By payment in due course- This is the most obvious and the usualmode of discharge. An instrument is discharged by payment made indue course by the party who is primarily liable to pay, or by a personwho is accommodated in case the instrument was made or acceptedfor his accommodation. The payment of the amount due on theinstrument must be made at or after the maturity to the holder of theinstrument if the maker or acceptor is to be discharged. A paymentby a party who is secondarily liable does not discharge the instrument.Again, any person liable to pay is entitled to have the instrumentshown to him before payment. On payment he is entitled to have theinstrument delivered up to him.

b) By party primarily liable becoming holder- If the maker of a note orthe acceptor of a bill becomes its holder at or after its maturity in hisown right, the instrument is discharged.

c) By express waiver- when the holder of a negotiable instrument at orafter its maturity absolutely and unconditionally renounces in writingor gives up his rights against the instrument, the instrument is



discharged. The remuneration must be in writing unless the instrumentis delivered up to the party primarily liable.

d) By cancellation- where an instrument is intentionally cancelled by theholder or his agents and the cancellation is apparent thereon, theinstrument is discharged. Cancellation may take place by crossingout signatures on the instrument, or by physical destruction of theinstrument with intention of putting an end to the liability of the partiesto the instrument.

e) By discharge as a simple contract- A negotiable instrument may bedischarged in the same way as any other contract for the payment ofmoney. This includes, for example discharge of an instrument bynovation or rescission or by expiry of period of limitation.

2. Discharge of party or parties

A party or parties to a negotiable instrument is/are discharged in any oneof the following ways:a) By payment- When payment on an instrument is made in due course,

both the instrument and the parties to it are discharged.b) By cancellation- When the holder of a negotiable instrument or his

agent cancels the name of a party on the instrument with intent todischarge him, such party and all subsequent parties, who have aright of recourse against the party whose name is cancelled, aredischarged from liability to the holder. The subsequent parties are inthe position of sureties to the prior party whose name is cancelledand discharge of the principal debtor automatically discharges thesureties.

c) By release- Where the holder of a negotiable instrument releasesany party to the instrument by any method other than cancellation,the party so released is discharged from liability.

d) By allowing drawee more than forty- eight hours- If the holder of abill of exchange allows the drawee more than forty-eight hoursexclusive of public holidays, to consider whether he will accept thesame, all previous parties not consenting to such allowance arethereby discharged from liability to such holder.

e) By non-presentment of cheque- where a cheque is not presented bythe holder for payment within the reasonable time of its issue and thedrawer suffers actual damage through the delay because of the failureof the bank, he is discharged from liability to the extent of suchdamage. In determining what reasonable time is, regard shall be hadto the nature of the instrument, the usage of trade and of bankers.

f) Cheque payable to order- Where a cheque payable to order purportsto be indorsed by the payee, the banker is discharged by paymentsin due course. Where a cheque is originally expressed to be payableto bearer the drawer is discharged by payment in due course to thebearer thereof. It makes no difference even if any endorsementwhether in full or in blank appears on the cheque and even if anysuch endorsement purports to restrict or exclude further negotiation.

g) Draft drawn by one branch on another- Where any draft (that is an



order to pay money) drawn by one office of a bank upon anotheroffice of the same bank for a sum of money payable to order ondemand purports to be indorsed by or on behalf of the payee, thebank is discharged by payment in due course.

h) Parties not consenting discharged by qualified acceptance- If theholder of a bill of exchange acquiesces (assents) in a qualifiedacceptance, all the previous parties whose consent is not obtainedto such acceptance are discharged from liability, they will however,be liable if on a notice being given to them they give their assent tosuch acceptance.

i) By operation of law- This includes discharge-1. By an order of insolvency court, discharging the insolvent2. By merger- When a judgment is obtained against the acceptor, maker

or indorser, the debt under the bill is merged into judgment debt.3. By lapse of time i.e., when the remedy becomes time barred.j) By material alteration- A material alteration of a negotiable instrument

renders the same void against persons who were parties theretobefore such alteration unless they have consented to the alteration.

k) Discharge by payment of altered instrument- When a promissorynote, bill of exchange or cheque had been materially altered but doesnot appear to have been so altered, or where a cheque is presentedfor payment which does not at the time of presentation appear to becrossed, payment on such an instrument discharges the party liable ifhe pays according to the apparent tenor of the instrument (as altered)at the time of payment and otherwise in due course. Such a paymentcannot be questioned even if it is proved that the instrument has beenaltered or that the cheque was originally crossed.

Have you under stood ?

Objective questions:1. A bill is drawn, payable at door no.50, Lucknow road, Calcutta, but

does not contain the name of the drawee. B who resides at doorno.50, Lucknow road, Calcutta accepts the bill. Is it a valid bill?

2. A bill is drawn “pay to A or order the sum of Rs.1000/.” In themargin the amount stated is Rs.10, 000/ in figures. Is this a valid bill?

3. A, on attaining the age of majority, executes a fresh promissory notein consideration of a promissory note executed by him during hisminority. Can a suit be maintained on the fresh promissory note?

4. A promissory note is executed by A in favor of B in consideration ofC, a relation of B, forbearing to sue on a prior promissory noteexecuted in favor of C. Is the note executed by A in favor of B anylawful consideration?

5. A accepts a bill payable at the syndicate bank, Chennai, andnowhereelse, is it a valid acceptance?

Answers:1. Yes 2.Yes 3, No 4.Yes 5.Yes



Short questions:Q.1.5.a. What is negotiable instrument?Q.1.5.b. What are the types of negotiable instruments?Q.1.5.c. Distinguish a cheque with bill of exchange.Q.1.5.d. Define a holder in due course.Q.1.5.e. What is meant by acceptance of a bill of exchange?Q.1.5.f. When is a negotiable instrument said to be discharged?

Extended Questions:Q.1.5.g. What are the provisions of the negotiable instruments Act?Q.1.5.h. Examine the liabilities of the drawer and the indorser in case of

a bill of exchange.Q.1.5.i. Define acceptance for honor. Can the drawer of a bill of

exchange accept it for honor?Q.1.5.j. Dishonor of a cheque for want of funds is an offence under the

Negotiable instruments Act. Do you agree with the statement?Q.1.5.k. What is the difference between discharge of an instrument and

discharge of a party to an instrument?1.6 Agency

Definition of an Agent: - Person employed to do any act for another or torepresent another in dealings with third person.• A approves B a broker to sell his car on his behalf then1. A = Principal B = Agent2. Relationship between A and B is Agency3. Act of an agent is the act of the principal

1.6.1 Nature of agency

Who can employ an Agent?• A major• Partnership firms• Any person of a sound mind• Company, an Artificial person

Who may be an Agent?

Person who is capable of contracting

(If the agent happens to be a person incapable of contracting, then theprincipal cannot hold the agent liable, in case he misconducts or has beennegligent in performance of his duties)

Agent & Servant: - Agent is not a servant – servant may be an agent –Agent may work for several principals at the same time.

Classification of Agent:I-Agents are classified as: 1. Commercial Agent (or) Mercantile Agent 2. Non-Commercial Agent (or) Non-Mercantile Agent



Mercantile or Commercial Agent1. Broker- Agent engaged to buy and / or to sell property or to make

bargains and contracts between the engager and a third party for acommission called brokerage.

2. Factor – Agent who is entrusted with possession of goods with anauthority to sell them. He can sell the goods on credit in his ownname. He is also authorized to raise money on their security.

3. Commission Agent- Agent who is employed to buy or sell goods ortransact business.

3. Delcredere Agent -Agent who’s consideration of an extraremuneration called a delcredere commission guarants theperformance of the contract by the other parties.

5. Auctioneer - Agent appointed to sell goods by auction.6. Banker - Buying & selling of securities, Collection of charges, bills,

interests, etc.Non Commercial Agent:-

Wife-: If the wife and husband are living together and the wife is bookingfor necessaries she is an agent.

When the wife lives apart from the husband, though no fault of hers, thehusband is liable to provide her maintenance. If he does not provide forher maintenance, she has implied authority to bind the husband forredressal.

II-Delegation of AgentSubagent and substituted Agent

General rule is that an agent cannot appoint an agent.However an agent may appoint an agent in the following circumstances.(1) Where expressly permitted by the principal.(2) Where the ordinary custom of trade permits delegation.(3) The nature of agency is such that it cannot be accomplished without

the appointment of sub agent.(4) Where the nature of the job assigned to the agent is purely clerical

and does not involve the exercise of discretion.(5) In an unfrozen emergency.Sub Agent-: Person employed by and acting under the control of theoriginal agent in the business of the agency.

There is no priority of contact between the subagent and the principal.

Substituted Agent: Where an agent appoints or names other personfor being appointed as an agent in his person, such person is called asubstituted agent.

A directs B, his solicitor to sell his house by auction and to employ anauctioneer for the purpose. B names C an auctioneer to conduct thesale. C is not a sub agent but is A’s agent for the conduct of the sale.



1.6.2 How the agency is created?

Agency can be created in the following ways as mentioned below:Creation of an Agency 1) By an express agreement

2) By Implication3) By ratification.

Consideration is not essential to create an agency

A-Express Agency

The authority of an agent may be expressed by the following forms:• Word of Mouth (Oral)• By writing-usual form of written of agency – Power of Attorney on

stamped paper.B-Implied Agency

Implied agency is possible by the below said method:• From conduct, situation or relationship of parties.

1.6.3 Agents authority and liability of principal and third party

The implied agency arises when the principal conducts himself towardsthe person alleged to be the agent or the third parties in such a manner, asif the principal had consented to the appointment of that person as agent.It includes:a) Agency by Estoppels- When a person has by his conduct or

statements induced others to believe that a certain person is his agent;he is estopped from subsequently denying it. Estoppels arise whenyou are precluded from denying the truth of anything, which you haverepresented as a fact, although it is not a fact.

b) Agency by holding out- P allows his servant A to buy goods for himon credit from C and pays for them regularly. On the occasion, Ppays his servant cash to purchase the goods. The servant purchasesthe goods on credit, pocketing the money. C can recover the pricefrom P since through previous dealings P has held out his servant Aas his agent.

c) Agency of Necessity- When somebody is forced to act on behalf ofa particular person.e.g., The master of a ship which is in distress or requires heavy andurgent repairs can pledge the ship or cargo (without express or impliedauthority) and raise money in order to execute the voyage. He willbe considered as the agent of the owner by necessity.

d) Agency by ratification- When an agent does an act for his principalbut without knowledge or authority or while he exceeds the givenauthority, the principal is not held bound by the transaction. ThePrincipal if he so desires can ratify the act of the agent. Agency insuch a case comes into existence from the moment the agent firstacted.



Requisites of valid ratification1. Agent must contract as agent.2. Principal must have been in existence at the time the agent originally

acted.3. Principal must also be competent of contracting at the time of contract

as well as at the time of ratification.4. Ratification must be done within a reasonable time.5. The act to be ratified must be a lawful one.6. Principal should have full knowledge of facts.7. Ratification must be of a contract as a whole.8. Principal must have authority to ratify.9. Ratification cannot be made so as to subject a third party to damage

or terminate any right or interest of a third person.1.6.4 Rights and duties of the principal, agents and the third party

A-Rights of an agent1. Right to receive agreed or reasonable remuneration.2. Right to retain money of the principal towards advances made or

expenses properly included by him.3. Right of lien to retain properties of the principal for the amount due

to himself for commission, disbursements or services rendered.4. Right of stoppage- in transit -in case.(i) where he purchases goods with his own funds or by incurring personal

liability,(ii) where he holds himself liable for the price of the goods sold, for

example delcredere agent.B-Principal’s duties to agent

1. To indemnify the agent against the consequences of all lawful actsdone by such agent in exercise of authority conferred upon him.

2. Liable to indemnify an agent against the consequences of an act donein, good faith, though it causes an inquiry to the right of thirdpersons.

3. The principal is not liable for acts which are criminal in nature thoughdone by the agent at the instance of the principal.

4. The principal must make compensation to his agent in respect ofinjury caused to such agent by the principal’s neglect or want ofskill.

C-Duties of an agent1. To conduct the business of agency to the principle’s directions and

not to deviate even for the benefit of the principal,2. To conduct the business with the diligence and skill generally

possessed by persons engaged in similar business,3. To render proper accounts,4. In case of difficulty to communicate with the principal,5. Not to make any secret profits,6. Not to deal on his own account,



7. Not entitled to remuneration for business misconduct,8. An agent should not disclose confidential information,9. When an agency is terminated by the principal dying or becoming of

unsound mind, the agent is bound to take on behalf of therepresentatives of his late principal, all reasonable steps for theprotection and preservation of the interests entrusted to him.

1.6.5 Liability of the principal for an agent’s torts

A-Liability of the principal to third persons1. Contracts entered into through an agent and obligations arising from

acts done by an agent may be enforced in the same manner and willhave the same legal consequence as contracts had been entered intoand the acts done by the principal in person.

2. Liable for the acts of the agents falling within actual authority,afferent or ostensible authority.

3. Principal will be liable even for misrepresentatives made or fraudsconstituted, by an agent for his benefits.

B-Personal liability of an agent1. Where acting for a foreign principal.2. Where acting for a principal whose name he does not disclose.3. Where the principal cannot be sued e.g. minor.4. Where he acts without authority or exceeds authority.5. Where be agrees to be personally bound.6. Where be signs a negotiable instrument in his own name.7. Where he is a factor or an auctioneer.8. Where he is guilty of fraud or misrepresentations in matters outside

his authority.9. Where trade or custom makes him personally liable.10. Where agency is one coupled with interest.

1.6.6 Termination of agencyThe various modes of termination of agency are mentioned below:

1. by revocation by the principal.2. on expiry of fixed period of time.3. on the performance of the specific purpose.4. In the event of insanity or death of the principal or agent.5. on destination of the subject – matter of agency.6. In the event of insolvency of the principal.7. by renunciation of agency by the agent.


Objective questions:1. A police man, thinking that the driver of a bus was drunk, ordered

him to leave the bus. The conductor asked the man in the street todrive the bus to its destination, a kilometer away. He drove the busnegligently and a passenger received injuries. Is the proprietor liable?



2. A, professing to act for a joint stock company about to beincorporated, enters into a contract with B on its behalf as agent.After incorporation the company passes a resolution adopting A’stransaction. Is the company liable on the contract?

3. P instructed his agent A to sell a picture at a named price. P died.Afterwards, before the fact of his death became known to A, A soldand delivered the picture. Was the sale binding on P’s executors?

4. A not being authorized thereto by P, demands on behalf of P thedelivery of a painting, the property of P, from T who is in possessionof it. T refuses to deliver. Can P ratify the demand and render Tliable for non-delivery?

5. M gave his wife authority to buy goods from D. M became insane,but the wife continued to buy from D, who did not know of M’sinsanity. Is M liable to D?

Answers:1. No 2.No 3.Yes 4.No 5.Yes

Short questions:Q.1.6.a. Define agent and principal.Q.1.6.b. What are the different kinds of agents?Q.1.6.c. Write short note on agency by holding out.Q.1.6.d. Define a sub-agent.Q.1.6.e. When is an agency irrevocable?

Extended Questions:Q.1.6.f. Discuss the various ways in which the relation of agency arises.Q.1.6.g. Explain the nature of agency by ratification.Q.1.6.h. Discuss about the rights and liabilities of the principal and the

agent.Q.1.6.i. Discuss the different modes in which the authority of an agent

may terminate.Summary:

A contract is an agreement made between two or more parties which thelaw will enforce. An agreement comes into existence by the process ofoffer by one party and its qualified acceptance by the other party andtheir must be consensus ad idem. There should be a consideration in acontract which means something in return. Every person is competent tocontract who is of the age of majority, sound mind. A contract is said tobe discharged when the obligations created by law comes to an end. Incase of breach of a contract, the injured party is having the remediesaccording to the law of contract. In certain cases the law imposes anobligation and allows an action to be brought on it as if it arose out of anagreement, though none was present in fact called as quasi contracts.

A contract of sale of goods is a contract whereby the seller transfers oragrees to transfer the property in goods to the buyer for the price. Astipulation in a contract of a sale with reference to goods which are the



subject thereof may be a condition or a warranty. It is important to knowthat the property should be good passes of transfers from the seller tothe buyer. It is the duty of the seller to deliver the goods and the buyer toaccept and pay for them in accordance with the terms of the contract ofsale.

A Negotiable instrument is one, which is acquired by any one who takesit bonafide and for value, notwithstanding any defect of title in the personfrom whom he took it. This negotiable instruments act deals withpromissory notes, bill of exchange and cheques with all the characteristicsor essential elements. The capacity of a person is to incur liability as aparty to negotiable instruments. When these instruments are transferredto any person, so as to constitute that person the holder thereof, theinstrument is said to be negotiated.

An agent is a person employed to do any act for another or to representanother in dealings with third persons. The person for whom such act isdone, or who is so represented, is called the principal. Any person whois of the age of majority, sound mind, according to the law may employan agent.



2.1 Introduction

A company means a group of persons associated voluntarily together forthe attainment of a common goal either, social or economic. Much theway people came together to buy and sell, lend and borrow, so did peoplecome together and pooled their resources for common benefit. Itrepresents different kinds of associations, both business and otherwise.Late 1800s early 1900 was the period of much industrial and commercialactivity. The vigorous activity raised several disputes and the courts werecalled upon to adjudicate this. The courts had to apply the provisions ina new and emergent context. In this, the courts gave several landmarkjudgments in interpreting the provisions. The British Act, as well as theIndian Act, was amended, enlarged and consolidated several times. Thelaw which governs companies in India at present is the Companies Act,1956. As a result the companies act became voluminous. The Act, 1956runs into 658 Sections and 15 Schedules. Companies incorporated underthe Companies act, 1956 are mostly business companies but they mayalso be formed for promoting art, charity, research, religion, commerce,or other useful purpose.

2.2 Learning Objectives

After studying this unit you should be able to:• Define a company• Understand the principles of company• Describe the scope and nature of the types of companies• Know the formalities in forming a company• Understand the Articles and Memorandum of Association• Determine the powers, liability and duties of directors of the company• Interpret the importance of Corporate Governance

UNIT 2

COMPANY LAW



DefinitionMeaning of the company

The company is one of the forms of organization. It has its distinctivecharacteristics and advantages which make it suitable for differentpurposes.

Literary MeaningThe term “Company” implies an association of a number of persons formedfor some common object or objects.

Legal MeaningAccording to section 3(1) (i) of The Companies Act, 1956, “Companymeans a company formed and registered under this Act or an existingcompany”.

2.3. COMPNAY LAW2.3.1 Nature and Type of a Company

On analyzing the aforesaid definitions the following characteristics of acompany are revealed:1. An artificial person created by law: A company is called an artificial

person because it does not take birth like a natural person but comesinto existence through law. Being the creation of law, the companypossesses only those properties which are conferred upon it by itscharter.

2. Separate Legal Entity: The case of Solomon v. Solomon and CompanyLtd. Mr. Solomon was running a shoe business in England. He formeda company known as Solomon and Co. Ltd. It consisted of Solomonhimself, his wife, his four sons and a daughter. The shoes business ofSolomon was sold to the company for $ 30,000. Mr. Solomonreceived from the company purchase price in the form of $20,000fully paid shares of $1 each and $ 10,000 in debentures which carrieda floating charge over the assets of the company. One share of $1each was subscribed for in cash by each member of course ofbusiness, the company became liable for some unsecured loan. Thecompany ran into financial difficulties after some time and went intoliquidation within a year. On winding up, the assets realized were $6,000. The company owed $10,000 to holder, (Mr. Solomon),nothing was left for unsecured creditors. Thus, after paying off thedebenture priority over the debentures contending that Mr. Solomonand Solomon and Co. Ltd. were one and the same person, theCompany was only a façade to defraud the innocent creditors.Mr. Solomon should not therefore, be treated as a secured creditor.Held: The Company had been validly constituted and it had anindependent existence distinct from its members. Therefore,Mr. Solomon’s business belonged to the company and not toMr. Solomon. The company and Mr. Solomon enjoyed separate legalentities. The fact that the members were from one single family hadno bearing upon the validity of the company.



3. Perpetual Existence: The term perpetual existence means thecontinued existence. The death, insolvency or unsoundness of mindof its members or transfer of shares by its members does not in anyway affect the existence of the company. Members may come andmembers may go but the company goes on forever. The companycan be compared with flowing river where water (members) keepson changing continuously; still the identity of the river (company)remains the same.

4. Common Seal: The term Common Seal means the official signatureof the company. Since the company being an artificial person cannotsign its name on a document, every company is required to have itscommon seal with its name engraved on the same. This seal acts asthe official signature of the company. Any document bearing thecommon seal of the company and duly witnessed by at least twodirectors will be binding on the company.

5. Limited Liability: In case of a company limited by share, the liabilityof a member is limited up to the amount remaining unpaid on theshares held by a member.

6. Free Transferability of shares: The shares of a public company arefreely transferable. A shareholder can transfer association, even apublic limited company can put certain restrictions on the transfer ofshares but it cannot altogether stop it. A shareholder of publiccompany possessing fully paid up shares is at liberty to transfer hisshares to anyone he likes in accordance with the manner providedfor in the articles of association of the company.

Types of Companies

The companies can be classified under the three categories as follows:1. Basis of incorporation2. Basis of liability3. Basis of control1. Basis of incorporation: This is further divided into three categories.

They are as follows:a) Charted company: A company incorporated under a special charter

granted by the king or Queen of England is called “ChartedCompany”. The familiar examples of the charted company are theEast India Company and the Bank of England. Now this type ofcompany cannot be formed in India.

b) Statutory Company: A statutory company is one which is createdby a special Act of Parliament or a state legislature. Such companiesare usually formed for achieving a purpose related with public utilities.The nature and powers of such companies are laid down in the specialAct under which they are created. A statutory company has also aseparate legal entity is conducted under the control and supervisionof the Auditor General of India and the annual report of working isrequired to be placed before the Parliament or state legislature, a thecase may be. Example, Reserve Bank of India.



c) Registered or Incorporated Company: A registered company isone which is registered in accordance with the provisions of theCompanies Act of 1956 and also includes the existing companies.Existing company means a company formed and registered underany of the previous laws.

A registered company may either be a private company or a publiccompany. It is explained as follows:I. Private Company- A private company means a company which

has a minimum paid up capital of Rs.1,00,000 or such higher paid upcapital as may be prescribed, and by its articles-

a) Restricts the right to transfer its shares if any.b) Limits the number of its members to fifty.c) Prohibits any invitation to the public to shares in or debentures of the

company.d) Prohibits any invitation or acceptance of deposits from persons other

then its members, directors or their relatives.A- Restriction on Transfer of shares- The right of transfer isgenerally restricted in the following manner:

i) Authorizing the directors to refuse shares to persons whom they donot approve or by compelling the shareholder to offer his shareholdingto the existing shareholders first.

ii) By inspecting the method for calculating the price at which the sharesmay be sold by one member to another

iii) By providing that the shareholders who are employees of thecompany shall offer the shares to specified persons or class of personswhen they leave the company’s service.

B - Limitation of Membership- The articles must contain a provisionwhereby the company limits the number of its members to 50.

C - Prohibition on Making an Invitation to Public- The articles mustprohibit any invitation to the public to subscribe for any of its sharesor debentures. Such a prohibition is necessary for the substance ofthe private character of the company.

D - Prohibition on Invitation/Acceptance of Deposit- The articlesmust prohibit any invitation to the public to Prohibit any Acceptanceof Deposit.

II- Public Company

A Public company means a company which is eithera) not a private company and has a minimum paid up capital of Rs

5,00,000 or such higher paid-up capital as may be prescribed: orb) is a private company which is subsidiary of public company.

2.Based on LiabilityOn the basis of liability, an incorporated company may either bei) a company limited by sharesii) a company limited by guaranteeiii) an unlimited company



i) Company Limited by Shares- A Company limited by shares is acompany in which the liability of its members is limited by itsmemorandum to the amount unpaid on the share respectively heldby them. The companies limited by shares may be either publiccompanies or private companies. If a member has paid the full amountof shares, then his liability shall be nil.

ii) Company Limited by Guarantee- A Company limited by guaranteeis a company in which the liability of its members is limited by itsmemorandum to such an amount as the members may respectivelyundertake to contribute to the assets of the company in the event ofits being wound up.

iii) Unlimited Company- An unlimited company is a company in whichthe liability of its members is not limited by its memorandum. In otherwords, the liability of members is unlimited. The members of suchcompanies may be required to pay company’s losses from theirpersonnel property.

3. Based on ControlOn the basis of control, the companies may be grouped as follows:

1. Government Company- A government company means any companyin which at least 51% of the paid up share capital is held by the centralgovernment or by any state government or partly by the centralgovernment and partly by one or more state governments and includesa company which is a subsidiary of a government company as thusdefined.

Example: Hindustan Aeronautics Ltd.2. Non-Government Company- A company which may not be termed as

a government company as defined in Section 617 is regarded as a non-government company

3. Foreign Company- A foreign company means a company, which isincorporated in a country outside India under the law of that country.After the establishment of business in India, the relevant documentsmust be filed with the registrar of companies within 30 days from thedate of establishment.

4. Domestic Company-A company which cannot be termed as foreigncompany under the provisions of the companies act as a domesticcompany.

5. Holding and Subsidiary Company- If one company controls the othercompany, the controlling company may be termed as the “HoldingCompany” and company so controlled may be termed as a “SubsidiaryCompany”.

6. Multi National CompanyA multinational company is huge industrial organization which-

a) operate in more than one countryb) carries out production, marketing and research activities on international

scale in those countries, andc) attempts to maximize profits world over.



ILLEGAL ASSOCIATION [SECTION 11]Meaning of Illegal Association [Section 11 (1) and (2)] According toSection 11, “No company, association or partnership consisting of morethan 10 persons for the purpose of carrying on the business of bankingand more than 20 persons for the purpose of carrying on another businessshall be formed unless it is registered as a company under this Act, or isformed in pursuance of some other Indian law”. Example: I Where anunregistered association is formed for carrying on the business of bankingwith 8 members. Subsequently 3 more persons join the association asmembers. The association would become an illegal association from themoment the number of its members exceed 10. Example II. Where anunregistered association is formed for carrying on the business of non-banking with 18 members. Subsequently 3 more persons join theassociation as members. The association would become an illegalassociation from the moment the number of its members exceed 20.Example III Where an un-registered association is formed for non-commercial purposes such as promotion of religion, art, science, charityor any other useful object, with 18 members. Subsequently 3 morepersons join the association as members. The association would notbecome an illegal association because the limit on maximum number ofmembers is not applicable to such association. Example IV Where anassociation is formed between three partnerships firms X (having 8persons), Y (having 7 persons), and Z (having 8 persons). Suchassociation would be an illegal association because the limit on maximumnumbers of members exceeds 20.

Notes:(i) Every person (natural or otherwise) who holds an independent

position in law and is capable of entering into contract shall be countedas one person.

(ii) Two or more persons holding a share jointly are treated as a singlemember

Non-Applicability of Section 11

Section 11 does not apply in the following cases:(a) Joint Hindu Family A Joint Hindu Family may carry on any business

even for earning profits and with any number of members withoutbeing registered in pursuance of any Indian Law as required bySection 11 of the Companies Act 1956 and yet it will not be anillegal association. But, where two families join hands to carry onbusiness, the provisions of Section 11 becomes applicable.

However, for computing the number of members of such an association,the minor members of such families shall not be included.(b) Stock Exchange is not covered by Section 11 as it is not formed for

the purpose of carrying on any business.(c) Non-Profit Earning Association- All religions, charitable, literary,

social, sports and other association whose object is not to makeprofit are also not covered by Section 11.



Consequences [Section 11 (4)]The consequences of an illegal association are as follows:1. Personal Liability: Every member shall personally liable for all the

liabilities incurred in carrying on the business.2. Punishable with Fine: Every member shall be punishable with fine

not exceeding Rs, 10,000.3. Neither such an association nor its members in their individual

capacity can sue any outsider who has dealt with it.4. Neither members Nor outsiders can sue such association.5. No member can sue another member in respect of any matter

connected with such association.6. Outsider can sue the members but not such association.7. Such an association can not enter into any contracts since it has no

legal existence.8. Such an association can not be wound up under the provisions of

Companies Act relating to winding up of unregulated companies aswell as through court because there is nothing to dissolve at all. [MewaRam v. Ram Gopal]

9. Once the association contravened the provision of Section 11, itremains illegal even if there is subsequent reduction in the number ofits members. In other words, the illegality of an illegal associationcannot be cured by subsequent reduction in the number of itsmembers. (Madanlal v. Jankli Parshad]

10. Contracts made before the registration cannot be validated and issuedupon by subsequent registration. [Gujarat Trading Co. v. Tricumji]

11. Illegality or invalidity in the constitution of an association does notaffect its liability to tax or its chargeability as a unit of assessment.(Kumaraswamy Chettiar v. ITO 1957]

12. No suit either for administration or partition of assets of an illegalassociation can be filed by any member of such an association.

In Mewa Ram v. Ra, Gopal High Court of Allahabad held that suchpartition of assets of an illegal association is not possible at all becausea decree for partition would amount to be in substance a directionfor winding up or a decree for dissolution and accounts.

13. A member of an illegal association who has paid any money to suchassociation would be able to recover it form the director or agentsor association before the money so paid has been applied to an illegalpurpose. [Greenpur v. Co-operatives (1926)]

14. Members of an illegal association have a beneficial interest in theproperty belonging to such association [Queen v. Tankard, (1894)].



2.3.2. Formation of company2.3.2.1 How to form a company?

The various steps involved in the formation of a company are given below:I. Approval at name

Step No.1 consult –a. the latest edition of Directory of Companies together supplements

updating it,b. the Guidelines issued by the Department of Company affairs, andc. the Emblems and Names (Prevention of Improper Uses) Act, 1950Step No. 2 Select in order of preference at least three names which –a. are not identical with or too similar to the name of another registered

company,b. are not prohibited under the Emblem and Names (Prevention of

Improper Uses) Act, 1950 andc. are not in contravention of the Guidelines issued by the Department

of Company affairs.Step No. 3 Apply to the Registrar of Companies of the state in which

registered office is to be situate to ascertain the availability of namesin the prescribed Form No. 1A long with a fee of Rs,. 500

Step No.4 Get ensured about the availability of names within 14 daysfrom date of submission of application since the Registrar is requiredto inform the status of the application within 14 days.

(a) If available – Complete all the formalities within a period of 3 months.(b) If not available – Apply again (if satisfied with the reason for refusal

given), or Make an appeal against refusal.II. Memorandum and Articles of Association

Step No.5 Get the Drafts of Memorandum of Association and Articlesof Association Prepared. However a public company limited by sharesneed not prepared its own articles. It may adopt Table A as given inSchedule I of the Act.Step No. 6 Get the Draft of Memorandum of Association and the Articlesof Association vetted by the Registrar.Step No. 7 Get the Memorandum Association and Articles of Associationprinted.Step No. 8 Get the Memorandum of Association and Articles ofAssociation stamped.Step No. 9 Get the Memorandum of Association and Articles ofAssociation signed by atleast 2 subscribers in case of a private companyand 7 subscribers in case of a public company. Each subscriber shallalso write in his own hand his address, description, occupation and numberof shares subscribed for in presence of at least one witness who shallattest the signature and shall write his own hand his address, descriptionand occupation (if any). These documents may be signed by an outsideragainst if he is authorized to do so by a power of attorney.



Step No. 10 Ensure that Memorandum and Articles of Association aredated on a date after the date of stamping.

III. Consent to Act as Direction in Form No. 29Step No. 11 Get Form No. 29 (in duplicate) duly filled up and signed toaccord to consent of a person willing to act as director if he is soappointed by the Articles of Association of a public company having sharecapital [Section 266].

IV. Notice of Situation in Form No. 18 (May be given within 30days of Incorporation)Step No. 12 Get Form No. 18 (in duplicate) fully filled up and signed togive the notice of the situation of the registered office of the company ifthe subscribers have already chosen a registered office and they wish togive notice to the Registrar at the time of registration. Alternatively suchnotice may be given within 30 days of the incorporation of the company.[Section 146]

V. Particulars of Directors, Manager or Secretary in Form No.32 May be given within 30 days of Incorporation.Step No. 13 Get Form No. 32 (in duplicate) duly filled up and signed toprovide particulars of directors, manager or secretary if they areappointed by Articles of Association and the subscribers wish to givenotice to the Registrar at the time of registration. Alternatively, such formmay be sent within 30 days of appointment of first directors.

VI. Statutory Declaration in Form No.1Step No. 14 Get the statutory declaration prepared in Form No.1statutory declaration is a declaration to the effect that all the requirementsof the act and rules there under relating to the registration of the companyhave been complied with. Such declaration can be signed by any one ofthe following persons:a. an advocate of the Supreme Court or of a High Court; orb. an attorney or a pleader entitled to appear before a High court; orc. a secretary, or a chartered accountant practicing in India and who

has been engaged in the formation of the company; ord. by a person named in the articles as a director, manager of secretary

of the company.VII. Filing of Documents with Fees

Step No. 15 File the following document with the Registrar ofcompanies along with the forwarding application with necessaryregistration and filing fees:a. The Memorandum of Association, duly signed by the prescribed

minimum number of subscribers, and duly stamped and signed bywitness. [Section 33(1) (a)]

b. The Articles of Association similarly signed, stamped and witnessed.[Section 33 (1) (b)]



c. A copy of agreement, if any, which the company purposes to enterinto with any individual for appointment as its managing director orwhole-time director of manger [section 33 (1) (c)]

d. A copy of any other agreement, if referred to in the Memorandumand Articles of Association in that case, it will form a part of theMemorandum and Articles of Association.

e. Power of Attorney duly stamped and signed by the subscribers au-thorizing a representative to make amendments and/or alterations inthe Memorandum and Articles of Association

f. A Certified copy of letter of the Registrar of Companies, intimatingthe availability of the proposed name.

g. Consent of director or act in Form No. 29 (in duplicate) wherevernecessary.

h. Notice of the situation of the registered office in Form No. 18(induplicate) wherever necessary.

i. Particulars of directors, managing director, manger and secretary inForm No. 32 (in duplicate) wherever necessary

j. Statutory declaration in Form No. 1VIII. Certificate of in-corporation

When the necessary documents have been filed with the Registrar alongwith the payment of requisite fee, the Registrar shall scrutinize thesedocuments and if he is satisfied that (a) all the documents are in orderand (b) the requirement of the Act in respect of registration have beenduly complied, with he shall enter the name of the company in theRegister of Companies and shall issue a certificate which is termed as‘Certificate of Incorporation’.Note: If the Registrar is of the view that there are some minor defects inany document, he may require that the defects be rectified. But, if thereare some material and substantial defects, the Registrar may refuse toregister the company.

Contents of Certificate of IncorporationThe certificate of incorporation contains:(a) the name of the company,(b) the date of its issue and(c) the signature of the Registrar with his seal.This certificate is literally the birth certificate of the company evidencingthat the company is born with its name on the date mentioned in thecertificate. Note: A print of this certificate is to be a part of all copies ofMemorandum and Articles of association.

2.3.2.2 Conclusiveness of Certificate of Incorporation1. According to Section 35 of the Companies Act.

Certificate of incorporation given by the Registrar of Companies inrespect of any association shall be conclusive evidence that all therequirements of Companies Act have been complied with in respectof its registration as well as matters precedent and incidental thereto,



and the association is a company authorized to be registered andduly registered under the Act.

2. Certificate cannot be disputed on any ground whatsoever and nothingis required to be inquired into as to the regularity of the priorproceedings.

3. In view of the exclusiveness of its certificate of Incorporation,irregularities relating to procedural matters pertaining to registrationsuch as defects in the signatures of the subscribers, or other prescribedparticulars will not affect the legal status or personality of the companythough it does not prevent an aggrieved person presenting a claimagainst persons responsible for getting the company incorporated.

4. In Peer’s case, the memorandum was found materially altered afterthe signatories had signed but before registration. It was held thatthe corporate status remained unaffected and the certificate ofincorporation was valid. In Moosa Goolam Arif v. Ebrahim GoolamArif, the memorandum of association of a public limited companywas signed by two adult persons. Other five members of the companywere minor. Their guardian made separate signatures for each of theminors. The Registrar registered the company and issued thecertificate of incorporation. The incorporation of the company waschallenged and the plaintiff prayed that the certificate of incorporationshould be declared void. The Privy Council rejected the plea of theplaintiff and held that the certificate of incorporation was valid.

5. The certificate of incorporation is also a conclusive proof of the factthat the company came into existence on the date mentioned in thecertificate.In the case of Jubilee Cotton Mills Ltd., v. Lewis, the companydelivered to the Registrar of Companies documents required for theregistration of the company on 6th January. On 8th January, theRegistrar registered the company and issued the certificate ofincorporation but dated it January 6th. The company allotted fewshares to Mr. Lewis of 6th January. The allotment was challengedand the court was requested to declare the allotment as void. Thecourt held that the certificate of incorporation is conclusive evidenceof all that it contains. Hence, the company shall be deemed to havebeen formed on 6th January and allotment of shares was valid.

6. Certificate of incorporation is not the conclusive proof with respectto the legality of the objective of the company, mentioned in the objectsclause of the Memorandum of Association. As such, if a companyhas been registered whose objects are illegal, the incorporation doesnot validate the illegal object. In such a case the only remedy availableis to wind up the company.

2.3.2.3 Effects of registration1. From the date of incorporation, the original subscribers to the

memorandum as well as the other persons who may, from time totime, become members of the company, shall constitute a bodycorporate by the name contained in the Memorandum of Association.[Section 34 (2)]



2. The body corporate shall be capable of exercising all the functionsof an incorporated company. [Section 34(2)]

3. The company shall have perpetual succession. [Section 34(2)]Perpetual existence shows the properties of immortality. In otherwords, it means that a company’s existence shows the properties ofimmortality. In other words, it means that a company’s existencepersists irrespective of the change in the composition of itsmembership. It continues to exist even if all its human members aredead. The company may be compared with a flowing river wherewater (members) keeps as changing continuously still the identity ofthe river (company) remain the same. Since it is created by law, itcan be put to an end only by the process of law. Thus, a companyshall continue by law, it can be put to an end only by the process oflaw. Thus, a company shall continue to exist indefinitely till it is woundup in accordance with the provision of the Companies Act.

4. The company shall have Common Seal. [Section 34 (2)] CommonSeal means the official signatures of the company. Any documentbearing the common seal of the company and duly witnessed by atleast two directors will be legally binding on the company.

5. Members are liable to contribute to the assets of the company in theevents of its being wound up to the extent of their contract orguarantee as the case may be. [Section 34 (2)]

6. The memorandum and articles when registered shall bind thecompany and members. [Sec. 36 (1)]

7. All money payable by any member to the company underMemorandum or Articles shall be a debt due from him to thecompany. [Section 36 (2)]

8. The subscribers of the memorandum of a company shall be deemedto have agreed to become members of the company and on itsregistration, shall be entered as members in its Register of Members.[Section 41 (1)]

9. A private company can commence its business immediately afterobtaining the certificate of incorporation.

Judicial Rulings1 . A company on registration acquires a separate existence and the law

recognizes it as a legal person separate and distinct from its members[State Trading Corporation of India. v. Commercial Tax Officer, AIR1963 SC 1811].

2. Merely because a company purchased all shares of another companyit will not serve as a means of putting an end to the corporate characterof another company because each company is a separate entity[Spencer & Co., Ltd., Madras v. CWT Madras, (1969) 39 Comp.Case 212].

3. Even if the entire share capital is held by the President of India itdoes not make a company an agent either of the President [HeavyElectrical Union v. State of Bihar, AIR 1970 SC 82].



2.3.2.4. Promotion

Meaning of Promotion

Promotion is the first stage in the formation of a company. Promotioninvolves identification of a business opportunity or idea, analysis of itsprospects and taking steps in implement it through the formation of aCompany. C.W. Gerstenberg has defined promotion as the discovery ofbusiness opportunities and the subsequent organization of funds, propertyand managerial ability into a business concern for the purpose of makingprofit there from. Promotion stage comprises the following activities tobe undertaken:a) Discovery of business idea or identification of business opportunity.b) Detailed investigation to find out the strong and weak points of the idea.c) Organization of resources.d) Securing the co-operation of the required number of persons willing

to associate themselves with the project.e) Obtaining the consent of persons willing to act as first directs.f) Appointing Legal Advisors.g) Application for proposed name of the company.h) Preparation of necessary documents like memorandum of

association, articles of association.i) Entering into preliminary contracts.j) Filing of the necessary documents with the Registrars.

Meaning of Promoters

The Companies Act does not define the term promoters any where; itonly refers to the liabilities of the promoters. A number of judicial decisionshave defined the term ‘promoter’.1. According to L.J. Bowen, the term promoter is a term not of law but

of business, usefully summing up in a single word, a number ofbusiness operations familiar to the commercial word y when a companyis generally brought into existence.

2. Lord Blackburn states that ‘the term ‘promoter’ is a short andconvenient way of designing those who set in motion the machineryby which the Act enables them to create an incorporated company”.

3. Justice C. Cockburn described a promoter as ‘one who undertaketo form a company with reference to a given project and to set itgoing, and who takes the necessary steps to accomplish that purpose”.

Thus, a promoter is one who identifies a business opportunity, idea,analysis its prospects and takes steps to implements it through theformation of a company.

A company may have more than one promoter. The promoter may be anindividual, firm, an association of persons or a body corporate. Thepromoter may be an individual, firm, an association or persons or a bodycorporate. For example, J.R.D. Tata was promoter of Tata Group, G.D.Birla was promoter of Birla Group, Dhirubhai Ambani was the promoterof Reliance Group.



Who are not Promoters?Everyone who is associated with the process of the formation of acompany cannot be called a promoter. The following persons cannot becalled as promoters:a) Persons acting only in a professional capacity.[Section 62(6)]

Example; A solicitor who draws up the documents of the proposedcompany in his professional capacity is not a promoter in the eyes ofthe law. Similarly, an engineer who advises on the selection of site ora valuer who helps with drawing the estimates would not be regardedas a promoter.

(b) A persons cannot be held as promoter merely because he has signedat the foot of the memorandum or that he has provided money forthe payment of formation expense. [G. Tiruvengadacharir v. Valuemusaliar, (1838) I.L.R. Mad. 192]

(c) Individuals do not become promoters because they buy property,subsequently sold by them to a company at a profit even though theconsideration consists of shares in the same company. But wherecertain persons buy property with a view to selling it later to acompany to be formed by them, such persons will be regarded aspromoters from the moment they took first step to carry out thatobject [Gluckstein v. Barnes, (1900 A.C. 240]From the above statements it should be clear to you that a promoteris one who performs the preliminary duties necessary to bring acompany into existence. Thus, the true test to describe a person as apromoter lies in finding out whether he is keen to form a companyand take steps to give it a concrete shape. Thus, whether a person isa promoter, in any particular case depends on the facts havingregard to the nature of person’s role and his relationship to thecompany that is formed.

Functions of a PromoterThe various functions performed by the promoters include the following:(a) To Conceive Business Idea: First of all the promoters conceives

the idea of business.(b) To make Detailed Investigation: After conceiving the idea of

business, they make detailed investigations to find out the weaknessand strong points of the idea.

(c) To Organize the Resources: After satisfaction about theprofitability and feasibility of the idea, they organize the resources toconvert the idea into a reality by forming a company. The steps to betaken in this regard include the following:

(i) Securing the co-operation of a the required number of personswilling to associate themselves with the project (Note: 7 persons are



required to form public company and 2 persons are required to forma private company).

(ii) Appointing Legal Advisors and other experts.(iii) Entering into preliminary contracts.(iv) Preparing a detailed financial plan.(d) To Obtain the Consent of Persons Willing to Act as First

Directors : The first directors are generally appointed by thepromoters. The promoters seek the consent of some individuals whomthey deem appropriate so that they agree to be the first directors.

(e) To Decide about the Name of the Company : The promotershave to seek the permission of the Registrar of companies forselecting the name of the company. The promoter usually gives threenames in order of preference. The promoters should ensure that thename of the company should not be identical without should not tooclosely resemble the name of another existing company.

(f) To Get the Necessary Documents Prepared: The promoters onthe advice of legal experts get the memorandum of association andarticles of association prepared and printed.

(g) To Arrange for Filling of the Necessary Documents with theRegistrar: The promoters are required to pay the stamp duty, filingfee and other charges for registration of the company. Thepromoters are to see that the various legal formalities for incorporatingthe company are complied with.

Legal Position of Promoters

The legal position of a promoter is somewhat peculiar. The promoter’slegal position is that he is neither an agent nor a trustee of the companyhe promotes. He is not an agent because there is no-principal inexistence. You will recall from your exposure to the Contract of Agencythat in order to be a valid contract of agency both the principal and theagent must be in existence. For the same reason, he also cannot be calledthe trustee of the company..

However, it does not mean that the promoters do not have any legalrelationship with the proposed company. The legal position of a promotercan be correctly described by saying that he stands in fiduciary position(relationship of trust and confidence) in relation to the company hepromotes. The fiduciary relation of a promoter really begins when thecompany is formed.

Lord Cairns has rightly stated the position of promoter in Erlanger v.New Sambrero Phosphate Co., “The promoters of company standundoubtedly in a fiduciary position. They have in their hands the creationand moulding of the company. They have the power of defining how andwhen and in what shape, and under whose supervision, it shall come intoexistence and begin to act as a trading corporation”. In fact, thepromoters occupy a fiduciary position in regard to the company theypromote and also the original allottees that they induce to buy shares ofthe company.



Duties of Promoters

The fiduciary obligation of a promoter begins as soon as he sets out toact for or promote the company. The fiduciary obligation of promotersmeans an obligations of promoters to disclose fully all material facts relatingto the nature and extent of contract and profit made by them either directlyor indirectly. Such disclosure must be express and actual and not merelyconstructive. The promoters in their fiduciary capacity have the followingimportant duties:(a) Not to make Secret Profit: A promoter cannot make any direct or

indirect profits out of the promotion of the company. Since he occupiesa position of a trust, it is his duty to be honest and uphold the trust ofhis position. The law prohibits only the making of secret profit i.e.the profits which the promoter has not disclosed to the company.The promoters of a company are perfectly free to make a profitprovided they disclose this fact to an independent Board of Directors.If there is no independent Board of Directors, then he must disclosethe profits to the intended shareholders. When a promoter makes asecret profit, the company has the following remedies against him:

(i) Recession of the Contract: The company may on learning of thesecret profit, rescind the contract entered into by the promoter tomake the said profit.

(ii) Order for Refund: The Company may require the promoter torefund the amount of secret profit.

(iii) Suit for Breach of Duty: The Company may sue the promoter formisfeasance, a promoter, by making the secret profit, has defaultedin his duty towards the company.

(b) To make full Disclosure to the Company of all Relevant Facts: Inkeeping with his fiduciary capacity, a promoter is bound to discloseto the company all relevant facts including any profit made from thesale of his own property to the company and his personal interest ina transaction with company. While making a disclosure the promotermust make the full and complete disclosure. If the contracts to sellhis own property to the company without making a full disclosure,the company may either repudiate the contract or affirm the contractand recover the profits made by the promoter. Such disclosure isineffective if made merely to directors who are nominees of thepromoters. Disclosure may be made either to an independent borderby means of prospectus to the prospective shareholders. If thepromoter makes a secret profit the company can rescind the contractof compel him to account for it. Where all the members of a privatecompany are cognizant of the facts, the rule would not apply.

Let us explain these fiduciary duties of the promoter with the help of caseof Erdanger v. New Sombrero Phosphare Co., (1878) 3 A.C. 1218.

“A” was the owner of some land. He and some of his friends, decided toform a company to manufacture microchips. They appointed the firstdirectors of the company and ‘A’ sold his own land to the company at aprice higher than the actual valuation of the land. When the company was



formed, the purchase agreement of land was approved at the meeting ofthe shareholders but the fact of ‘A’s ownership and the profit made byhim were not disclosed at the meeting. Subsequently when the companywent into liquidation, the liquidator filed a suit against ‘A’ to recover theprofits made by him in the sale of land. You would observe that in thiscase ‘A’ had defaulted in his duty to make full disclosure of all materialfacts and had made a secret profit out of promotion. As there was nodisclosure by the promoters of the profits they were making, thecompany is entitled to rescind the contract. ‘A’ could have retained theprofit made by him if he had made a full disclosure to the directors of thecompany or to the shareholders of the company, all the relevant facts ofthe transaction including his personal interest and the profits made.(c) To give the Benefit of Negotiation to the Company: The

promoter must pass on to the company, the benefit of anynegotiation or agreement that he has carried on in his capacity of apromoter. For example, when he has negotiated a certain price forsome land for the company, he must sell the property to thecompany at the negotiated price. If he charges a price higher thanthe negotiated price, the company may rescind the contract ondiscovering the truth of the matter. If, due to some reason, the contractcould not be rescinded, the company is entitled to claim damagesfrom the promoters and the amount of damages shall be equal to theamount of profits made by promoters. However, it should beremembered that secret profits on the sale of property can berecovered from the promoter only when the property was boughtand sold to the company while he was acting as a promoter. Thepromoter must act honestly and diligently to escape liability withrespect to dealing with the future company and the outsiders.

(d) Duty of Promoters towards Future Allottees: The promoters standin a fiduciary position towards the company. It does not mean thatthey stand in such relation only to the company but they also stand inthis position to the future allottees of shares. The promoters mustensure that the prospectus issued at their instance contains allmaterials facts and particulars and does not contain any mis-statements.

Liabilities or promoters

The liabilities of the promoters under the various provisions of TheCompanies Act are discussed below:(i) Liability for not complying with the provisions of section 56: Explains

the matters that should be stated and the report that should be statedand the reports that should be set out in the prospectus. If thisprovision is not complied with, the promoter may be held liable bythe shareholders.

(ii) Civil Liabilities for any untrue statements made in the prospectus[Section 62]: The promoter may be held liable to pay compensationto every person who subscribes for shares or debentures for anyloss or damage sustained by him on account of the untrue statement



made in the prospectus. Under Section 62 specific provisions havealso been made of the grounds on which the promoter can avoid hisliability.

(iii) Criminal Liabilities for Issuing a Prospectus which Contains UntrueStatements [Section 63]: The promoter can be held criminally liableif the prospectus issued by them contained mis-statements. Thepunishments prescribed are imprisonment extending up to two yearsor a fine up to Rs. 50,000 or both. The promoters may have to bearthis criminal liability for misstatements unless he can prove that theuntrue statement was immaterial or that he was justified in believing,because of reasonable grounds, that the statement was true at thetime of issue of prospectus.

(iv) Liabilities for Public Examination [Section 478]: If in the event ofwinding up of the company the liquidator’s report alleges a fraud inthe promotion or formation of the company, the promoter can alsobe held liable for public examination by the Court like any otherdirector or officer of the company.

(v) Liability for Misfeasance or Breach of Trust by Misapplication ofFunds [Section 543]: Like any other director or officer of thecompany, a promoter can also be held liable if he had misapplied orretained nay of the property of the company or is found guilty ofbreach of trust or misfeasance in relation to the company.

(vi) Liable to the Suspended from Taking Part in the Management of theCompany [Section 203]: The court may suspend a promoter fromtaking part in the management of the company for a period of fiveyears if he is convicted of any offence in connection with thepromotion, formation or management of a company.

(vii) Personality Liability for Pre-incorporation Contracts: Even the deathof the promoter does not relieve him from this liability

Remuneration of promoters

A promoter has no right to demand any remuneration from the company,for his promotional services in the absence of an express contract withthe company. In the absence of a contract, he cannot even recover fromthe company payments he has made towards legal fees, stamp duties,registration fees, or other expenses in connection with the formation ofthe company.

He, therefore, is not entitled to recover any remuneration for his serviceunless the company after getting formed enters into a specific contractwith the promoter for this purpose. Even if the promoter has entered intoa contract with the prospective directors before the incorporation, hehas no valid claim against the company for remuneration. This is so becausethe directors cannot enter into any contract on behalf of a company thatis not yet in existence. There are also cases where the articles of a companymay specifically provide that a specified sum may be paid to the promotersas remuneration for their services. While this provision gives the directoran authority to make such payment, it does not give the promoters a rightto claim remuneration or to sue the company, for the same.



Modes of Giving Remuneration

The remuneration may be paid to the promoters in any of the followingways:(i) He may be allowed to sell his own property to the company for cash

at a price higher than the valuation, after he has made a full disclosureabout the valuation and the profit earned by an independent Boardof Directors.

(ii) If the promoter has purchased some business or some other propertyto be sold to the company, he may sell the same to the company at ahigher price after making a full disclosure of the price paid and theprofit earned.

(iii) The company may allot to the promoters fully paid up shares of thecompany.

(iv) He may be paid a certain lump-sum by the company as a remunerationof services rendered.

(v) He may be given a commission at fixed rate on the shares sold.(vi) The company may give him an option to subscribe for a certain

number of the company’s un-issued shares at par. This option isgenerally limited to a certain period which means that the promotermust subscribe to the shares within a certain time.

Disclosure in Prospectus

Whatever is the manner in which the company chooses to compensatefor the services of the promoter, the amount of remuneration and themanner of payment must be disclosed in the prospectus, if theremuneration is paid within two years preceding the date of theprospectus.

Preliminary contracts or pre-incorporation contracts

Meaning of Preliminary Contracts

Preliminary contracts are those contracts which are entered into by thepromoters for an on behalf of the proposed company before itsincorporation. These contracts are generally entered into by the promotersto acquire some property or some rights for the proposed company. Forexample, contract with the vendor to sell his running business to theproposed company, contract for the purchase of property for the proposedcompany, contract for the grant of a lease for the proposed company.

Legal Position of Preliminary ContractsThe legal position of preliminary contracts can be explained as follows:1. The Company is not bound by the Preliminary Contracts: The

Company cannot be held liable for the preliminary contracts. Acompany is not bound by the preliminary contracts even if thecompany has taken the benefit of the work on its behalf under thecontract. In case of Re English and Colonial produce Ltd., (1906) 2



Ch. 435. a solicitor was appointed by the promoters of the companyand was instructed by them to prepare the articles and thememorandum of the company. The solicitor also paid the necessaryregistration fee of the company. These promoters later became thedirectors of the company. The solicitor sued for his expenses and thefees paid by him. It was held that since the company was not inexistence when these expenses were incurred, the company is notbound to pay.

2. The Company cannot Enforce Preliminary Contracts: The companycannot enforce such contracts made before incorporation, by thepromoters. This means that on account of a preliminary contract thecompany does not get a right to sue the third party for fulfillment ofthe contract. In case of Natal Land Co. V Pauline Colliery Syndicate(1904) A.S. 120, the owner of a piece of land agreed to lease it to acompany to be formed by promoters. The promoters later on formeda company. On some prospecting of the land, it was discovered thatthere was a definite possibility of striking of the land, it was discoveredthat there was a grant of lease to the company. It was held that thecompany cannot sue ‘owner’ and cannot claim specific performanceas it was not even in existence when the lease was signed.Thus preliminary contracts cannot be enforced by or against thecompany, Exception to above principles The provisions of Sections15(h) and 19(e) of The Specific Relief Act, 1963 provide an importantexception to the general principle ‘preliminary contracts can not beenforced by or against the company’. According to Sections 15(h)and 19(e) of the Specific Relief Act, 1963, where the promoters ofthe company have entered into contracts before its incorporation,specific performance may be obtained by or against the company if –

(a) Such contracts are for the purposes of the company.The term “contracts for the purposes of the company” means contractswhich are necessary for the incorporation and working of thecompany. For example, contracts for the preparation and printing ofthe memorandum and articles or contracts for the supply of necessaryraw material for the production work in the company are contractsfor the purposes of the company.

(b) Such contracts are warranted by terms of incorporation.(c) Such contracts are accepted by the company after its incorporation(d) The acceptance of such contracts is communicated by the company

to the other party to the contract.However the above provisions are not applicable for:

(a) Contract to take shares,(b) Contract to render personal services.3. The Company cannot Ratify the Preliminary Contracts: The Company

cannot ratify the preliminary contracts after incorporation becausefor valid ratification of a contract, the principal must have been inexistence on the date when the contract is originally entered into. Incase of Kelner v. Baxter, It was held as the company was not inexistence when the preliminary contracts were made; it could not be



bound by a purported ratification. What the company can do is toenter into a new contract with the vendors after incorporation togive effect to the terms of the contract made before incorporation.

4. The company cannot Adopt Preliminary Contracts: The companycannot adopt preliminary contracts after its incorporation either bypassing a special resolution or by making adoption of such contractas one of the objects of company in its memorandum of association[North Sydney Investment Company v. Higgins (1999) A.C. 263]

5. Personal Liability of the Promoter for Preliminary Contracts: Thepromoters are personally liable for the preliminary contracts. Thereason for this is that the preliminary contract is made for a companywhich, as known to both the contracting parties, is as yet non-existent.The contract, therefore, is deemed to be personally entered into bythe promoters and they will be held personally liable for theperformance of these contracts. The promoters will continue to bepersonally liable until the company after its incorporation adoptpreliminary contracts by entering into new contracts with the thirdparties on the same terms as were embodied in the original contracts.The preliminary contracts made by the promoters generally containa provision that if the company adopts the agreements onincorporation, the liability of the promoters shall come to an end andif the company does not adopt the preliminary contract within aspecified period either party may rescind the contract. In such a case,liability of the promoter will cease on the expiry of the specifiedperiod.

2.3.2.5. Certificate of commencement of businessMeaning of certificate of commencement of business

The certificate of commencement of business is a certificate which entitlesa company to commence business or to exercise borrowing powers.

Companies not required to obtain certificate of commencement ofbusiness

Since a private company (whether or not having share capital) and apublic company having no share capital can commence businessimmediately after its incorporation, such companies are not required toobtain certificate of commencement of business.

Company which is required to obtain certificate of commencementof business

A public company having share capital is required to obtain certificate ofcommencement of business from the Registrar before it can commenceits business or exercise borrowing powers.

Procedure for obtaining the certificate of commencement of businessI. If a public company, having share capital, has issued a prospectus,

inviting the public to subscribe for its shares or debenture, it cannotcommence any business or exercise borrowing power unless -



a. The company has allotted the shares up to the amount of minimumsubscription

Every director has paid to the company, in cash, the application andallotment money on the shares taken or contracted to be taken by him inthe same proportion as public.b. No money is liable to be repaid to the applicants for failure to apply

for or to obtain permission for the shares or debentures to be listedon any recognized stock exchange.

c. Duly verified declaration in the prescribed Form No. 19 has beenfiled with the Registrar. The declaration must specify that Clauses(a), (b) and (c), as above have been complied with. The declarationmust be verified by one of the directors or the Secretary of theCompany. Where the Company has not appointed a Secretary, thedeclaration may be verified by a Secretary in whole-time practice.

II. If the company has a share capital but does not issue a prospectusinviting the public to subscribe for its shares, the company cannotcommence any business unless -

a. The company files with the Registrar, a statement in lieu of prospectus,along with the report specified in Part II of Schedule III. The statementshould be filed with the Registrar at least three days before the firstallotment.

b. Every director of the company has paid to the company, in cash, theapplication and allotment money on the shares taken or contractedto be taken by him.

c. A duly verified declaration in the prescribed form has been filed withthe Registrar at least three days before the first allotment is made.The declaration must specify that the above conditions have beencomplied with and must be verified by one of the directors or theSecretary of the Company. In case the company has not appointed aSecretary, the declaration may be verified by a Secretary in wholetime practice. [Section 149 (2)]When the above requirements are duly fulfilled, the Registrar shallissue a certificate known as ‘certificate of commencement ofbusinesses’. This document certifies that the company is entitled tocommence business and is also a conclusive evidence of the fact thatthe company is so entitled. Any contract entered into will be bindingon the company.

2.3.2.6. Consequences of Default [Section 149(6)]If any company commences business in contravention of these provisions,every person who is responsible for the default shall be punishable withfine which may extend to Rs. 50,000 for every day during which thedefault continues.

Consequences of not Commencing Business [Section 433 (c)]If any company does not commence its business within one year of itsincorporation, it is liable to be wound up by the court under Section 433.



2.3.2.7. Provisional contractsMeaning of Provisional Contracts

Provisional Contracts are those contracts which are entered into by thecompany after obtaining the certificate of incorporation but beforeobtaining the certificate of commencement of business.

Legal Position of Provisional ContractsAccording to Section 149(4) such contracts are purely provisional innature and shall not be binding on the company until the date on which itbecomes entitled to commence business. Therefore, if a company entersinto contract after its incorporation but never gets the certificate tocommence business, contracts so entered shall not be binding upon thecompany. However, on the issue of the commencement certificate, suchcontracts become automatically binding on the company and need noratification. For example, Mr. X will not succeed in recovering the amountfrom the company because the company never became entitled tocommence business. [Re Otto Electrical Co., (1906)]

2.3.3. Memorandum and Articles of Association2.3.3.1. Meaning of memorandum of association

According to Section 2(28) of The Companies Act, Memorandum meanthe memorandum of association of a company as originally framed or asaltered from time to time in pursuance of any previous company laws orof this Act. But this definition is not an exhaustive one.The status and importance of Memorandum of Association has been clearlybrought out in many decided cases as follows:1. “Memorandum of Association of a company contains the fundamental

conditions upon which alone the company is allowed to beincorporated. They are conditions introduced for the benefit of thecreditors and the outside public as well of the shareholders”.[Guinness v. Land Corporation of Ireland, (1882) 22 Ch.D. 359]

2. “In cases of Ashbury Rly. Carriage and Iron Co. V. Riche, (1875)LR 7HL 653, Lord Cairns observed Memorandum of association ofa company is it charter and defines the limitations on the powers ofthe company established under the Act, that it contains in it, boththat which is affirmative and that which is negative and that it statesaffirmatively, the ambit and extent of vitality and power which by laware given to the corporation and it states negatively that nothing shallbe done beyond that ambit”.

3. Memorandum of Association defines its relations with the outsideworld and the scope who deals with the company to know that is itspermitted range of activities [Egyptian Sal and Soda Cpo. Ltd., v.Portsaid Salt Association, 1931 A.C. 677].

To sum up, Memorandum of Association is the constitution of the companywhich lays down the fundamental conditions upon which along the



company is allowed to be formed. It defines as well as confines the powersof the company. It not only shows the objects of formation but alsodetermines the utmost possible scope of its operations beyond which itsaction cannot go. If it enters into a contract which is beyond the powersconferred on it by the memorandum, such contract will be ultra vires thecompany and hence void. Even the unanimous consent of the entire of ismembers cannot ratify such contract.Thus, in this respect it is the company’s charter defining its constitution andscope of the powers with which it has been established under the Act.

2.3.3.2. Purpose of memorandum of associationThe Memorandum of Association is a public document which is open forinspection by any member of the public on payment of prescribed fees[Section 610]. Therefore, every person who deals with the company ispresumed to have the knowledge of its contents.The purpose of Memorandum is two-folda) First, to enable the intending shareholders to know the purpose for

which their money is going to be used and within what field they aretaking risk in making the investment.

b) Second, to enable the persons intending to deal with the company toknow with certainty as to whether the contractual relationship whichthey intend to enter into with the company is within its corporateobjects or not [Cotman v. Broughman, (1918) A.C. 514]

Thus, Memorandum gives protection not only to the shareholders butalso to persons who intend to deal with the company.

2.3.3.3. Form of memorandum [section 14]According to Section 14, the Memorandum of Association of a companymust be in one of the forms given in Schedule I as may be applicable to thecase of the company or in a form as near thereto as circumstances admit.The Tables in Schedule I to the Act specify the following forms applicableto different types of companies as under:Table B : Memorandum of Association of a Company Limited by Shares.Table C: Memorandum Association of a Company Limited by Guaranteeand not having a share capitalTable D: Memorandum of Association of a Company Limited byGuarantee and having a share capitalTable E: Memorandum of Association of an Unlimited Company.

2.3.3.4. Printing and signature of memorandum [section 15]The memorandum must be –(a) printed(b) divided into paragraphs numbered consecutively, and



(c) signed by at least 7 persons in case of a public company and by atleast 2 persons in case of a private company. The persons signingthe Memorandum are known as subscribers to the Memorandum.

- Each subscriber must give his address, description and occupation(if any).

- The signature of each subscriber must be attested in the presence ofat least one witness.

- The witness must attest the signature and add his address, descriptionand occupation (if any).

2.3.3.5. Contents of memorandum [section 13]

The memorandum of association of a company must state the followingclauses:1. The Name Clause2. The Registered Office Clause3. The Objects Clause4. The Territorial Limit Clause5. The Liability Clause6. The Capital Clause and7. The Subscription ClauseLet us know about each of the aforesaid clauses in detail.

2.3.3.6. Name clause

1. Legal Requirements(a) Last Word [Section 13(1)(a)]: The Memorandum of every

company must state the name of the company with the word“Limited” as the last word of the name in the case of a PublicLimited Company and with “Private Limited” as the last words ofthe name in the case of a private limited company.Exception in Case of Licensed (Associations Not for Profit)Companies [Section 25] The Central Government may give licensedirect that a non-profit making association be registered as acompany with limited liability without the addition of the word“Limited” or the worlds “Private Limited”. A non-profit makingassociation is an association which –

(i) is formed for promoting commerce, art, science, religion, charity orany other useful object.

(ii) intends to apply its profits / income in promoting its objects, and(iii) Prohibits the payment of any dividend to its members.(b) Undesirable Name to be avoided [Section 20 (1)]: The name

must not be undesirable in the opinion of Central Government. Thename shall be considered as undesirable if -

(i) It is identical with or too nearly resembles the name of an existingcompany [Section 29(2)(i)] or a registered trademark, or a trademark which is subject of an application for registration of any otherperson under the Trade Marks Act 1999 [Section 20(2) (ii)].



However, the Central Government before deeming a name asundesirable under Section 20(2)(ii) consult the Registrar of TradeMark [Section 20(3)]. In Society of Motor Manufacturers andTraders Ltd., v. Motor Manufactures and Traders MutualAssurance Co. Ltd., (1925) 1 Ch. 675, where a company wasincorporated to conduct the business of motor vehicle assuranceunder a name somewhat similar to that of a motor dealer’s tradeprotection association, the court refused an injunction to theassociation because the difference between the activities of thecompany and the association precluded any possibility of confusion.

In Ewing. v. Buttercup Margarine Co., (1917) 2 Ch. 1, Ewing wascarrying on business under the name of Buttercup Dairy Company as awholesale and retail provision merchant. A new company, ButtercupMargarine Co., was formed with the object of manufacturing and sellingmargarine in wholesale. Ewing applied to the court for restraining thenew company from using the name, contending that it was calculated todeceive and that people were likely to be confused into thinking of bothcompanies as one or closely related. The court granted an injunction.

The court, however, will not grant an injunction to prevent the use of apurely descriptive word with a definite meaning and in common use. InAerators Ltd., v. Tollit, (1902) 2 ch. 319, the business of the plaintiff wasthe sale of apparatus by which small quantities of liquids could be aerated.The defendant proposed to register a company to be called AutomaticAerators Limited, the object of which was to work under patents in respectof aeration of liquids in large quantities. The court did not grant theinjunction as both companies had different patents and apparatus althoughthe main object of both was to manufacture apparatus for theinstantaneous, automatic aeration of liquids.

(ii) It is prohibited by the Emblems and Names (Prevention of ImproperUse) Act, 1950. This Act prohibits the use of the name and emblems ofthe United Nations and the Word Health Organization, the official sealand emblems of the Central and State Governments, the Indian NationalFlag, the name and pictorial representation of Mahatma Gandhi and thePrime Minister of India.

(iii) It is in the contravention the guidelines issued by the Department ofCompany Affairs (Govt. of India).

(c) Publication of Name and Address [Section 147]i. The name and the address of the registered office must be painted or

affixed on the outside of every office or place of business in legiblecharacters of one of the languages in general use in that locality.

ii. The name and address of the registered office must be mentioned inlegible characters in its entire business letters, bill heads, letter pa-pers, notice and other official publications.

iii. The name must be engraved in legible character on its seal.



iv. The name must be mentioned in all bills of exchange, hundies, prom-issory notes, endorsements, cheques and orders for money or goods,bills of parcels, receipts and letters of credit.

2.3.3.7. Registered office clause [section 13(1) (b) and section 146]

Legal Requirementsa) Name of the State [Section 13(1)] The Memorandum of every

company must state the name of the State in which the registered officeof the company is to be situated. It may be noted that the exact addressof the registered office need not be stated in the Memorandum.

b) Time Limit within which the Company must have its Registered Office[Section 1456 (1)] A company must have a registered office asfrom the day on which it commences business or as from the 30thday after the date of its incorporation whichever is earlier.

c) Notice of situation [Section 14(2)] Notice of the situation of theregistered office and of every change therein must be given to theRegistrar (otherwise than through a statement as to the address ofthe registered office in the Annual Report) within 30 days of the dateof the incorporation or of the date of change.

Importance All communications and notices are to be addressed to theregistered office [Section 146 (1)]. Every company must keep properbooks of account at its registered office [Section 209 (1)]. The domicileand the nationality of the company and the jurisdiction of the court aredetermined by the situation of its registered office.

2.3.3.8. Objects clause [section 13(1) (d)]

The Company registered after the commencement of the Companies(Amendment) Act, 1965 must divide its object clause into two sub-clauses, namely:(a) Main Objects

This sub-clause covers the following two:(i) Main Objects of the Company to be pursued on its incorporation, and(ii) Objects incidental or ancillary to the attainment of the main objects(b) Other Objects

This sub-clause covers the other objects which are not included in‘Main Objects’.

Notes:i. If more than one activity is proposed to be pursued, a separate

paragraph should be provided for each activity.ii. Under ‘Objects incidental or ancillary to the attainment of main objects’

all activities essential for the attainment of main objects such as openingof a bank account, appointment of agents, officers, purchase and saleof raw material and finished goods etc. are to be included.

iii. The test to be applied whether a power is implied or not, is not thebenefit which the transaction is expected to confer on the company butwhether it can reasonably be regarded as arising from the main object



of the company. In case of London Country Council v. Attorney (1902)A.C. 165, the council having a statutory power to work tramways wasrestrained from running omnibuses in connection with the tramways.The court held that the council could not undertake the omnibus businessas it was in no way incidental to the business of working tramways,however beneficial it might prove to the original business.

In case of Evans v. Brunner Mond & Co., (1921) 1. Ch. 359, where acompany expended money on scientific research while its main objectwas the business of chemical manufacturing, it was held that the act wasconducive to attainment of the main object of the company and thereforevery much within its powers.(iv) Wherever the object clause includes the words such as “to do all

such things as are incidental or ancillary to the attainment of the mainobjects”, these words do not increase the area of the company’sexpress powers as defined by the ‘Main objects’. These words shouldbe constructed as being limited to the doing of such things as arelegitimate necessary to the attainment of the objects previouslyspecified.

(v) In case of companies (other than trading corporation), with objectnot confined to one state, the states to whose territories the objectextends. [Section14 (1) (e)]

Restrictions on the Selection of ObjectsThe subscribers to the memorandum may choose any ‘objects’ for thepurposes of their company subject to the following restrictions:a. The objects must not including anything which is illegal or contrary

to general law e.g. floating a company for dealing in lotteries [Ex-parte More, (1931) 2 K.B. 197]

b. The objects must not include anything which is against public policye.g. trading with alien enemies [Daimler & Co., v. Continental TyreCo., (1916) 2 A.C. 307] or objects which are in restraint of trade[Mac. Ellis v. Calligot etc., Company, (1919) A.C. 459].

c. The objects must be not including anything which is prohibited by theCompanies Act, 1956.

Importance of Objects ClauseThe objects clause is of fundamental importance to its members as wellas its non-members. In the first place, it gives protection to subscribers(members) who learn from it the purposes to which their money can beapplied. In the second place, it gives protection to outsiders dealing withthe company who learn from it what its gives protection to outsiders dealingwith the company who learn from it what its powers are and what is therange of its activities. The narrower the objects appended in thememorandum, the lesser is the subscribers’ risks, the wider these objects,the grater is the security of those who transact business with the company.



2.3.3.9. Liability clause [section 13(2)]The liability clause states the nature of the liability of members. The legalrequirements regarding this clause in respect of various types ofcompanies are as follows:

Type of company Specific regulation required

1. In case of an unlimited

Company

Its Articles must state the number of members

with which the company is to be registered and it

has a share capital, the amount of share capital

with which it is to be registered.[Section 27(1)]

Note: Its Articles must be in the Form given in

Table E.

2. In case of a company

limited by guarantee but

not having share capital


with which it is to be registered. [Section 27(2)]


Table C.


limited by guarantee and

having share capital

Its Articles must state the number of members.

[Section 27(2)].


Table D.

4. In case of a Private

Company having share

capital

Its Articles must contain the following

Four restrictions as contained in Section 3(1)(iii)-

--

(a) Restricting the right to transfer its shares

(b) Limiting the number of its members to 50

excluding the past and present employees of

the company

(c) Prohibiting any invitation to the public to

subscribe for any shares in or debentures of

the company. [Section 27(3)]

(d) Prohibiting any invitation or acceptance of

deposits from persons other than its

members, directors or their relatives.


Company having no share

capital

Its articles must contain the following three

restrictions as contained in Sub-clauses (b), (c)

and (d) of Section 3(1) (iii):

a) limiting the number of its members to 50

Notes :i. In case of an unlimited company, liability clause is not required.ii. In a limited company, the liability of directors or of any director or

manager may be made unlimited by providing so in t hememorandum. [Section 322]



iii. Where a company has carried on business with fewer members thanthe statutory minimum for more than 6 months, every member who isaware of this fact is severally liable for the entire debts of thecompany contracted after a period of 6 months and may be severallysued therefore. [Section 45]

2.3.3.10. Capital clause [section 13(4)]In case of limited companies by shares, this clause must state the amountof share capital with which the company is to be registered and thedivision thereof into shares of fixed amount, Such capital is called‘Authorized’ or ‘Nominal’ or ‘Registered’ capital. The fixed amountof a share is known as ‘Par’ or ‘Nominal’ value of a share. The amountof authorized capital should be sufficiently high considering theimmediate need of the business and possible expansion in the near future.The stamp duty and registration fee are payable on the basis of amountof the authorized capital.

Notes:i. In case of an unlimited company having a share capital, the capital

clause is not required in its memorandum. But Section 27(1) providesthat the amount of share capital with which the company is to beregistered must be stated in the Articles of Association of an unlimitedcompany having a share capital.

ii. In case of company having no share capital, the capital clause is notrequired in its memorandum.

iii. Division of the authorized capital into different classes of shares (ifany) and the rights of various clauses of share holders need not bestated in the capital clause. Instead, these details may be given in theArticles of the company.

iv. The effect of capital clause is that the company cannot issue moreshares than are authorized for the time being by the memorandum.

2.3.3.11 Association or subscription clause (sections 12(1), 13(4)(B),(C) and 15(C)

Legal Requirementsa. Each of the subscribers must give in his own handwriting his name

with surname, address, description (by the name of father, husbandor wife as the case may be), [Section 15(C)

b. In case of a company having share capital the each of the subscribermust also write in his own handwriting opposite to his name, thenumber of shares agreed to be subscribed by him. Each subscribermust take at least one share. [Section 13(4) (b), (c)]

c. that such declaration must be signed by at least 7 persons (in case ofa public company) or 2 persons (in case of a private company).[Section 12(1)]

d. that an agent may sign the memorandum of association on behalf ofsubscriber if he is authorized by a power of attorney to do so.

e. that the signatures of the subscribers must be attested by at least onewitness who must not be from among the subscribers. [Section 15 (c)



f. that each of the witness must give in his own handwriting, his name, withsurname, the description and occupation, if any. [Section 15 (c)]

g. Such clauses must be strictly in accordance with standard formats.Specimen of Subscription Clause in Case of Memorandum of aCompany having a Share Capital

“We the several persons, whose names and addresses are subscribed,are desirous of being formed into a company in pursuance of theMemorandum of Association and we respectively agree to take thenumber of shares in the capital of the company set opposite to ourrespective names”.

2.3.3.12. Alteration of the memorandumA company may alter the conditions contained in this memorandum in thecases, in the mode and to the extent for which express provision is madein the Act [Section 16(1). Let us now discuss the procedure for makingalterations in the different clauses of the memorandum.

2.3.3.13. Alteration of the nameProcedure for Changing the NameThe procedure for changing the name of the company is given below:

Case Legal Requirements

(a) The company may change its name by

passing a special resolution at a general

meeting of the members.

(i) Where the only change in the name of

the Company is the deletion there from

the words ‘private’ consequent on the

conversion of a private company into a

public company. [Proviso to Section

21)]

(b) A copy of resolution is required to be

filed with the Registrar within 30 days

of passing the resolution.


passing a special resolution. However,

to alter the Articles in this case, the

approval of Central Government would

be necessary in addition to special

resolution.


field with the Registrar within 30 days


(ii) Where the only change in the name of

the company is the addition thereto the

words ‘private’ consequent on the

conversion of a public company into a

private a company. [Proviso to Sections

21 and 31 (1)]

(c) A copy of order of the Central

Government’s approval is required to

be filed with the Registrar within 3

months of the order.

(a) The company may change its name by (iii) To change the name which is identical



Note :Application by a registered proprietor of trademark should be consideredafter 5 years of the registration of the company. [Proviso to Section 22(1)]

2.3.3.14. Registration of Change of Name [Section 23]The provisions relating to the registration of change of name are givenbelow:a. A copy of the resolution passed at the general meeting must be filed

with the Registrar within 30 days of passing the resolutionb. A copy of the order of the Central Government’s approval (whenever

if any required) must be filed with the Registrar within 3 months ofthe order.

c. The Registrar shall enter the new name on the Register in the placeof the former name and shall issue a fresh certificate of incorporationwith the necessary alterations embodied therein. [Section 23 (1)]

d. The change of name shall be complete and effective only on the issueof such a certificate. [Section 23 (1)]

e. The Registrar shall also make the necessary alteration in theMemorandum of association of the company. [Section 23 (2)]

f. The change of name shall not affect any right or obligations of thecompany. [Section 23(3)]

g. The change of name shall not render defective any legal proceedingsby or against it. Any legal proceedings which might have beencontinued or commenced by or against the company by its formername may be continued by its new name. [section 23(3)]

2.3.3.15. Alteration of registered officeProcedure for changing the Registered OfficeThe procedure for changing the registered office of the company is given below:


passing an ordinary resolution and with

the previous approval of the Central

Government signified in writing.

(iii) To change the name which is identical

with or too nearly resembles the name

of an already registered existing

company or on an application by

registered proprietor of a trade mark, is

in the opinion of Central Government

identical with or too nearly resembles,


field with the Registrar within 30 days




Case Legal Requirements

(i) Change from one place to another

within the same city, town or village

[Section 146(2)]

(a) A resolution of the Board of

Directors is required to be passed.

(b) Notice of new location must be

given to the Registrar within 30

days of the change [Section 146(2)]

(ii) Change from one city, town or village to

another within the jurisdiction of the

same Registrar of Companies within the

same State.

(a) Special Resolution A special

resolution is required to be passed

at a general meeting of the

shareholders. [Proviso to Section

146(2)]

(b) Filling of Copy of Special

Resolution with ROC. A copy of

the special resolution, as aforesaid,

is to be filed with the Registrar

within 30 days of change [Section

146(2)]

(iii) Change from the jurisdiction of on e

ROC to the jurisdiction of another ROC

within the same State.

(a) Special Resolution. A special

resolution is required to be passed

at a general meeting of the

shareholders. [Proviso to Section

146(2)]

(b) Confirmation of Regional

Director.

Confirmation of Regional Director

is to be obtained where the change

is from Registrar of Companies.

The Regional Director must convey

his confirmation within 4 weeks

from the date of receipt of

application for such change.

(c) Filling of Copy of Special

Resolution with ROC. A copy of

the special resolution, as aforesaid,

is to be filed with the Registrar

within 30 days in Form No. 23.



2.3.3.16. Articles of Association

Meaning of Articles

Section 2(2) of the Companies Act defined Articles as of a company asoriginally framed or as altered from time to time in pursuance of anyprevious companies’ law or of this Act. This definition is not sufficient toexplain its meaning. Let us look at some of the observation made injudicial cases1. The Articles of Association of a company are the internal rules and

regulations to the management of its internal affairs (Guinnes v. LandCorporation of Ireland, (1882)22 Ch. D. 349)

2. ‘The articles play a part subsidiary to memorandum of association.They accept the memorandum of association as the Charter of In-corporation of the company and so accepting it, they proceed todefine the duties, rights and powers of governing body as betweenthemselves and the company at large and the mode and form in whichchanges in the internal regulation of the company may from time totime be made.” (Ashbury Railway Carriage Co. Ltd. V. Riche, (1875)L.R. 7 H.L. 653, p. 670).

3. The document containing the articles of association of a company isa business document; hence it has to be construed strictly. It regu-lates domestic management of a company and creates certain rightsand obligations between the members and the company (S.S.Rajkumar vs. Perfect Castings (P.) Ltd.,[1968]38 Camp. Case187)

4. The Articles of Association are in fact the bye-laws of the companyaccording to which director and other officers are required to per-form their functions as regards the management of the company, itsaccounts and audit. Thus, the memorandum lays down the objectsfor which the company is formed the article lay down rules and regu-lations for the attainment of those objects.

Which companies are required to register its articles [section 26]

According to Section 26 the following companies are required to registerits Articles along with the memorandum of association:1. An Unlimited Company (Whether Public or Private),2. A Company Limited by Guarantee (Whether Public or Private),3. A Private Company Limited by Shares

Which company need not have its own articles [section 28]

A public company limited by shares need not necessarily have its ownarticles. A company limited by shares may either have its own articles orit may adopt either wholly or partly Table A of Schedule I of theCompanies Act. Even if it does register Articles of its own, Table A willstill apply automatically unless it has been excluded or modified. In otherwords, there are three possible alternatives in which a public companylimited by shares may adopt Articles of Association. These are:



(i) It may adopt Table A in full; or(ii) It may wholly exclude Table A and set out its Articles in full; or(iii) It may set out its own Articles and adopt part of Table A.If such a company goes in for the first alternative, then it is not necessaryto get any Articles of Association registered. It has only to endorse onthe face of the Memorandum of Association that it has adopted Table Aas its Articles of Association. The advantage in adopting the regulationsof Table A is that its provisions are legal beyond any doubt.[Lock v.Queensland Investment & Land Mortgage Co., (1896) Cl. 397].

Specific regulation required in the articles of specific companies:

As per Section 27, the specific regulations required in the Articles ofspecific companies are given below:

Type of company Specific regulation required

1. In case of an unlimited

Company


with which the company is to be registered and it

has a share capital, the amount of share capital

with which it is to be registered.[Section 27(1)]


Table E.


limited by guarantee but

not having share capital


with which it is to be registered. [Section 27(2)]


Table C.


limited by guarantee and

having share capital

Its Articles must state the number of members.

[Section 27(2)].


Table D.


Company having share

capital

Its Articles must contain the following

Four restrictions as contained in Section 3(1)(iii)-

--

(a) Restricting the right to transfer its shares

(b) Limiting the number of its members to 50

excluding the past and present employees of

the company

(c) Prohibiting any invitation to the public to

subscribe for any shares in or debentures of

the company. [Section 27(3)]



Form of articles [section 29]

According to Section 29, the Articles of Association of a company mustbe in one of the forms given in Schedule I as may be applicable to thecase of the company or in a form as near thereto as circumstances admit.

The Tables in Schedule I to the Act specify the following forms applicableto different types of companies as under:

Table C: Articles of Association of a company limited by guarantee andnot having a share capital.

Table D: Articles of Association of a company limited by guarantee andhaving a Share capital.

Table E: Articles of Association of an unlimited company.

Note: Additional matters which are not inconsistent with the provisionscontained in the form in any of the Tables C, D, and E may be included inthe Articles. (Proviso to Section 29)

Printing and signature of articles (section 30)

The articles must be –a) printed,b) divided into paragraphs numbered consecutively, andc) signed by at least 7 persons in case of a public company and by at

least 2 persons in case of a private company. The person signing theArticles is known as ‘Subscribers’. Each subscriber must give hisaddress, description and occupation (if any). The signature of eachsubscriber must be attested in the presence of at least one witness.The witness must attest the signature and give his address descriptionand occupation (if any).

Contents of articles of association

The Articles of Association of a company may contain the regulation forthe attainment of objects stated in the memorandum subject to thefollowing restrictions:a) The articles must not include anything which is illegal or contrary to

general law.

(d) Prohibiting any invitation or acceptance of

deposits from persons other than its

members, directors or their relatives.


Company having no share

capital

Its articles must contain the following three

restrictions as contained in Sub-clauses (b), (c)

and (d) of Section 3(1) (iii):

a) limiting the number of its members to 50



b) The articles must not include anything which is against public policy.c) The Articles must not include anything which is prohibited by the

Companies Act, 1956.Articles usually contain provisions relating to the following matters:a) Share capital and right of shareholders, variation of these rights.b) Allotment of shares.c) Calls on shares and Lien on shares.d) Transfer of Shares.e) Transmission of Shares.f) Forfeiture of Shares.g) Conversion of Shares into Stock.h) Share Warrants and Shares Certificates.i) Alteration of Capital.j) General Meeting and proceedings thereat.k) Voting Rights, Voting and Poll and Proxies.l) Directors, their appointment, remuneration, qualification, powers and

proceedings of Board of Directors .m) Manager/Secretary.n) Seal.o) Dividend and Reserves.p) Capitalization of Profits.q) Accounts, Audit and borrowing powers.r) Winding up.s) The extent to which Table A of Schedule I of the Act is to apply or

not to apply.Alteration of articles of association

Section 31 empowers the company to alter or add to its Articles. Thisfundamental power of the company to alter its Article is subject to thefollowing limitations:1) Special Resolution: The alteration must be affected by passing a

special resolution at the general meeting of the company [Section 31(1)]. A copy of the special resolution authorizing such alterationmust be filed with the Registrar within 30 days of passing theresolution and a printed copy of altered articles must be filed withthe Registrar within 3 months of passing the resolution. The effect ifchange must be incorporated in all copies of articles of associationissued after the date of alteration [Section 40].

2) Approval of Central Government in Case of Conversion ofPublic Company into Private Company: No alteration having theeffect of converting a public company into a private company shallhave effect unless approved by the Central Government [Provisonto Section 31(1)]. In this case, a printed copy of the altered articlesmust be filed with the Registrar within 1 month of the date of receiptof the order of approval [Section 31(2A)].

3) Valid as if originally contained: Any alteration made in the Articleshall subject to the provisions of this Act, is valid as if originallycontained in the Articles. [Section 31(2)]



4) Not inconsistent with any Act: The alteration must not be inconsistentwith any provisions of the Companies Act or any other statute.

5) Not inconsistent with Memorandum: The alteration must not beinconsistent with any provisions of the Memorandum of Association.Articles being subordinate to the memorandum must not override.

6) Not inconsistent with Company Law Board (CLB) Order: Thealteration must not be inconsistent with an order of Company LawBoard.

Where the company amends its articles on order of CLB (on Applicationu/s 397 or u/s 398 for relief in case of oppression or mismanagement),the subsequent alteration thereof which is inconsistent with such an ordercan be made by the company only with leave of the Company Law Board.[Section 404(1)].7) Not to permit any Illegal Thing: The alteration must not permit

anything which is illegal.8) Undertaking in Writing [Section 38]: No alteration having the

effect of increasing the liability of a member shall be binding uponhim unless he agrees in writing either before or after alteration.However, in case of a company which is a club/any other association,the alteration requiring the member to pay subscription/charges at ahigher rate shall be binding upon him although he does not agree inwriting to be bound by the alteration [Section 38].

9) Reserve Capital: A reserve capital once created in pursuance ofSection 99 cannot be unreserved but may be cancelled as a reductionof capital [Midland Railway Carriage Wagon Co.(1907) W.N. 175].

10) Retrospective Effect: The alteration may be regarded as having aretrospective effect so long as it does not affect the things alreadydone by the company and alteration is for the benefit of the companyas whole [Allen v. Gold Reef of West Africa (1909) S.C. 732]. Inthe case of Allen v. Gold Reef of West Africa, the original Articlesgave the company a lien on all shares “not fully paid-up” for calls dueto the company. ‘S’ was the only member holding some fully paid-up shares, but he also owed money to the company for calls due onother shares. ‘S’ died and his shares were inherited by his legalrepresentatives. The company, thereafter, altered its Articles enablingthe company to exercise lien on all shares, whether fully paid or not.Now the question arose whether the company could exercise lieneven on fully paid-up shares. It was held that company could do soas it was done bona fide for the benefit of the company as a whole.

11) Bona Fide: The alteration must be a bona fide for the benefit of thecompany as a whole. Such alteration shall be valid even though theprivate interests of some members may be affected adversely. Incase of Sidebottom v.Kershaw, Leese & Co. Ltd.(1920) 1 Ch. 154],the alteration of articles empowered the directors to require anymember who carried on a business competing with that of thecompany to sell his shares at a fair price to persons nominated by thedirectors. The validity of the resolution was challenged on the groundthat the alteration will not be for the benefit of the company as awhole.



The Court held that it was in the interest of the company as a wholeto be protected against competition and upheld the resolution. Thecourt was of the view that it was very much in the interest of thecompany as to get rid of such members who were carrying on acompeting business as they always had the chance to exploit thecompany’s secrets for their personal benefit and at its cost.

12) Not to constitute a Fraud on Minority: The alteration must notconstitute a fraud on minority. An alteration has the effect of whichis to discriminate between the majority shareholders and minorityshareholders so as to give the former an advantage of which thelatter have been deprived, would constitute a fraud on minority.In Menier V.Hooper‘s Telegraph Works Ltd. (1874) 9 Ch. App 350,Two Companies A and B were in rivalry. The Majority shareholdersof company A were also the shareholders of Company B. CompanyA had filed a suit against Company B. Later, shareholders ofcompany A passed a resolution to compromise the action againstCompany B in such manner that the terms of compromise werefavourable to Company B and unfavourable to Company A. Theminority shareholders questioned the power of the majority to makethe said compromise and the court set aside the same. It observed:“It would be a shocking thing, if that could be done and that majorityshould have nothing to do with it, then the majority have putsomething in their pockets at the expense of the minority”.Re Cook V.Deeks (1916) AC 554, the directors of railwayconstruction company obtained a contract in their own names toconstruct a railway line. The contract was obtained undercircumstances which amounted to breach of trust by the directorswho then used their voting powers to pass a resolution of thecompany declaring that the company had no interest in the contract.It was held that the benefit of the contract belongs in equity to thecompany and that the directors could not benefit themselves at theexpense of the minority. If it were checked, this would betantamount to allowing a majority to oppress the minority.In Brown V. Briish Abrasive Wheel Co., (1919) I Ch. 290, themajority shareholders holding 98% of the shares were willing tosubscribe further capital which the company badly needed but onlyif they were able to acquire the shareholdings of the minority. Theypassed a special resolution to alter the articles to enable them topurchase the minority shares compulsorily on certain terms. Theplaintiff refused to sell its shares and challenged the validity of themajority resolution. It was decided that the alteration was not forthe benefit of the company, but for the benefit of the majority andaccordingly an injunction was granted against the company prohibitingit from carrying out the resolution.

13) Not to cause Breach of Contract with an Outsider: Alterationmust not cause a breach of contract with an outsider. The companyshall remain liable for damages for its breach.Murac Rubber Syndicate v.Alperton Rubber Co.Ltd. (1915) Ch.186. In this case an agreement was made between Company A and



Company B. Company A had the right to nominate two directors onCompany B‘s board as long as company A held 5,000 shares inCompany B. This was incorporated in the articles. Company Anominated two persons as directors and they were disapproved byCompany B. Company B also made an attempt to alter the clauseof articles which provided Company A the right of nomination. Thecourt granted on injunction restraining Company B from making thesaid alteration on the ground that it would constitute a breach ofcontract with an outsider.But later in case of Chttambram Chettiar v. Krishan Aiyangar, I.L.R.30 Mad. 36, it was held that a company may alter its articles even ifit causes breach of contract with the outsider. It has statutory powerto do so. Where the contract with the outsider is wholly dependenton articles, alteration would be operative, and accordingly, theperson accepting appointment purely on the terms of the articles takesthe risk of those terms being altered, and will be bound by thealtered article.But the situation will be different if apart from the articles, there is anindependent contract. In Southern Foundries Ltd. V.Shirlaw, ‘S‘was appointed Managing Director in a company for ten years by anagreement dated 21.12.1933. Subsequently, the company wasamalgamated with another company and new articles were adopted.The latter gave power to the company to dismiss a director andaccordingly S was removed from office as director and the companytreated him as having ceased to be one. He sued the company forwrongful repudiation of the contract. It was held that dismissal wasbreach of contract and therefore the company was liable for damages.

14. Not to take Away Statutory Power to Alter The powers to alterarticles of association is a statutory power and it cannot be takenaway by any provision in the memorandum of articles {Walker v.London Tramways Co., (1879) 12 Ch.D.705)

Distinction between memorandum and articlesThe Memorandum of Association differs from the Articles of Associationin the following respects:

Basis of Distinction Memorandum ofAssociation

Articles of Association

1.Contents It contains thefundamental conditions upon which alone the company is allowed to be incorporated

It contains the internal rules and regulations relating tomanagement of internal affairs.

2. Fundamental / Subordinate document

It is Fundamental document.

It is subordinate to the Memorandum

3. Compulsory or optional

Every company must have its ownmemorandum.

A public company limited by shares need not have its own Articles. It may adopt Table A as its articles.

4.Relationship defined It defines the relationship between the company and outsiders.

It defines the relationship between the company and its members as members only and as members inter se.

5. Alteration whether The memorandum cannot Articles can be easily altered by



Binding effects of memorandum and articles (section 36)

Section 36 provides that the Memorandum and Articles shall, whenregistered, bind the company and the members thereof to the same extentas if they respectively had been signed by the company and by eachmember, and contained covenants on its and his part to observe all theprovisions of the Memorandum and of the Articles. Thus, theMemorandum and Articles constitute a binding contract between thecompany and each of its members. The legal effects can be studiedunder the following headings:

1. Members bound to the Company

Since the Memorandum and Articles constitute a contract between themembers and the company, the members are bound to the company bywhatever is contained in these documents. Accordingly, the company isentitled to sue its members for enforcement of the articles and can restrainits members through court from violating any provisions contained therein.

In case of Boreland‘s Trustee v. Steel Brothers and Co. Ltd. {(1901) 1Ch. 279} the articles of company provided that the shares of any memberwho became bankrupt would be sold to other persons at a price fixed bythe directors B, a shareholder became bankrupt and his trustee inbankruptcy claimed that he was not bound by the articles and couldtherefore, sell those shares at their true value. But it was held, that thetrustee in bankruptcy was bound by the Articles as it constituted a bindingcontract between the members and the company.

Similarly in case of Bradford Banking Company v. Brigs, (1886) 12 A.C.29, where the articles give the company a lien upon each share for debtsdue by shareholders to the company, and where a shareholder mortgages

5. Alteration whether easy or difficult

The memorandum cannot be so easily altered. The company has to follow the strict p rocedure for the alteration of its clauses. In some cases alteration requires the approval of the Company Law Board.

Articles can be easily altered by passing a special resolution.

6. Binding Effect of ultra vires act

An act which is beyond the powers g iven in the Memorandum us ultra vires and void and it cannot be ratified even by the unanimous consent of all the members.

An act is intra vires the Memorandum but ultra vires the Articles may be ratified by share -holders by passing a special resolution.

7. Remedy in case of ultra vires contracts

In case of the contracts ultra vires thememorandum, outsiders have no remedy against the company.

In case of contracts ultra vires the Articles, the outsiders can enforce the contract against the company provided they had no knowledge of irregularity.



his shares and the mortgagee serves notice thereof upon the company,the mortgagee would have priority over the company, only if theshareholder had incurred a liability to the company after the notice of themortgage was given to the company. If, on the other hand, the shareholderhad incurred a liability before the notice of mortgage was given to thecompany, the company would have the priority.

2. Company Bound to the MembersSince the memorandum and articles constitute a contract between membersand the company, the company is bound to its members by whatever iscontained in these documents. Accordingly, the members are entitled tosue the company for enforcement of the Articles and can restrain thecompany through court from violating any provisions contained therein.Views differ on the questions as to whether and how far the memorandumand articles bind the company to the members. The views expressed invarious judicial cases are given below:a) “The company is bound to the extent that any member can sue it so

as to prevent any beach of the article which is likely to affect his rightas a member of the company”. {Hickman v. Kent Sheepbreeder`sAssociation }(1885) 1 Ch. 88)

Thus, “An individual member can file a suit against the company to enforcehis individual rights e.g. right to contest election for directorship of thecompany, right to get back his shares wrongfully forfeited, right to receivea share certificate, notice of general meeting etc”. {Pender v.Lushirgton(1817) Ch.D.70, Nogaffa v. Madras Race Club, AIR 1951 Mad. 83,C.L.Joseph v. Los, AIR 1965 (Ker.) 68}b. “The member suing in such cases sues not in the right of a member but in

his own right to protect from invasion of his own individual right as amember {Edwards v. Halliwell,(1950) 2 All ER 1964 at p. 1067]

c. In case of Johnson v. Lyttle Iren Agency,(1877) 5 Ch. D. 687, a forfeitureof shares irregularly effected by a company was set aside at the instanceof the aggrieved member as the company did not comply with theprovisions of the Articles.

d. In case of Wood v. Odessa Water Works, 6 (1884) 42, Ch. D.636, thearticles empowered the company to declare a dividend to be paid to theshareholders with the approval in the general meeting. A resolution waspassed to pay the dividend by issue of debenture bonds and not in cash.At the instance of a member, the court granted an injunction restrainingthe director from acting on the resolution.

e. Thus, the member can sue the company for the breach of the Articles inthe following cases :

a) When the company does an ultra vires illegal act,b) For the enforcement of personal rights e.g. right to receive declared

dividend,c) when majority plays fraud on minority andd) for submitting the petition to court for its orders for preventions of

oppression and mismanagement under sections 397 and 398.



3. Between Members inter seAlthough there is no express agreement between the members of company,yet articles regulate their rights inter se. Such rights can only be enforcedby or against a members through the company or through the liquidatorrepresenting the company but no members has as between himself andanother member any right beyond that which the contract with thecompany gives him {Weltan v. Saffary (1897) A.C.315]. But the contraryview was taken in case of Royfield v. Hands and others, (1852) 2. W.L.R.851. In this case, the articles provided that every member who intendsto transfer his shares must inform the directors and directors must takethe said shares equally between them at a fair value. The plaintiff informedthe directors of his intention to transfer his shares. But the directorsrefused to take the shares and argued that the articles could not imposesuch obligation upon them in their capacity as directors. The court heldthat the directors were bound to take the shares since the articles imposedobligation upon them in their capacity as members and thus obligationwas personal one which could be enforced against them by other membersdirectly without joining the company as a party.It may also be noted that the articles constitute a contract betweenmembers only as regards matters arising out of the company relationshipof members as members. They cannot regulate rights arising out of anyother contracts in which other members have no interest. In case ofKhusi Ram v. Hanut Mal (1949) 53 C.W.N. 305, where a member hada commercial dispute of private nature with another member, an arbitrationclause in the articles of the company was not allowed to be invoked.

4. Between the Company and OutsiderSince the Memorandum and Articles do not constitute a contractbetween the company and outsider, an outsider is not entitled to sue thecompany for enforcement of the Articles even if the articles providecertain rights to him.The following case of Eley v. Positive Government Life Assurance Co.Ltd., (1876) 1 Ex. D. 88 illustrates this point. “The Articles of the company contained a provision that Eley would bethe solicitor of the company for life and would not be removed fromoffice except for misconduct. Eley acted as solicitor to the company andalso became a member of the company. The company, however,terminated his services. Thereupon, he sued the company of damagesfor breach of contract. Held, the Articles cannot be the basis of a contractbetween the company and an outsider. It would be noted here that hewas trying to exercise his right as an employee and not as a member. Aperson can be a member of the company and at the same time may becreditor or employee of the company. In the above case, he was tryingto exercise his right as an employee of the company. There was noindependent contract between the company and Eley apart fromwhatever was contained in the Articles. Therefore, his suit was dismissed.



Similarly in case of Re Rotherham Alum & C0., (1883) 25 D. 103, wherethe articles provided for remuneration to be paid to promoters, it washeld that this clause did not give any right of action to promoters againstthe company.

It may also be noted that where articles are deemed to have formed apart of outsider’s contract with the company, the outsider is entitled tomaintain a suit on the basis of that contract. In case of Re. New BritishIron Co., (1898) 1 Ch. 324, where an individual entered into a contractwith a company to serve as a director and the articles of the companyrequired the director to have a share qualification and fixed hisremuneration, it was held that director was entitled to recover hisremuneration as fixed by the articles because the terms of articles weredeemed to have formed a part of his contract with the company.

Though the articles and memorandum do not constitute a contract betweenthe company and an outsider, still the outsider is entitled to assume thatall the necessary formalities have been duly complied with in internalworkings of the company. {The Royal British Bank v. Turquand}

Doctrine of constructive notice

Since the Memorandum and Articles of Association on their registrationwith the Registrar, become public documents and are available for publicinspection in the Registrar’s office on payment of prescribed fee (Section610) every person dealing with the company is presumed to have theknowledge of the contents of these documents and also to have understoodthem according to their proper meaning. [earnest v. Nicholls (1857) 6H.I.C. 401, Griffith v. Poget, (No.2) (1877) 6 Ch. D. 517, Oak BankOil v. Crum, (1882) 8 A.C. 65]. This type of presumed knowledge ofthese documents is termed as ‘Constructive Notice of Memorandumand Articles of Association’.

Accordingly, if a person supplies goods to a company in which it cannotdeal according to its objects clause, he will not be able to recover theprice from the company. The supplier cannot in his defense take the pleathat he did not have the knowledge of the contents of the memorandumof Association of the Company. Thus, if a person enters into a contractwhich is ultra vires the company, he must do so at his peril.

The doctrine of constructive notice is not a positive one but a negativeone like that of estoppels of which it forms part. It operates only againstthe person who has been dealing with the company but not against thecompany itself. Consequently, he is prevented from alleging that he didnot know that the constitution of the company rendered a particular actor particular delegation of authority ultra vires. Thus, this doctrine is a‘cloud‘ for the strangers.

Principle of ostensible authority

A third party dealing with the company in good faith assumes that theperson who is dealing with him has the required authority to deal onbehalf of the company. For example if a person is dealing with a director



in a matter in which normally a director have power to act for the company,then that person can presume that latter has ‘ostensible authority‘ or‘apparent authority on that matter on behalf of the company.Person dealing with the company is not under obligation to inquire thatwhether the person to whom which he is dealing really has the authority.In such cases, it is not material whether the person concern should atleast have ‘ostensible authority‘ e.g. a purchase manager can be saidto have ostensible authority to issue purchase orders, but he cannot haveostensible authority to sign cheques on behalf of the company.

Notes :i) The director repaid his personal loan through the company’s ac-

count by using company cheques. The lender knew from the chequesthat the amount is from company account and not from his personalaccount. In this case the acts of director are ultra vires. A directorcannot be presumed to have ostensible authority to repay his per-sonal loan from company account. Hence, lender is liable to repaythe amount to the company.

ii) A director has no ostensible authority to institute a suit on behalf ofthe company. Such authority has to be specifically conferred by aresolution [Indian Commerce v. Swadharma Swarajya Sangha(19980].

iii) Filing of suit cannot be done with specific authority [BOC India v.Zinc Products (1997)].

iv) Suit filed by the secretary under general power of attorney, laterratified by Board is valid [Turner Marrison & Co, V. Hunger FordInvestment, 42 Comp Cas 512 (SC) 85 ITR 607, AIR 1972 SC1311].

Doctrine of Indoor Management

Meaning of Doctrine of Indoor Management

The doctrine of indoor management is an exception to the doctrine ofconstructive notice. This doctrine protects the outsiders against thecompany by entitling them to assume that the provision of the Articles ofAssociation have been duly complied with by the company in its internalworking. This doctrine is based on the principles of justice and publicconvenience. In case of Pacific Coast Mines Ltd. V. Arkuthnd, (1971)A.C. 607, the Court held “An outsider is presumed to know theconstitution of a company but not what may or may not have taken placewithin the doors that are closed to him”. Therefore, if the contract iswithin the powers of the company, then company will be bound to theoutsider and will not be allowed to escape liability by showing that therewas some irregularity in following procedure. This is known as theDoctrine of Indoor Management or Rule in Royal British Bank v. Turquand(1856) 6 E & B 327. The facts of this case are as follows:



The directors of a company were authorized by the articles to borrow onbond such sums of money, as authorized from time to time, by a resolutionof the company, in General Meeting. The directors borrowed moneyfrom Turquand and issued a bond to him. No resolution of the company,as was required to be passed according to the Articles of Associationwas passed. Decision, Turquand could sue the company on the bond, ashe was entitled to assume that the resolution of the company in GeneralMeeting authorizing the directors to borrow money on the basis of bondhad been passed.

Exceptions to the Doctrine of Indoor ManagementThe doctrine of indoor management is subject to the following limitations:Let us discuss these exceptions one by one.

1. Knowledge of IrregularityWhere the person dealing with the company has knowledge of anirregularity regarding the internal management of the company, he cannotclaim protection provided by this doctrine. The knowledge of irregularitymay be actual or constructive. In this connection the case of Howard v.Pokent Ivony Co. is relevant. The directors were empowered to borrowmoney up to $1,000 sanction of the shareholders was required for anamount in excess of this. The directors themselves lent to the companyan amount in excess of the borrowing powers without the consent of theshareholders. It was held that the directors had the notice of the internalirregularity and therefore the company was liable to them only for $1,000.

2. Suspicion of IrregularityWhere the person dealing with the company is put upon an enquiry, hecannot claim protection under this doctrine in the circumstances underwhich he would have discovered irregularity if he had made the properenquiries. In case of Underwood v. Bank of Liverpool (1924) I.K.B.775, the sole director paid a cheque drawn in company’s name, into hisown bank account. It was held that the bank was put upon inquiry andwas not entitled to rely upon the ostensible authority of the director.Likewise, a person dealing with the company may be put upon enquiryby reason of the unusual magnitude of the transactions having regard tothe position of the agent who is acting for the company. [ Houghton &Co. v. Nothard Howe & Wills, [(1917) I.K.B. 147, 149]

3. ForgeryA person dealing with the company cannot claim protection under thisdoctrine where forgery is involved. A company cannot be held liable

Exception to the Doctrine of Indoor Management

Knowledge of Irregularity

Suspicion of Irregularity

Forgery No knowledge of Articles

Acts beyond Apparent Authority



for forgeries committed by its officers. In case of Rubben v. GreatFingal Consolidated (1906) AC. 439, the secretary of the companyissued a share certificate in favour of Rubben by forging the signaturesof two directors under the seat of the company. ‘R‘ wanted to beregistered as a member but the company refused to register him as amember. ‘R‘ contended that since signatures were part of internalmanagement and he had no means to ascertain the genuineness of thesignatures, therefore he should be protected. The court held that theshare certificate is not binding on the company since the doctrine ofindoor management applies to irregularities and not illegalities (i.e.forgery).

4. No knowledge of ArticlesWhere the person dealing with the company has no knowledge of articles,he cannot claim protection under this doctrine since this doctrine is basedon the principle of estoppels and the person who did the act withoutconsulting the Articles, cannot be said to have relied upon the articles.The company’s articles contained a clause ‘the directors may delegateany of their powers other than the power to borrow and make calls tocommittee consisting of such members of their body as they think fit.One ‘T‘ an active director of the company entered into a contract with‘Rama Corporation‘ under which he took a cheque from ‘Rama Corp‘.In fact ‘Rama Corp. had not inspected the defendant’s article, thereforehe did not know of the existence to delegate authority.It was held that defendant company was not bound by the agreementsince the power was never delegated to ‘T‘.In the opinion of Justice Slade, J. ‘the knowledge of article is essentialbecause the rule of ‘Indoor management‘ is based upon the principle ofestoppels. He observed, “A person who at the time of entering into acontract with a company, has the knowledge of the company’s Articlesof Association, cannot rely on those articles as conferring ostensible orapparent authority of the agent of the company with whom he dealt.”

5. Acts beyond Apparent AuthorityWhere an officer of the company does something, which would notordinarily be within his powers, the person dealing with him must makeproper inquiries and satisfy himself as to the officer‘s authority. If he failsto make proper inquiry in spite of suspicious circumstances, he cannotclaim any protection under the doctrine of indoor management.In case of Anand Bihari Lal v. Dinshaw & Co., AIR (1942), theaccountant of the company transferred some property of the company tothe plaintiff. The transfer was held by the court to be void, because thepower to transfer property could not be considered within the apparentauthority of the accountant. The plaintiff were put upon an enquiry beforeentering into the transaction as they should have insisted on seeing thepower of attorney executed in favour of the accountant. Even a delegationclause in the Articles is not enough to validate the transaction unless theaccountant was in fact authorised.



Similarly in case of Kredit Bank Case v. Scchenkers, (1927), K.B. 826,where a branch manager of a bank drew and endorsed bills on behalf ofhis company without any authority, it was held that drawing of bills was notwithin the oridinary ambit of power of this branch manager and companywas not bound unless such authority was in fact delegated to him.

2.3.4. ProspectusProspectusMeaning of prospectus (section 2(36)]

According to Section 2(36) prospectus means “any document describedor issued a prospectus and includes any notice, circular, advertisementor other document inviting deposits from the public or inviting offers fromthe public for the subscription or purchase of any shares in, or debenturesof, a body corporate”. In simple words, the term ̀ Prospectus` means adocument which invites deposits from the public or invites offers from thepublic to subscribe or buy the shares or debentures of the company.Thus, a prospectus is not an offer in itself but an invitation to make anoffer. Application for making a deposit or for purchase of shares ordebentures constitutes an offer by the applicant to the company. It isonly on the acceptance of the offer, by the company, a binding contractcomes into existence.The prospectus must be in writing. An oral invitation to subscribe for asshares will not be considered prospectus. Television or film advertisementcannot be treated as prospectus.

Meaning of invitation to the public (section 67]

From the definition of prospectus, it is clear that a document can beregarded as a prospectus only when it invites offers from the public.According to Section 67(1) and (2), the term ‘public‘ includes any sectionof the public whether selected as members or debenture holder of thecompany concerned or as clients of the person issuing the prospectus orin any other manner. According to Section 67(3), no offer or invitationshall be treated as made to the public in either of the following twocircumstances:1. If it is not calculated to result in the shares/debentures becoming

available by persons other than those receiving the offer or invitation.2. If it can properly be regarded as being a domestic concern of the

persons making and receiving the offer or invitation.Thus, in determining whether or not an offer has been made to thepublic, the test is not who receives the offer or the invitation but whocan accept it. If the invitation can be accepted by any one whetherthe prospectus was addressed to him or not, then it should be regardedas invitation being made to the public. If the invitation can be acceptedonly by those to whom it has been made, then it should not be regardedas invitation being made to the public. Some of the decided casesare given below:



a. An offer by directors to a few of their friends, relatives, customersby sending them a copy of prospectus marked “not for publication”was not considered an offer to the public {Sherwell v. CombinesIncandescent Syndicate (1970) W.N.110]

b. An offer of shares to the kith and kin of a director is not an invitationto the public. [Rattan Singh v. Moga Transport, A.I.R.1959 Pun,196]

c. A single private communication does not amount to an invitation tothe public.

A managing director of a company sent to his co-director several copiesof a document marked “strictly private and confidential” and containingparticulars of a proposed issue of shares, accompanied by shareapplication forms. One of the copies was sent by the co-director to asolicitor, who is turn, gave it to a client who passed it on to a relation.The allottee (relative of the client of the solicitor) filed a suit forcompensation for the loss sustained by him by reason of an omission inthe document. It was held that the document did not amount to“prospectus issued to the public”, as it was marked “strictly private andconfidential” [Nash v. Lynde (1929) A.C.158]

When is an offer not treated as Private Issue? [Proviso to Section 67(3)]

If an offer is made to 50 or more persons, it will not be treated as privateissue, i.e. it will be treated as public issue. However this provison is notapplicable toa) Non Banking Finance Companies referred to in Section 45-I(f) at

the RBI Act , orb) Public Financial Institutions as defined in Section 4A of Companies

Act.Special Provisions for Non-banking Finance Companies (NBFC) andPublic Financial Institution (PFI) [section 67(3A)].

According to Section 67(3A), NBFC and PFI can make private offerover to 50 or more members, without issuing a prospectus as per guidelinesnotified by SEBI in consultation with RBI.

Meaning of the Term ‘Subscription or Purchase of Shares’

The term ‘subscription or ‘purchase of shares’ means taking or agreeingto take shares for cash. In case of Government stock and other SecuritiesInvestment Co. Ltd. V. Charistopper (1956), All E.R. 490, an offer wasmade by Company X to the members of Companies Y and Z to acquireall their shares in these companies in exchange for allotment of shares inthe company. It was held that the offer could not be said to have beenmade to the public on the following two grounds:a) It did not invite subscription for shares since subscription means

taking shares for cash (as it was an exchange offer).b) It could be accepted only by members to whom it was made.



Initial Offer of Securities to be in Dematerialized form in CertainCases (Section 68B]

Every listed public company, making initial public offer or any securityfor a sum of rupees ten crores or more, shall issue the same only indematerialized form by complying with the requisite provisions of theDepositories Act, 1996 and the regulations made there under.

Significance of prospectusProspectus is an important document because of the following reasons:1. Invitation - It serves as an invitation by the company to the public to

invest through making deposit or subscribing shares or debenture.2. Advertisement- It acts as a medium of advertisement since it informs

the public about its present operations and future prospects.3. Authentic Record -It serves as an authentic record of the terms and

conditions of the issue of deposits, shares or debentures4. Protection -It protects the interests of the investors who invest on

the faith of the prospectus since any misstatement in the prospectusattracts both civil and criminal liability for persons who authorize theissue of prospectus.

When prospectus is not required to be issued (section 56)The issue of a prospectus is not necessary in the following cases:1. Where shares are not offered to the public [Section 56(3)]2. Where a person is bonafide invited to enter into an underwriting

agreement. [Section 56(3)]3. When shares or debentures are offered to existing holders of shares

or debentures. [Section 56(5)]4. When the issue relates to shares or debentures uniform in all respects

with shares or debentures previously issued and dealt in or quoted ina recognized stock exchange. [Section 56(5)]

Requirements as to prospectus [section 55 to 61 and 66]The various requirements as to issue of prospectus are given below:1. Dating of Prospectus [Section 55]-Every prospectus issued by the

company must be dated. This date must be taken as to the date of thepublication of the prospectus unless contrary is proved.

2. Signature of Prospectus [Section 60(1)] -A copy of prospectus to bedelivered to the Registrar for registration must be signed by every personwho is named in the prospectus as a director or proposed director or hisagent authorized in writing.

3. Delivery of Prospectus [Section 60(1)] - A copy of prospectus must bedelivered to the Registrar for registration on or before the date ofpublication of prospectus.

4. Endorsement or Attachment- The copy of the prospectus must haveendorsed on or attached to it the following :



a. The written consent of the expert to the issue of the prospectus, if hisreport has been included therein and such expert must not be connectedor interested in the formation, promotion or management of the company.

b. A copy of every contract appointing or fixing the remuneration ofmanagerial personnel.

c. A copy of every material contract unless it is entered into in the ordinarycourse of business within 2 years before the date of issue of theprospectus.

d. When the persons making the reports relating to profits and losses,assets and liabilities, etc. have made adjustments to them, a signedstatement by them states the adjustments and the reasons for the same.

e. The written consent of the person if any named in the prospectus asthe auditor, adviser, attorney, solicitor, banker of the company to actin that capacity.

f. A duly signed report required by Part II of Schedule II relating toadjustments regarding the figures of any profits/losses, or assets orliabilities.

5. Matters to be stated on the Face of Prospectus [Section 60(2)]:Every prospectus must state on fact of it,

a) that a copy thereof has been delivered for registration, andb) the documents required to be endorsed on or attached to the copy

delivered for registration.6. Time limit within which Prospectus is to be Issued [Section 60(4)]

The prospectus must be issued within 90 days after the date on which acopy of the same is delivered to the Registrar. If it is issued after 90 daysafter its registration, it shall be deemed to be a prospectus a copy ofwhich has not been delivered to the Registrar.

Penalty for Issue of Prospectus without Registration [Section 60(5)]

The company and every person who is knowingly a party to the issue of prospectuswithout registration shall be punishable with fine up to Rs.50, 000.

Approval of prospectus by various agencies

Authorities who Approve the Prospectus The draft prospectus is requiredto get approved by the following authorities before it is filed with ROCfor registration.a) All the lead managers to issue (who must be authorized by SEBI);b) Each of the Stock Exchanges where the shares of the company are

listed and where the shares/debentures are required to be issued;Vetting by SEBI - The draft prospectus is required to get vetted bySEBI to ensure and adequacy of disclosures. However, vetting by SEBIdoes not amount to approval of prospectus. SEBI does not take anyresponsibility for the correctness of the statements made or opinionsexpressed in the prospectus.

Duty of ROC - The ROC must ensure that merchant bankers to theissue whether as lead manager, Co-managers, advisers or consultants



are only those authorized by SEBI. Each merchant banker has beengiven a code number; ROC must not register a prospectus if priorregistration, SEBI informs ROC that the contents of prospectus filed arein contravention of any law or statutory rules and regulations.

Who can exercise powers in relation to issue and transfer ofsecurities and non-payment of dividend etc. [section 55a]

The following table shows the authorities who can exercise powers inrelation to issue and transfer of securities and non-payment of dividendetc.

Powers of SEBI [section 55a]In the case of public company, which intends to list its securities on arecognized Stock Exchange, the provisions of the following sections shallbe administered by SEBI.1. Section 55 to 58-Matters relating to Prospectus.2. Section 59-Matters relating to Prospectus.3. Section 69-75—Allotment4. Section 76-77B-Commission and Discounts5. Section 78-79A-Issue of Shares at Premium/Discount6. Section 80-80A-Issue and Redemption of Preference Shares7. Section 81—Further Issue of Capital8. Section 82-84-Nature, Numbering and Certificate of Shares9. Section 108-109-110-112-Transfer of Shares & Debentures10. Section 113—Limitation of Time for issue of share11. Section 116, 177—Provisions relating to Debentures12. Section 118-122-Provisions relating to Debentures13. Section 206, 206A, 207—Distribution/Payment of Dividend (So far

as they relate to issue and transfer of Securities and non-payment ofDividend).

Type of Powers Authority who can exercise such powers

1. Powers relating to issue and transfer

of securities and non-payment of

dividend

a) In case of listed public

companies

b) In case of those public

companies which intend to get

their securities listed on any

recognized stock exchange in

India

c) In case of any other companies

a) Securities and Exchange Board of

India (SEBI)

b) Securities and Exchange Board of

India (SEBI)

c) Central Government

2. Powers relating to any other matter Appropriate authority as prescribed under

the Act



Shelf prospectus [section 60a]

What is Shelf Prospectus?

“Shelf Prospectus” means a prospectus issued by any financial institutionor bank for one or more issues of the securities or class of securitiesspecified in that prospectus.

Who is required to File a Shelf Prospectus [Section 60A (1)]

Any public financial institution, public sector bank or scheduled bankwhose main object is financing, shall file a shelf prospectus.

“Financing” means making loans to or subscribing in the capital of, aprivate industrial enterprise engaged in infrastructural financing or, suchother company as the Central Government may notify in this behalf;

Benefit of Filing Shelf Prospectus [Section 60A (2)]

A Company filing a shelf prospectus with the Registrar shall not be requiredto file prospectus afresh at every stage of offer of securities by it within aperiod of validity of such shelf prospectus.

Obligation of a Company Filing a Shelf Prospectus [Section 60A (3) and (4)]

A company filing a shelf prospectus shall be required to file an informationmemorandum on all material facts relating to new charges created, changesin financial positions as have occurred between the first offer of securities,previous offer of securities and the succeeding offer of securities withinsuch time as may be prescribed by the Central Government, prior tomaking of a second or subsequent offer of securities under the shelfprospectus.

An information memorandum shall be issued to the public along withshelf prospectus filed at the stage of the first offer of securities and suchprospectus shall be valid for a period of one year from the date of openingof the first issue of securities under that prospectus:

Provided that where an update of information memorandum is filedevery time an offer of securities is made, such memorandum togetherwith the shelf prospectus shall constitute the prospectus.

Information memorandum [section 60B]

When Information Memorandum may be circulated [Section 60B (1)]

A public company making an issue of securities may circulate informationmemorandum to the public prior to filing of prospectus.

What is Red-herring Prospectus?

“Red-herring Prospectus” means a prospectus which does not havecomplete particulars on the price of the securities offered and the quantumof securities offered.



Obligations of the Company Filing Information Memorandum1. A company inviting subscription by an information memorandum shall

be bound to file a prospectus prior to the opening of the subscriptionlists and the offer as a red-herring prospectus, at least three daysbefore the opening of the offer.

2. The information memorandum and red-herring prospectus shall carrysame obligations as are applicable in the case of prospectus.

3. Any variation between the information memorandum and the red-herring prospectus shall be highlighted as variations by the issuingcompany.

4. Every variation as made and highlighted in accordance with Sub-section (4) above shall be individually intimated to the persons invitedto subscribe to the issue of securities.

5. In the event of the issuing company or the underwriters to the issuehave invited or received advance subscription by way of cash orpost-dated cheques or stock-invest, the company or suchunderwriters or bankers to the issue shall not encash such subscriptionmoneys or post-dated cheques or stock-invest before the date ofopening of the issue, without having individually intimated theprospective subscribers of the variation and without having offeredan opportunity to such prospective subscribers to withdraw theirapplication and cancel their post-dated cheques or stock-invest orreturn of subscription paid.

6. The applicant or proposed subscriber shall exercise his right towithdraw from the application on any intimation of variation withinseven days from the date of such intimation and shall indicate suchwithdrawal in writing to the company and the underwriters.

7. Any application for subscription which is acted upon by the companyor underwriters or bankers to the issue without having given enoughinformation of any variations, or the particulars of withdrawing theoffer or opportunity for canceling the post-dated cheques or stock-invest or subscription moneys or cancellation of its application, as ifthe said application had never been made and the applicants areentitled to receive back their original application and interest at therate of fifteen per cent from the date of encashment till payment ofrealization.

8. Upon the closing of the offer of securities, a final prospectus statingtherein the total capital raised, whether by way of debt or share capitaland the closing price of the securities and any other details as werenot complete in the red-herring prospectus shall be filed in a case ofa listed public company with the Securities and Exchange and in anyother case with the Registrar only.

Meaning of deemed prospectus or prospectus by implicating or offerfor sale [section 64]

Where the company allots or agrees to allot any shares or debentures toissuing house and others with a view to such shares being offered topublic for sale, any document by which the offer for sale to public is



made shall be deemed to be a prospectus issued by a company and allprovisions applicable to prospectus shall apply with specifiedmodification. [Section 64(1)]

Presumption- It will be presumed that an allotment or an agreement toallot shares or debentures to the issuing houses was made with a view tooffer them to public if it is shown—-(a) that shares were offered to the public for sale within 6 months after

they were allotted or agreed to be allotted to issuing house, or(b) that the whole consideration in respect of shares/debentures had not

been received by the company [Section 64(2)]Additional Matters to be Stated- In addition to the matters requiredby Section 56, the deemed prospectus issued by an issuing house underSection 64(1) must state the following two matters:(a) The net amount of consideration received or to be received by the

company in respect of these shares or debentures.(b) The place and time at which the contract of allotment may be in-

spected.Application forms to be accompanied by abridged prospectus[section 56(3)]

1. Meaning form to be accompanied: Abridged prospectus means amemorandum containing such salient features of a prospectus as maybe prescribed. [Section 2(1)]

2. Application form to be accompanied: Every application form forshares in or debentures of a company must be accompanied by anabridged prospectus containing all the prescribed features except inthe following cases where the form of application is issued—a) to persons who is Bona fide invited to enter into an underwriting

agreement. [Section 56(3)(a)]b) in relation to shares or debentures which were not offered to

the public. [Section 56(3)(b)]c) to existing members or debenture holders of the company

whether with or without the right of renunciation. [Section56(5)(a)]

d) in relation to shares or debentures which are— i) Uniform in all respects with shares or debentures previously

issued, and ii) dealt in or quoted at a recognized stock exchange.[Section

56(5)(b)] The logic behind the first two exceptions is that thepublic are not involved, hence no needs of protection. In caseof last two exceptions, the offeree being already a member forthe shares being quoted one, must have enough information aboutthe company to protect him.

3. Form of abridged Prospectus: The Government has prescribed aForm 2A of abridged prospectus. The abridged prospectus and theshare application form must bear the same printed number.



4. Duty to Furnish Prospectus: A copy of prospectus must befurnished on a request being made by any person before the closingof the subscription list [Provision to Section 56(3)].

5. Penalty for Default [Section 56(3)]: If any person acts in thecontravention of the provisions of Section 56(3), he shall bepunishable with fine which may extend to Rs.50,000.

Expert’s consent [section 57-58-59]

Meaning of Expert [Section 59(2)]- The expression ‘expert’ includesan engineer, a valuer, an accountant and any other person whoseprofession gives authority to a statement made by him.

Expert to be Unconnected [Section 57]- The statement of an expertmust not be included in the prospectus if he is in any way connected withthe formation or promotion or management of the company. In otherwords, the person must be independent to function as an expert.

Conditions for Issue of Prospectus Containing Expert’s Statement-[Section 58]

The statement of an expert must not be included in the prospectus unless—a) The expert has given his written consent to the issue of the prospectus.b) The expert has not withdrawn such consent before the delivery of a

copy of the prospectus for registration.c) A statement that he has given and has not withdrawn his consent

appears in the prospectus.Penalty for Default [Section 59(2)] - Every person who is knowinglya party to the issue of prospectus in contravention of Section 57 or Section58, shall be punishable with fine up to Rs.50,000.

Terms of Contracts Mentioned in Prospectus not to be Varied[Section 61]-A company must not vary the terms of contract mentionedin the prospectus or statement in lieu of prospectus, except with theapproval of the members in general meeting.

Legal Significance [Section 56(2)]- Any condition in the prospectuswhich requires or binds an applicant for shares or debentures to waivecompliance with any of the requirements relating to statutory matters andreports, shall be void. Similarly, the condition which has the effect ofaffecting him with the notice of any contract, document or a matter notspecifically referred to in the prospectus, shall be void.

Expert’s Right to be Indemnified [Section 62(3)]-Where an experthas given his consent to the inclusion of his report in the prospectus andhas withdrawn his consent before the issue of the prospectus and in spiteof this the prospectus has been issued, the directors of the company andevery other person who authorized the issue of the prospectus shall beliable to indemnify the expert against all damages, costs and expenseswhich he may have incurred on account of his being associated with theissue of the prospectus as an expert.



Effect of accepting application without complying with therequirements of section 56 -In case the company accepts the application for shares or debentureswithout complying with the requirements of Section 56, the applicant canneither ask for the rescission of the contract nor the rectification of theregister. But he can sue the person responsible for the issue of theprospectus for any damages which he may have suffered [South of EnglandNatural Gas and Petroleum Co., (1911) Ch.573]Matters to be stated in the prospectus [section 56]Every prospectus must state the matters specified in Part I of Schedule IIand set out the reports specified in Part II and the said Part I and Part IIhave effect subject to provisions contained in Part III of that Schedule.Keeping in view the requirements of Schedule II of The Companies Act,1956 and the SEBI guidelines for disclosure and investor protection, theprospectus to be issued by companies should provide for the followingmatters:

1) General Informationa) Name and address of the registered office of the issuer company;b) Details of letter of intent/industrial license obtained and declaration

of the Central Government ;c) Name of stock exchanges where listed (if applicable) and where

listing applications have been made for the issue;d) Provision of Section 68A (1) of The Companies Act, 1956 regarding

fictitious applications;e) Minimum Subscription Clause:(i) For Non-underwritten Public Issues:

“If the company does not receive the minimum subscription of 90%of the issued amount on the date of closure of the issue, or if thesubscription level falls below 90% after the closure of issue onaccount of cheques having being returned unpaid or withdrawal ofapplications, the company shall forthwith refund the entire subscriptionamount received. If there is a delay beyond 8 days after the companybecomes liable to pay the amount, the company shall pay interest asper Section 73 of the Companies Act 1956’.

(ii) For Underwritten Public Issues:“If the company does not receive the minimum subscription of 90% ofthe net offer to public including development of Underwriters within 60days from the date of closure of the issue, the company shall forthwithrefund the entire subscription amount received. If there is a delay beyond8 days after the company becomes liable to pay the amount, the companyshall pay interest prescribed under Section 73 of the Companies Act1956”.

For Composite Issues:

The lead Merchant Banker shall ensure that the requirement of “minimumsubscription” is satisfied both jointly and severally, i.e., independentlyfor both rights and public issues.



If the company does not receive the minimum subscription in either of theissues the company shall refund the entire subscription received.i) Offer of sale- The requirement of minimum subscription shall not be

applicable to offer for sale.ii) Public issues by infrastructure companies-The requirement of minimum

subscription shall not be applicable to an eligible infrastructurecompany, provided disclosures regarding the alternate source offunding are made in the offer documents.

iii) declaration about the issue of allotment letters or refunds within aperiod of 10 weeks and interest in case of any delay in refund at theprescribed rate under Section 73(2)/73(2A) of the Companies Act,shall be mentioned.

iv) Dates of opening, closing and earliest closing of the issue;v) Names and addresses of lead managers, co-managers, trustees (if

applicable), legal advisers to the company, auditors, bankers to theissue, brokers to the issue and the secretary.

vi) Whether or not credit rating from any other recognized agency hasbeen obtained for the proposed issue of debt (including convertibleinstruments) should be mentioned. If rating is obtained, it should beindicated, preferably with implications of the rating symbol. In termsof SEBI guidelines, rating of a credit agency is mandatory fordebentures with maturity period of more than 18 months.

vii) Underwriting arrangements made for the issue, names of underwriters,amount underwritten and declaration by Board of Directors and thelead managers that in their opinion the resources of the underwritersare sufficient to discharge their underwriting obligations.

viii) Compliance Officer:a. The name, address, telephone number, fax and E-mail number and

address of Compliance Officerb. The investor’s attention shall also be invited to contact the compliance

officer in case of any pre-issue/post-issue related problems such asnon-receipt of letters of allotment/share certificates/refund orders/cancelled stock invests etc.

2. Capital Structure of the company and Issue Details(a) Authorized, issued, subscribed and paid-up capital of the company.(b) Size of the issue with break up of reservation for preferential allotment

to promoters, shareholders of group/associate companies, financialinstitutions, mutual funds, NRI, permanent employees, etc. The lock-in-period in respect of shares/debentures to be allotted to promotersand shareholders of group and associate companies/employees/financial institutions should be mentioned. The maximum number ofshares/debentures that can be allotted to each employee and thenumber of permanent employees in the company should be mentioned.

(c) Paid-up capital after the present issue and after conversion ofdebentures, if applicable.

(d) Securities Premium Account (before and after the issue)3. Terms of the Present Issue

Terms of payments



(a) The caption “Interest in Case of Delay on Despatch of AllotmentLetters/Refund Orders in Case of Public Issues” shall appear andshall contain the following statement:“The company agrees that as far as possible allotment of securitiesoffered to the public shall be made within 30 days of the closure ofpublic issue. The company further agrees that it shall pay interest @15% per annum if the allotment letters/refund orders have not beendespatched to the applicants within 30 days from the date of theclosure of issue in fulfillment of underwriting obligations to meet theminimum subscription requirement, shall not be entitled for the saidinterest.”

b) Arrangements for disposal of odd lotsc) Rights of the instrument holdersd) How to apply-availability of forms, prospectus and mode of payment.e) Disclosures about Stock invest:(i) The disclosures regarding manner of obtaining and mode of drawing

stock invests, non-utilisation of stock invests by third party, timeperiod for utilization of stock invests by the purchasers and disposalof applications accompanied by stock invest as specified by the RBIshall be incorporated at the appropriate places in the offer document.

(ii) Name of the bank through which the stock invests shall be realized,shall be given in the prospectus.

(iii) The following paragraph shall be incorporated at the appropriateplaces in the prospects:“Registrars to the Issue have been authorized by the company (throughresolution of the Board passed on)… (date)… to sign on behalf ofthe company to realize the proceeds of the stock invest from theissuing bank or to affix non-allotment advice on the instrument orcancel the stock invest of the non-allottees or partially successfulallottees who have enclosed more than one stock invest. Suchcancelled stock invest shall be sent back by the Registrars directlyto the investors.”

(f) Despatch of Refund OrdersThe following clause shall be incorporated in the prospectus:

“The company shall ensure despatch of refund orders of value over Rs.1,500 and share/debenture certificates by Registered Post only. Adequatefunds for the purpose shall be made available to the Registrars by theissuer company.”Undertaking by the Issuer Company.Utilisation of Issue ProceedsAny special tax benefits for company and its shareholders.

4. Particulars of Issue(a) Objects(b) Project cost(c) Means of financing(d) Appraisal(e) Deployment of funds in the project



5. Details about the Company Management and Project(a) History, main objects and present business of the company.(b) Subsidiaries of the company.(c) Promoters and their background.(d) Key Managerial Personnel.(e) Names, addresses and occupation of manager, managing director

and other directors including nominee directors, whole-timedirectors and their directorships in other companies.

(f) Cost of the project, means of financing and location of the project(g) Plant and machinery for the project, technology adopted and

process of manufacture.(h) Collaboration, performance guarantee or assistance in marketing by

the collaborators.(i) Infrastructure facilities for raw materials and utilities like water,

electricity, etc.(j) Schedule of implementation of the project, with separate details of

land acquisition, civil work, installation of plant and machinery andthe progress till the date of the prospectus.

(k) Expected date of trial production and commercial production.(l) Nature of the products, consumer/industrial and end users and

approach to marketing and proposed marketing set up.(m) Export possibilities and export obligation.(n) Expected capacity utilization during the first 3 years from the date of

commencement of production for each of the major product groups.(o) Expected year when the company would be able to earn cash profits

and net profits and the expected cash profits and net profits for thenext 3 years.

(p) High/Low equity prices of the shares/debentures of the company foreach of the last 3 years and monthly high/low prices for the last 6 months(applicable to existing listed companies).

6. Management discussion and Analysis of financial conditions andresult of the operations as reflected in the financial statements.

7. Financial information of Group Companies.8. Information about Companies Under the Same Management Covered u/s 370(1)(B)

In respect of any issue made by the company and other listed companiesunder the same management, the following details are to be incorporated.1. Name of the Company;2. Year of issue;3. Type of issue (Public/Private/Composite);4. Amount of Issue;5. Date of Closure of issue;6. Date of completion of delivery of share/debenture certificates/letters

of allotment; and 7. Date of completion of the project, where the object of the issue was

for financing a project;8. Rate of dividend paid;



9. Promise vis-à-vis Performance;10. The following information shall be disclosed for all issues

irrespective of the issue price:a. Earnings per share, i.e. EPS pre-issue for three years (as adjusted

for changes in capital);b. P/E pre-issue and comparison thereof with industry P/E where

available (giving the source from which industry P/E has been taken);c. Average return on net worth in the last three years;d. Minimum return on increased net worth required to maintain pre-

issue EPS;e. Net Asset value per share based on last balance sheet;f. Net Asset Value per share after issue and comparison thereof with

the issue price; Provided that the projected earnings shall not beused as a justification for the issue price in the offer document:Provided further that the accounting ratios disclosed in the prospectus insupport of basis of the issue price shall be calculated after giving effectto the consequent increase in capital on account of compulsoryconversions outstanding, as well as on the assumption that the optionsoutstanding, if any, to subscribe for additional capital will be exercised;

g. An illustrative format of disclosure in respect of basis for issue priceis given in Schedule XV;

i) The issuer company and the lead merchant banker shall provide theaccounting ratios as mentioned above to justify the basis of issue price:Provided that, the lead merchant banker shall not proceed with theissue in case the accounting ratios mentioned above, do not justifythe issue price.

ii) In case of book issues, the offer document shall state that the finalprice has been determined on the basis of the demand from theinvestors.

11. Outstanding Litigation Pertaining to:i) Matters likely to affect operation and finances of the company,

including disputed tax liabilities; andii) Criminal prosecution launched against the company and directors

for alleged offences under the following statutes:The Indian Stamp Act, 1899The Central Excises Act, 1944The Imports and Export (Control) Act, 1951The Industries (Development and Regulation) Act, 1951The Prevention of Food Adulteration Act, 1954The Essential Commodities Act, 1955The Companies Act, 1956The Wealth-tax Act, 1957The Income-tax Act, 1961The Customs act, 1962The Monopolies and Restrictive Trade Practices Act, 1969The Foreign Exchange Management Act, 1999.

12. Risk Factors and Management Perception as the same, if any,13. Disclosure on Investor Grievances and Redressal System,14. General Information



a) Consent of directors, auditors, solicitors/advocates, managers to theissue, Registrar to the Issue, Bankers to the company, bankers tothe issue and experts.

b) Expert opinion obtained, if any.c) Change, if any, in directors and auditors during the last three years,

and reasons thereof.d) Authority for the issue and details of resolution passed for the issue.e) Procedure and time of schedule for allotment and issue of certificate.f) Names and addresses of the company secretary, legal adviser, lead

managers, co-managers, auditors, bankers to the company, bankersto the issue and brokers to the issue.

15. Financial Information.A report from the auditors on:a) Profits and Losses- of the company (where there is no subsidiary

company) and the combined profits and losses of the subsidiaries orindividual profits and losses of each subsidiary for each of the fivefinancial years preceding the issue of prospectus (where there aresubsidiaries);

b) Assets and Liabilities- of the company (where there is no subsidiarycompany) at the last date to which the accounts are made up and thecombined assets and liabilities of the subsidiaries or individually withthe assets and liabilities of each subsidiary (where there aresubsidiaries); and

c) Rates osf the Dividends- paid by the company in respect of eachclass of shares for each of the five financial years preceding the issueof prospectus.

If no accounts have been made up in respect of any part of the period offive years ending three months before the date of issue of prospectus, thereport should contain a statement of the fact. Further, a statement ofaccounts of the company should be made in respect of a part of the saidperiod up to a date not earlier than six months of the date of issue ofprospectus and the assets and liabilities position as at the end of thatperiod. There should be a certificate from the auditors that such accountshave been examined and found correct by them.

The report should distinguish items of a non-recurring nature and indicatethe nature of provisions or adjustments made or are yet to be made.16. Statutory and other informationa) Minimum subscription, as laid down in the SEBI guidelines.b) Expenses of the issue giving separately fees payable to advisers,

registrars to the issue, managers to the issue and trustees for debentureholders.

c) Underwriting commission and brokerage.d) Previous issue for cash or consideration otherwise than for cashe) Details of public or right issue during the last five years. i) Date of allotment and refund; ii) Date of listing on the stock exchange; and iii) Amount of premium or discount, if applicable.f) Details of premium received in respect of any issue of shares made

in the two years preceding the date of issue of prospectus or to be



made stating the proposed date of issue, the reasons for differentiationof premium for different categories, if applicable and the disposal ofpremium received or to be received.

g) Commission or brokerage paid on previous issue.h) Debentures and redeemable preference shares and other instruments

outstanding on the date of prospectus and the terms of their issue.i) Option to subscribe. The details of options to subscribe for securities

to be dealt with in a depository.j) Particulars of property purchased or proposed to be purchased from

vendors to be paid for wholly or partly out of the proceeds of theissue and the interest of the promoters or directors in any transactionrelating to the property within the last two years.

k) Details of directors, proposed directors, whole-time directors, theirremuneration, appointment and remuneration of the managingdirector(s).

l) Interests of directors, their borrowing powers and qualification shares.m) Any amount or benefit paid or given within the two preceding years

or intended to be paid or given to any promoter or officers andconsideration for the payment or giving of the benefit.

n) The dates of, parties to, and general nature of -i) every contract of appointment or remuneration of a managing

director or manager; andii) every other material contract, not being a contract entered into in the

ordinary course of business of the company or entered into morethan two years prior to the date of prospectus:

Reasonable time and place for inspection of the contract should beprovided for.o) Full particulars of the nature and extent of interest of every director

or promoter.i) In the promotion of the company; or in any property acquired by the

company within two years of the date of the prospectus or proposedto be acquired by it.

p) Rights of members regarding voting, dividend, lien on shares, andmodification of rights and forfeiture of shares/debentures.

q) Restriction on transfer and transmission of shares/debentures and onconsolidation /splitting.

r) Revaluation of assets, if any, during the last 5 years.s) Material Contracts and Inspection of Documentst) Particulars of default in meeting statutory dues, institutional dues,

dues to holders of instruments like debentures, fixed deposits andarrears of cumulative preference shares, pertaining to the companyand/or other companies promoted by the same promoters, whichare listed on stock exchanges.

u) Any material development after the date of the last balance sheetand its impact on the performance and prospects of the company.

Misleading prospectusMeaning of Misleading Prospectus (Section 65)

The Prospectus may be described as ‘misleading prospectus if it containsuntrue statement. The prospectus is said to have contained untruestatement in the following circumstances:



a) Where it contains a statement which is misleading in the form andcontext in which it is included and

b) Where it omits any matter which is calculated to mislead.Thus, the term ‘untrue statement’ has been used in a broader sense. Itcovers not only false statement, but also concealment of materialstatements.

Rule of Golden Legacy

Justice Kindersley, V.C. in New Brunswick and Canada Rly. and LandCo. v. Muggeridge [(1860), 3 Lt. 651: 30 LJ Ch.242] observed: “Thosewho issue a prospectus hold out to the public that great advantages willaccrue to persons who will take shares. Public is invited to take shareson the faith of the representation contained in the prospectus. Therefore,they are bound to state everything honestly and faithfully. They must notonly abstain from stating something as a fact when it is not actually so butalso must not omit a fact the existence of which might in any degree affectthe nature or quality of the privileges and advantages which the prospectusholds out as an inducement to take shares.”The above stated rule is popularly knows as ‘Rule of Golden Legacy’.Remedies against the companya) Rescission of the ContractWhere a prospectus contains misstatements (whether made innocentlyor fraudulently), the contract to subscribe for shares become voidable atthe option of the aggrieved subscriber. In other words, subscriber to theshares can file a suit against the company to rescind the contract underthe general law of contract. The right of rescission of contract can beexercised subject to the following conditions:i) The prospectus must have been issued by the company or by someone

authorized by the company in this behalf.ii) There must be misrepresentation or omission of a fact. In other words,

a mere opinion, a statement of expression or intention does not amountto misrepresentation.

iii) The misrepresentation must of fact and not of law.iv) The misrepresentation or omission of a fact must be misleading.In case of Arnison v. Smith,(1889) 40 Ch. D.569, A statement in theprospectus did not contain any untrue statement. One of the statementsdisclosed the rates of dividends paid for a number of years. This was afactual statement, which was true. But the dividends had not been paidout of trading profits but out of realised capital profits. This fact was notdisclosed in the prospectus. The prospectus was held to be misleadingnot because of what is stated but because what it concealed or omitted.

Further, if a statement was true when it was made but subsequently becameuntrue when shares were allotted, the contract to subscribe for sharescan be rescinded. [Re Scottish Petroleum Co., (1823) 23 Ch. D.413]



v) The misrepresentation must be material to the contract of takingshares. A fact can be considered as material if it is likely to influencethe judgement of a prospective investor in deciding whether he shouldpurchase shares in the company or refrain from doing so. In thevarious, judicial decisions, the misrepresentation were held to bematerial facts.

a) A statement that two leading businessmen of repute have agreed tobecome directors of the company when they had only expressedtheir willingness to help the company. [Re Metropolitan CoalConsumer‘s Association, (1892) 3 Ch. 2]

b) A statement that the proceeds of the issue of debentures were to beutilized for improving and developing the business whereas the realobject of issuing debentures was to pay-off past liabilities. [Edingtonv. Fitzmaurice, (1885) 29 Ch. D.459]

c) A statement that directors and their friends have subscribed a largeportion of the capital of the company and that they now offer theremaining shares to the public whereas the fact was that they hadonly subscribed ten shares each. [Handerson v. Lacon, (1867) 5Eq. 249]

vi) The aggrieved party must have relied upon the prospectus whileapplying for shares.A purchaser of shares in the open market has no remedy against thecompany or any other persons even if he might bought the shares onthe faith of misrepresentation in the prospectus. [Peek v. Gurney,(1870 L.R. 6 H.L. 377)]

vii) The aggrieved party must exercise the right to rescind the contractwithin a reasonable time of becoming aware of a mis-statement inthe prospectus and before the company goes into liquidation.[Shiromani Sugar Mills Ltd. v. Debi Prasad, AIR (1950) All 508]

viii) The aggrieved party must exercise the right to rescind the contractbefore he affirms his contract for purchase of shares. In the followingcases, it has been held that the subscriber has affirmed the contract:

a) Were he has received divided or paid cash [Scholey v. CentralRailway, (1868) L.R. 9 Eq. 266],

b) where he attends and votes at general meetings [Shrpley v. LouthEtc. Co. (1876) 2 Ch. D. 663],

c) where he executes a transfer of his shares [Crowley‘s case (1869)L.R. 4 Ch. App. 332].

It may be noted that a transfer of part of shares before discovery ofmisrepresentation does not affect his right as to the rest. [Re MountMorgan Etc. Ltd. (1887) 56 L.T. 622]

b. Damages for Fraud (Deceit)

The subscriber can recover damages for any loss which he may havesuffered if he was induced to take shares based on a fraudulentmisrepresentation of material facts. Lord Herschall in Derry v. Peek,(1889) 14 A.C. 337, said: “To support an action for deceit, fraud mustbe proved and nothing less than fraud will do. Fraud is proved where it



is shows that a false statement has been made (a) knowingly, or (b) withoutrelief in its truth, or (c) recklessly, carelessly whether it is false or true”.

The right to claim damages may be exercised subject to the fulfillment ofthe following conditions:i. There must be fraudulent misrepresentation,ii. The fraudulent misrepresentation must relate to facts which are

material to the contract of purchasing shares,iii. The aggrieved party must have actually relied on the misstatements,iv. The aggrieved party must have taken shares directly from the

company, andv. The aggrieved party must have suffered some loss.It may be noted that the right to claim damages may be exercised againstthe company after rescinding the contract of allotment and against thepersons who authorized the issue of prospectus without rescinding thecontract of allotment. The House of Lords in Houldsworth v. City GlargowBank, (1990) 5 A.C. 317, held that if a shareholder wants to sue thecompany for damages, he must first rescind the contract. He can not suethe company for damages while he remains a shareholder.

Remedies against directors and promoters

(a) Damages for Misrepresentation Under Section 62 (1)

The following persons are liable to compensate all those who subscribefor shares on the faith of the prospectus for any loss sustained by themby reason of any untrue and misleading statement included in theprospectus.i) Every person who is director of the company at the time of the issue

of the prospectus.ii) Every person who has authorised himself to be named and is named

in the prospectus as a director or as one having agreed to become adirector, either immediately, or after an interval of time.

iii) Every promoter of the company.iv) Every person who has autho rised the issue of t he

prospectus.Notes:

(a) The action for damages must be taken within 3 years from the dateof the allotment of the shares.

(b) A shareholder, who bought shares from existing shareholders or fromthe share market, cannot bring an action for deceit against directors.[Peek v. Gurney]

(c) The subscribers may institute a suit for damages against thoseresponsible for the issue of the prospectus, inspite of the fact that thecontract to purchase shares has been repudiated. This is an actionfor deceit under the general law. [Derry v. Peek, (1889) 14 A.C.337]

(d) The action for damages can be taken even if the remedy by way ofrescission (as against the company) has been last through negligenceor even if the company goes into liquation.



Defences available to Directors etc. (Section 62(2)]

No person shall be liable under this section, if he proves;i) that, if he is having consent to become a director, had withdrawn his

consent to become director before the issue of prospectus and thatit was issued without his authority; or

ii) that the prospectus was issued without his knowledge or consentand that on becoming aware of its issue, he immediately gavereasonable public notice to that effect; or

iii) that after the issue of the prospectus and before, allotment, he, onbecoming aware of any untrue statement in it, had withdrawn hisconsent to the prospectus and gave reasonable public notice of thewithdrawal and his reasons for doing so; or

iv) that he had reasonable ground to believe and until allotment didbelieve that the statement was true. This statement pertains to everyuntrue statement not purporting to be made on the authority of expertor of a public official document or statement or

v) that the statement was a correct and fair representation of thestatement made by an expert and he had reasonable ground to believeand until issue of prospectus did believe that the person making thestatement was competent to make it and that the expert had givenhis consent and had not withdrawn that consent before delivery of acopy of the prospectus for registration or to the defendant’sknowledge, before allotment; or

vi) that if the statement is a copy of or extract from an official documentor his made by an official person, it was a correct and fair copy ofthe document or a fair representation of the statement.

Remedies against expert (section 62(3)]

The form ‘expert’ includes an engineer, a valuer, an accountant and anyother person whose profession gives authority to a statement made byhim (section 59(2)].

An expert is liable to compensate only in respect of his own untruestatement, wrong report or valuation made by him and included in theprospectus.

a) Defences Available to an ExpertAn expert shall not be liable if he proves-i) having given his consent, he withdrew it in writing before delivery of

a copy of the prospectus for registration with the Registrar ofCompanies; or

ii) after delivery of prospectus for registration with the Registrar ofCompanies but before allotment, he on becoming aware of the untruestatement, withdrew his consent in writing, and gave reasonable publicnotice of the withdrawal and his reasons therefore; or

iii) he was competent to make the statement, and believed on reasonablegrounds that it was true.



Measure of Damages- The damages is the loss suffered by reason of thefalse statement, that is to say, the difference between the value which theshares would have had if the company had processed the advantagesstated in the prospectus (but not exceeding the price paid) and the truevalue of the shares at the time of allotment in the circumstances which infact existed. [McConnell v. Wright, (1903) 1 Ch. 546]

Right of Indemnity- Every such director or expert who has escaped liabilityon the above grounds is entitled to be indemnified by other directors orexperts who continue to be liable against all damages, costs and expenseswhich he may incur in defending himself against any legal proceedingsbrought against him. (Section 62(4)]

Right of Contribution- If any subscriber realizes any damages from anydirector or officer of the company for untrue statement in the prospectus,the directors and officers who authorized the issue of untrue prospectusshall contribute and pay their share of damages to the director who hasmade the payment. [Gerson v. Simpson, (1903) 2 K.B. 197]

b) Damages for Omission u/s 56

In case of any omission of required matter in the prospectus, the subscribercan sue the persons responsible for the issue of prospectus ifhe can prove –a) that he would not have purchased shares if there had been no such

omissions, andb) that he has actually suffered a loss.Notes:i) Omission does not entitle the subscriber to rescind the contract unless

it amounts to fraud or misrepresentation. [Shiromani Sugar Millsv.Debi Prasad, AIR (1950) All. 508]

ii) Subscriber can sue even if omission does not make the prospectusmisleading.

1) Defences Available (Section 56(4)]

A director or any other person sued under this section shall not be liable, if –a) he proves that he had no knowledge of any matter not disclosed; orb) he proves that the non-compliance or contravention arose from an

honest mistake of fact; orc) in the opinion of the court, the matter not disclosed was immaterial; ord) that the non-compliance or contravention ought to be excused with

regard to all the circumstances of the case.Criminal Liability for Misstatement (Section 63)

Every person who had authorized the issue of prospectus containing anuntrue statement shall be punishable with imprisonment for a term up to 2years or with fine up to Rs.5,000 or with both unless he proves either –



a) that the statement was immaterial; orb) that he had reasonable ground to believe and did up to the time issue

of prospectus that the statement was true.Penalty for fraudulently inducing persons to invest money (section 68)

Any person who, by making (either knowingly or recklessly) any false,deceptive or misleading statement, promise or forecast or by any dishonestconcealment of material facts, induces or attempts to induce another personto enter into, or to offer to enter into –a) any agreement for, the acquisition, disposal, subscribing for, or

underwriting shares or debentures, orb) any agreement for the purpose of securing any profit to any of the

parties from the yield of shares or debentures, or from fluctuations inthe value of shares or debentures;

shall be punishable with imprisonment for a term up to 5 years, or withfine up to Rs.1,00,000 or with both.

Personation for acquisition etc., of shares. (Section 68a (1)

Any person who –a) makes an application to a company for acquiring, or subscribing for,

any shares therein, in a fictitious name orb) otherwise induces a company to allot, or register any transfer of,

shares therein to him, or any other person in a fictitious name, shallbe punishable with imprisonment for a term up to 5 years.

Disclosure in Prospectus (Section 68A (2)]

The provisions of Section 68A (1) must be prominently reproduced inevery prospectus issued by the company and in every form of applicationfor shares which is issued by the company to any person.

Issue of securities only in demat form (Section 68B]

Initial Public officer of Securities of at least Rs.10 crore must be only inDematerialized form, by complying with the requisite provisions of theDepositories Act, 1996 and regulations made there under. According toSEBI Guidelines a company can make an issue of securities to the publicor on right basis only in demat form, while this new section implies thatonly with regard to initial offer it should be in demat form, whereas forany subsequent issue it could be in physical form.

Statement in lieu of prospectus (section 70)

When required- When the public company having share capital decidesto raise the capital privately (say from relatives and friends) without invitingoffers from the public. It is required to issue a statement in lieu ofprospectus.



Contents- The statement in lieu of prospectus shall contain the particularsand reports as set out in Schedule III to the Companies Act.

Signature-The statement to be delivered to the Registrar for registrationmust be signed by every person who is named in the statement as directoror proposed director or his agent authorized in writing.

Delivery- The statement must be delivered to the Registrar for registrationat least 3 days before the allotment of the shares or debentures.

Penalty for Default- The Company and every director of the company,who willfully authorizes or permits contravention, shall be punishable withfine up to Rs.10, 000.

Liability for Misstatement- The liability for any misstatement is aStatement in lieu of prospectus is the same as in case of prospectus.

Is a Private Company Required to Issue Prospectus or Statement inLieu of Prospectus?

A private company is neither required to issue a prospectus nor a statementin lieu of prospectus since it cannot invite public to subscribe for its sharesor debentures as per restrictions of Section 3(1)(iii).

Public deposits

Meaning of Public

In general the term ‘Public’ includes a section of the public also. Butsection 58A (1) makes a distinction between the public and the membersof the company. Present and ex-employees of the company fall in thecategory of public.

Meaning of Deposit

‘Deposit means any deposit of money including any amount borrowedby a company but would not include:a) Amount received from the Central Government or State Government

or Local Authority or a Foreign Government or any foreign citizen,authority or a foreign person.

b) A loan received from any banking company.c) A loan received from IFCI, UTI, IDBI, LIC or ICICI or any other

financial institutions.d) Amount received by a company from any other company provided

the borrower company has not entered the field of commercialproduction and has not accepted any deposits from the public.

e) Any amount of security deposit received from an employee of thecompany.

f) Amount received as security or as an advance from any purchasingagent, selling agent during the course of business of the company.



g) Amount received as subscriptions to any shares, bonds ordebentures pending allotment including the amount received as callsin advance on shares.

h) Amount received in trust or any amount in transit.i) Amount received by a public company from its directors or by a

private company or a deemed public company from its shareholdersor directors.

j) Amount raised by issue of bonds or secured debentures.k) Amount brought by promoters as unsecured loans subject to certain

conditions.Power of Central Government to Frame Rules [Section 58(1)]-TheCentral Government is empowered to prescribe in consultation withReserve Bank of India the limit up to which, the manner in which and theconditions subject to which the deposits may be invited from the publicor from its members.

Conditions subject to which Deposits may be Invited [Section 58A (2)]

No company shall itself or through any other person invite any depositunless:a) Such deposit is invited as per the rules of section 58(1)b) An advertisement including a statement showing the financial position

of the company has been issued by the company in such form andmanner as may be prescribed.

c) The company is not in default in the repayment of any deposit orpart thereof and any interest thereupon in accordance with the termsand conditions of such deposit.

Obligation to Repay Unrenewed Deposits [Section 58A (3)]

Every deposit accepted by a company after Sept, 1, 1989, must be repaidin accordance with terms and conditions of deposit unless renewed asper rules.

Obligation to Repay Deposits Accepted in Violation of Rules[Section 58A (4)]

Where any deposit is accepted in contravention of the rules it must berefunded within 30 days from the date of acceptance of such deposit orwithin such further extended time not exceeding 30 days as the CentralGovernment may allow on sufficient cause shown by the company (Section58A(4)].

Penalty for Default in Repayment of Deposits Accepted in Violationof Rules (Section 58A (5)]

If the company fails to make repayment of deposit within the time allowedthe company shall be punishable with fine which shall be at least 200% ofthe amount of deposit not repaid. Every officer in default shall bepunishable with imprisonment up to 5 years and fine.



If fine realized then the court shall pay an amount equal to the amount ofdeposit not repaid to the depositor and with that the company’s liabilityto that extent shall stand discharged.

Penalty for Contravention Relating to the Acceptance of Deposits[Section 58A (6)

1. The company shall be punishable with find which shall be at least anamount equal to the amount of the deposit so accepted.

2. Its every officer in default shall be punishable with imprisonment forterm up to 5 years and fine.

Penalty for Contravention Relating to the Invitation of any Deposit[Section 58A (6)]

1. The company shall be punishable with fine up to 1, 00,000 but fiveshall be at least Rs.5, 000.

2. Its every officer in default shall be punishable with imprisonment fora term up to 5 years and fine.

Companies to which Provisions of Section 58A do not Apply[Section 58A (7)]

1. A banking company2. Such other company which the Central Government may after

consultation with Reserve Bank of India specify in this behalf. TheCentral Government has exempted the companies which are smallscale industrial units and fulfill the following conditions:

a) The paid up capital of the company does not exceed Rs.25 lakh.b) Deposits are not accepted from more than 100 persons.c) the deposits do not exceed Rs. 20 lakh or the amount of its paid up

capital, which ever is less, andd) there is no invitation to public for deposits (vide Notification GSR

No.73 1E, Dt. 12.2.96).i) a “Small Scale Industrial Unit” means any industrial undertaking

registered with the Directorate of Industries or Small Scale Industries,as the case may be, of the State Government and in respect of whichthe investment in plant and machinery is not in excess of 3 crores ofrupees in value;

ii) “Deposit” has the same meaning as in Clause (b) of Rule 2 of theCompanies (Acceptance of Deposits) Rules, 1975.

Companies to which Provisions except Relating to Advertisementof Section 58A do not Apply (Section 58A (8)]

The Central Government has exempted the class of companies whichsatisfy the eligibility criteria laid down by the Reserve Bank of India inthe Non-Banking Companies (Acceptance of Deposits throughcommercial paper) Directives, 1989 subject to the following conditions:i) The companies shall comply with the terms and conditions stipulated

from time to time by the RBI.ii) The companies shall, in their annual accounts disclose the maximum



amount raised at any time during a financial year and the amountoutstanding as at the end of financial year [Notification GSR 1075(E),dated 29.12.1989].

Power of Company Law Tribunal to Order Companies to Repaydeposits (Section 58A (9)]- In case a company fails to repay any depositas per the terms and conditions of deposit, the Company Law Tribunal isempowered to order companies to repay deposits within such time andsubject to such conditions as may be specified in the order. This powermay be exercised suo-moto (of its own) or on the application of a singledeposit holder. But before making such an order the Company LawTribunal may give the company a reasonable opportunity of being heardon the matter (Section 58A(9)].

Penalty [Section 58A (10)]

Whosoever fails to comply with the orders of the Company Law Tribunalshall be punishable with imprisonment up to 3 years and fine of at leastRs.500 for every day during which the default continues.

Right of Aggrieved Depositor

The aggrieved depositors, whose deposits had matured after and whohave not been repaid, may make an application (in triplicate) to CompanyLaw Board Bench (located at Delhi, Calcutta, Bombay and Madrasdepending upon the registered office of the company) in the prescribedForm No.11, along with an application fee of Rs.50 by bank draft infavour of the “Pay and Accounts Officer, Department of CompanyAffairs”. The application can either be filed with the concerned BenchOfficer personally or sent by post.

It may be clarified that, in the following circumstances, applicationunder Section 58A (9) of the Act will not lie:

i) Deposit made for booking/purchase of scooter, car, etc. is not adeposit for purposes of Section 58A of the Act.

ii) Deposits accepted by financial companies like hire purchase financecompany, a housing finance company, an investment company, aloan/mutual benefit financial company, and equipment leasingcompany, a chit fund company or a company, which receives depositsunder any scheme or arrangement by way of contribution/subscriptions or by sale of units/certificates.

iii) Deposits accepted by a sick industrial company covered by the SickIndustrial Companies (Special Provisions) Act, 1985, in respect ofwhich the Board of Industrial and Financial Reconstruction (BIFR)has specifically, by order, suspended the operation of any contract,agreement, settlement, etc., under Section 22(3) of the said Act.

iv) Deposits accepted by relief undertakings which are notified as suchunder the various State Laws. Proceedings under Section 58A (9)of the Companies Act, 1956 shall remain stayed during the notifiedperiod.



In addition to the relief available under the Companies Act, 1956,depositors can also take action against the defaulting companies underthe normal civil law of the country.

Nomination [Section 58A (11)]A depositor may make a nomination and the provisions of Section 109Aand B shall apply to such nomination.

“Small depositors” (section 58aa]Meaning of Small Depositor

A ‘small depositor’ means a depositor who has deposited in a financialyear a sum not exceeding Rs.25,000 in a company and includes hissuccessors, nominees and legal representatives. It does not include thosedepositors who renew their deposits and those depositors whoserepayment is not made to death or has been stayed by a competent court.

Duty of Defaulting Company to Intimate CLTWhere a company fails to repay the deposit as interest thereon to anysmall depositor, it must give intimation as monthly basis to the CompanyLaw Tribunal within 60 days of the date of default stating the names andaddresses of each small depositor(s) the principal sum of deposits due tothem and interest thereon.

Power of CLT to Make an OrderThe company Law Tribunal on receipt of such intimation shall pass anappropriate order within 30 days from the date of receipt of intimationfrom the company after giving the small depositor an opportunity of beingheard.

Restrictions on the Defaulting Company1. It must be accept further deposits from small depositors unless it

repays all matured small deposits along with interest due thereon.2. It must state in all its future advertisement and applications inviting

deposits the following details: total number of small depositors is theamount due to there in respect of which the default was committed.

3. The fact of such waiver must be mentioned in every futureadvertisement and application from inviting deposits where the interestaccrued as small deposits has been waived.

4. The application form inviting deposits must contain a statement thatthe applicant had been apprised of every past default, waiver ofinterest, etc.

5. If the company subsequent to acceptance of small deposits availsany working capital from any bank, it must be first utilized for repayingthe principal and interest due to small depositors before applying thefunds for any other purpose.

Penalty for DefaultThe penalty for failure to comply the provisions of this section or order ofCLT is subject to a find of Rs.500 per day and imprisonment up to 3years. Directors are also liable to be proceeded against:



Non-refund of deposits to be cognizable. (section 58aaa]1. Any offence relating to acceptance of deposits under Section 58A

or Section 58AA shall an offence cognizable under the CriminalProcedure Code.

2. No court shall take cognizance of any offence under this provisionexcept on a complaint made by the Central Government or any officerauthorised by it in this behalf.

Provisions Relating to Prospectus to Apply to Advertisement (Section 58B)The provisions of this Act relating to a prospectus shall, so far as may be,apply to an advertisement referred to in Section 58A. But having regardto the words “so far as may be” as used in Section 58B, wherever inrespect of certain matters specific provisions have been made in Section58A or the Companies (Acceptance of Deposits) Rules, 1975, thecorresponding provisions in the Act relating to prospectus would not applyto this advertisement. For example, Section 56(1) requires a prospectusto contain information on matters specified in Schedule II. This will notbe applicable on an advertisement inviting deposits because of Rule 4 ofthe Companies (Acceptance of Deposit) Rules, 1975.

The companies (acceptance of deposits) rules, 1975A summary of these rules is given below:

1. Minimum Term of DepositA company can accept or renew deposits for a minimum period of12 months (6 months in case of deposits for meeting short termrequirements of funds).

2. Maximum Term of DepositA company can accept or renew deposits for a maximum period of5 years.

3. Maximum Limit of Deposits

Deposits Maximum Limit

a) In case of deposits received from

general public

25% of the paid -up capital and reserves

(10% in case of deposits for less than 12

months)

(35% in case of Govt.Company)

b) In case of deposits received against

unsecured debentures or from

shareholders

10% of the paid up capital and free

reserves



4. Meaning of Free Reserves

It includes the amount in the securities premium account capital anddebenture redemption reserves and other reserves appearing in the balancesheet and created by way of appropriation from the profits of the company.But the term ‘free reserves’ would not include any reserve created:i) For repayment of any future liability or for depreciation on assets or

for bad debts.ii) By revaluation of assets.For calculating the total paid up capital and free reserves, the followingshall be reduced.

a. the debit balance of profit and loss account.b. the balance of deferred revenue expenditure.c. the balance of other intangible assets.

5. Maximum Rate of Interest

A company can accept or renew deposits at a rate of interest no exceeding14% p.a. at rests not shorter than monthly rents.

6. Maximum Rate of Brokerage to any Broker

7. Advertisementa. In Two Newspapers: Advertisement inviting deposits from public shall

appear in leading English Newspaper and in one vernacularnewspaper circulating in the state where the registered office of thecompany is situated.

b. Under Board’s Authority: The advertisement must be issued on theauthority and in the name of the board of directors of the company.

c. Contents: It must contain the conditions subject to which depositsshall be accepted, the date on which the Board approved the text ofadvertisement and the prescribed information.

d. Hold Good Period: The advertisement for acceptance of depositsshall hold good for 6 months from the date of the closure of financialyear in which it is issued or until the date of the holding of the annualgeneral meeting where the balance sheet is presented or where theannual general meeting is not held for any year, the latest day onwhich the meeting should have been held as per the Act, whicheveris earlier. After the expiry of the above period the companies arerequired to issue a fresh advertisement for inviting further deposits.

e) Filing of copy of ROC: No advertisement for inviting deposits canbe issued unless a copy of the advertisement duly approved andsigned by a majority of the directors of the company has been filedwith the Registrar.

In case a company intends accepting deposits without an advertisement,it must filed with the Registrar a copy of the statement in lieu ofadvertisement stating the particulars required in the advertisement andduly approved and signed by the majority of the directors of the board.



8. Application Form for Deposit

A company can invite or renew deposits only on the form supplied by thecompany. The form shall contain all prescribed particulars in relation toaccepting deposits especially in relation to financial position, compositionof management of the company, etc. so as to enable the prospectiveinvestors to assess the risk before making deposits. It must also includedeclaration by the applicant that the amount is not being deposited out offunds acquired by him by borrowing or accepting deposits form any otherperson.

9. Issue of Receipts

Every company must furnish to the depositor or his agent a receiptspecifying the date of deposit, name and address of depositor, amountof deposit, rate of interest payable and the date of maturity of depositwithin 8 weeks. The receipt must be signed by a duly authorized officerof the company.

10. Register of Deposits

The company must maintain a register of deposits at its registered officestating details about name and address of depositors, date and amountof each deposit, period of deposits, rate of interest, dates when interestwill be paid and the date when each deposit shall become repayable.Such register must be preserved by the company for at least 8 calendaryears from the financial year in which the latest entry was made in theregister.

11. Maintenance of Liquid Assets

Every company before the 30th day of April of each year must depositor invest, as the case may be at least 15% of the amount of its depositsmaturing during the year commencing from 1st day of April and endingon 31st day of March of the following year in any or more of the securitiesas prescribed.

12. Filing of Deposits with ROC and RBI

Every company accepting deposits must on or before 30th June of everyyear file with the Registrar a return duly certified by the auditor of thecompany, in the prescribed form furnishing information as on 31st day ofMarch of that year. A copy of such return is also to be simultaneouslyfiled with the Reserve Bank of India.

13. Penalty

If a company or any other person contravenes any of these rules forwhich no punishment is provided in the Act, the company and its everyofficer in default or such other person shall be punishable with fine up toRs.5,000 and in case of continuing default, with a further fine up to Rs.500per day.



2.3.5. Powers, duties and liabilities of Directors

Who is a director of the company?

A company in the eyes of the law is an artificial person. It has no physicalexistence. It has neither soul nor a body of its own. As such, it cannot actin its own person.

“The company itself cannot act in its own person, for it has no person; itcan only act through directors, and the case is, as regards those directors,merely the ordinary case of principal and agent.”

The directors are the brain of a company. They occupy a pivotal positionin the structure of the company. They are in fact the mainspring of thecompany. Speaking about the importance of directors, Neville J., observedin Bath c., Standard Land Co., (1910) 2 Ch. 408 that “ the Board ofdirectors are the brain and the only brain of the company which is thebody, and the company can and does act only through them.” It is only“when the brain functions that the corporation is said to function.”

Definition [Sec. 2 (13)]

‘Director’ includes any person occupying the position of director, bywhatever name called. The important factor to determine whether a personis or not a director is to refer to the nature of the office and its duties. Itdoes not matter by what name he is called. If he performs the functions ofa director, he would be termed a director in the eyes of the law eventhough he may be named differently. A director may, therefore, be definedas a person having control over the direction, conduct, managementsuperintendence of the affairs of a company. Any person in accordancewith whose directions or instructions, the Board of the company. Butsuch a person shall not be deemed to be a director if the Board acts onthe advice given by him in a professional capacity.

Only individuals can be directors (Sec. 253), No body corporate,association or firm can be appointed director of a company. Only anindividual can be so appointed.

2.3.5.1 Number of directors

Every public company (other than a deemed public company) shall havebe at least 3 directors and every other company (e.g., a private company,a deemed public company) at least 2 directors. [Sec. 252(1)].

However a public company having-(a) a paid-up capital of Rs. 5 crore or more;(b) one thousand or more small shareholders;shall have at least one director elected by such small shareholders in themanner as may be prescribed. “Small shareholder” means a shareholderholding shares of nominal value of Rs. 20,000 or less in a public companyto which Sec. 252(1) applies [Provison to Sec. 252(1) as introduced bythe Companies (Amendment) Act, 2000].



Increase or reduction in number of directors (Sec. 258). Subject tothe statutory minimum limit, the articles of a company may prescribe themaximum and minimum number of directors for its Board of directors.The number so fixed may be increased or reduced within the limitsprescribed by the Articles by an ordinary resolution of the company ingenera meeting, if the number falls below the minimum, prima facie theBoard cannot act.Sanction by the Central Government (Sec. 259). Any increase innumber of directors beyond the maximum permitted by the Articles shallbe approved by the Central Government. But where the increase innumber does not make the total number of directors more than 12, noapproval of the Central Government is needed.

2.3.5.2 .Appointment of directors1. First directors (Sec. 254 and Clause 64 of Table A). (a) The Articlesof a company usually name the first directors by their respective namesor prescribe the method of appointing them.(b) If the first directors are not named in the Articles, the number of

directors and the names of the directors shall be determined in writingby the subscribers of the Memorandum or a majority of them (Clause64 of Table A).

(c) If the first directors are not appointed in the above manner, thesubscribers of the Memorandum who are individuals becomedirectors of the company. They shall hold office until directors areduly appointed in the first annual general meeting (Sec. 254).

2. Appointment of directors by the company (Secs. 255 to 257, 263and 264). Directors must be appointed by shareholders in general meeting.In the case of a public company or a private company which is a subsidiaryof a public company, at least 2/3rd of the total number of directors shallbe liable to retire by rotation. Such directors are called rotational directorsand shall be appointed by the shareholders in general meeting.Ascertainment of directors retiring by rotation and filling of vacancies(Sec. 256). (1) At the annual general meeting of a public company or aprivate company which is a subsidiary of a public company 1/3rd (or thenumber nearest to 1/3rd of the rotational directors shall retire from office.(2) The directors to retire by rotation at every annual general meetingshall be those who have been longest in the office since their lastappointment.(3) At the annual general meeting at which a director retires by rotation,the company may fill up the vacancy (thus created) by appointing theretiring director or some other person.(4) If the place of the retiring director is not filled up, the meeting mayresolve not to fill the vacancy. If there is no such resolution, the meetingshall stand adjourned till the same day in the next week. If at the adjournedmeeting also, the place of retiring director is not filled up, nor is there aresolution not to till the vacancy, the retiring director shall be deemed tohave been re-appointed at the adjourned meeting.



3. Appointment of directors by directors (Sec. 260, 262 and 313).The directors of a company may appoint directors-

(1) As additional directors (Sec. 260). Any additional directors appointedby the directors shall hold office only up to the date of the next annualgenera meeting of the company. The number of directors and additionaldirectors must not exceed the maximum strength fixed for the Board bythe Articles [Patrakola Tea Co., Re, A.I.R. (1967) Ca. 406].

If the annual general meeting of a company is not held or cannot be held,the additional director shall vacate his office on the day on which theannual general meeting should have been held.

If an additional director has been appointed as managing director also,the moment he ceases to be an additional director, and he will cease tobe the managing director.

(2) In a casual vacancy (Sec. 262). In the case of a public company, or aprivate company which is a subsidiary of a public company, if the officeof any director appointed by the company in general meeting is vacatedbefore his term of office expires in the normal course, the resulting casualvacancy may be filled by the Board of directors at a meeting of the Board.This power of the Board is subject to any regulations in the Articles ofthe company. By ‘casual vacancy’ is meant any vacancy which occurs byreason of death, resignation, disqualification, or failure of an electeddirector to accept the office for any reason other than retirement byrotation. A vacancy caused by the retirement of a director by rotation isnot a casual vacancy; such a vacancy has to be filled by the annual generalmeeting.

(3) As alternate director (Sec. 313). An alternate director can be appointedby the Board if it is so authorized by (i) the Articles of the company, or(ii) a resolution passed by the company in the general meeting.

He shall act for a director, called ‘the original director’ during his absencefor a period of at least 3 months from the State in which Board meetingsare ordinarily held.

4. Appointment of directors by third parties. The Articles under certaincircumstances give power to the debenture-holders or other creditors,e.g., a banking company or financial corporation, who have advancedloans to the company to appoint their nominees to the Board. The numberof directors so appointed shall not exceed 1/3rd of the total number ofdirectors, and they are not liable to retire by rotation.

5. Appointment by proportional representation (Se. 265). The Articlesof a company may provide for the appointment of not less than 2/3rd ofthe total number of directors of a public company or of a private companywhich is a subsidiary of a public company according to the principle ofproportional representation. The proportional representation may be bya single transferable vote or by a system of cumulative voting or otherwise.The appointment shall be made once in 3 years and interim casualvacancies shall be filled in the manner as provided in the Articles.



6. Appointment of directors by the Central Government (Sec. 408).Sec. 408 empowers the Central Government to appoint such number ofdirectors on the Board of a company as the Tribunal may, by order inwriting, specify as necessary to effectively safeguard the interests of thecompany or its shareholders or the public interest. The appointment willbe for a period not exceeding 3 years on any one occasion. The purposeof the appointment is to prevent the affairs of the company from beingconducted either in the manner-(a) Which is oppressive to any members of the company; or(b) Which is prejudicial to the interests of the company or to public

interest?The Tribunal may pass the above order on a reference made to it by theCentral Government or on the application-(i) of not less than 100 members of the company, or(ii) of members of the company holding not less than 1/10th of the total

voting power therein.Any director appointed by the Central Government shall not be requiredto hold any qualification shares not shall his period of office be liable totermination by retirement of directors by rotation. Any such director maybe removed by the Central Government from his office and another personmay be appointed in his place.

Position of directors

It is very difficult to pinpoint the exact legal position of the directors of acompany. They have been described by various names, sometimes asagents, sometimes as trustees, and sometimes as managing partners ofthe company. But “such expressions are not used as exhaustive of thepowers and responsibilities of such persons but only as indicating usefulpoints of view from which they may, for the moment and for the particularpurpose, be considered”. We may now consider the position of thedirectors from all these points of view.

Directors as agents- A company, as an artificial person, acts throughdirectors who are elected representatives of the shareholders. They are,in the eyes of the law, agents of the company for which they act, and thegeneral principles of the law of principal and agent regulate in mostrespects the relationship between the company and its directors.

Directors as employees. Although the directors as a company are itsagents, they are not employees or servants of the company for beingentitled to privileges and benefits which are granted under the CompaniesAct to the employees. But there is nothing to prevent a director frombeing a servant of the company under a special contract of service whichhe may enter into with the company.

The Companies Act itself indicates many situations where a director maybe in the employment of a company.



Directors as officers. For certain matters under the Companies Act, thedirectors are treated as officers of the company (Sec. 2 (30)]. As suchthey are liable to certain penalties if the provisions of the Companies Actare not strictly complied with.Directors as trustees. Directors are treated as trustees-(1) of the company’s money and property; and(2) of the powers entrusted to them.(1) Directors are trustees of the company’s money and property in thesense that they must account for all the company’s money and propertyover which they exercise control. They have also to refund to the companyany of its money or property which they have improperly paid away ortransferred.Directors are, however, not trustees in the real sense of the word becausethey are not vested with the ownership of the company’s property. It isonly as regards some of their obligations to the company and certainpowers that they are regarded as trustees of the company.(2) Directors are trustees of the powers entrusted to them in the sensethat they must exercise their powers honestly and in the interest of thecompany and the shareholders and not in their own interest.Alexander v. Automatic Telephone Co., (1900) 2 Ch. 56. The directorsof a company paid up nothing on their own shares. They, however, madeall the other shareholders pay a certain amount on each share. They didnot tell the other shareholders of the difference. Held, this was a breachof trust, and the directors were bound to pay to the company what theothers had paid on each of their shares.Piercy v. S. Mills & Co. Ltd., (1920) 1 Ch. 77. The directors of acompany had the power to issue the unissued shares of the company.The company was in no need of further capital but the directors made afresh issue a themselves and their supporters with a view to maintainingcontrol of the company. Held, the allotment was invalid and void.Trustees for the company. Directors are trustees for the company andnot for third persons who have made contracts with the company [CityEquitable Fire Ins. Co. Ltd., Re (1925) Ch. 407] or for the individualshareholders. The leading case on the point is:Percival v. Wright, (1902) 2 Ch. 421. The directors of a company boughtshares from a shareholder, while they were negotiating for the sale of thecompany to another at a very high price and they did not disclose thisfact to the shareholder. The shareholder sued to have the sale set aside.Held, the sale was binding, as the directors were under no obligation todisclose the negotiations to the shareholders.Quasi-trustees. Directors are really only quasi-trustees because-(1) they are not vested with ownership of the company’s property;(2) their functions are not the same as those of trustees;(3) their duties of care are not as onerous as those of trustees.



To sum up : “Directors have sometimes been called as trustees orcommercial trustees, and sometimes they have been called managingpartners; it does not matter much what you call them so long as youunderstand what their real position is, which is that they are reallycommercial men managing a trading concern for the benefit of themselvesand of all the shareholders in its. They stand in a fiduciary position towardsthe company in respect of their powers and capital under their control”.

2.3.5.3. Restrictions on the appointment of directors (Sec. 266)

A person shall not be capable of being appointed director of a companyby the Articles and shall also not be named as a director or proposeddirector in the prospectus unless before the registration of the Articles, orthe publication of the prospectus or the filing of the statement in lieu ofprospectus, as the case may be, he or his agent authorized in writing, has-(1) signed and filed with Registrar a consent in writing to act as such

director, and has(2) (a) signed the Memorandum for his qualification shares, if any; or (b) taken his qualification shares, if any, from the company and paid

or agreed to pay for them; or(i) signed and filed with the Registrar an undertaking in writing to take

from the company his qualification share, if any, and pay for them; or(ii) made and filed with the Registrar an affidavit to the effect that his

qualification shares are registered in his name.Sec. 266 does not apply to a private company.

2.3.5.4. Number of directorships (Sec. 275, 277 to 279)No person to be a director of more than 20 companies (Sec. 275). Aperson shall not hold office at the same time as director in more than 20companies.Exclusion of certain directorships (Sec. 278). In calculating the numberof companies of which a person may be a director, the followingcompanies shall be excluded, viz.,(a) a private company which is neither a subsidiary not a holding company

of a public company;(b) an unlimited company;(c) an association not carrying on business for profit or which prohibits

the payment of a dividend; and(d) a company in which such person is only an alternate director.Choice of person becoming director of more than 20 companies (Sec. 277).Where a person already holding the office of director in 20 companies isappointed as a director of any other company, the appointment shall not takeeffect unless such person has, within 15days of his appointment, effectivelyvacated his office as director in any of the companies in which he was alreadya director. The new appointment of such person as director shall take effectonly if such choice is made; and it shall become void if the choice is not madewithin 15 days of the day on which the appointment was made.



2.3.5.5. Disqualifications of directors (Sec. 274)A director must be-(a) an individual,(b) competent to contract, and(c) hold a share qualification, if so, required by the Articles.

The following persons are disqualified for appointment as directorsof a company:

(a) A person of unsound mind.(b) An un-discharged insolvent.(c) A person who has applied to be adjudicated as an insolvent and his

application is pending.(d) A person who has been convicted by a Tribunal of any offence

involving moral turpitude [and sentenced in respect thereof toimprisonment for not less than 6 months], and a period of 5 yearshas not elapsed from the date of expiry of the sentence.

(e) A person whose calls in respect of shares of the company held formore than 6 months, have been in arrear.

(f) A person who is disqualified for appointment as director by an orderof the Tribunal under Sec. 203 (which deals with power of the Tribunalto restrain fraudulent persons from managing companies) on theground of fraud or misfeasance in relation to the company.

(g) A person who is already a director of a public company which-(i) has not filed the annual accounts and annual returns for any three

continuous financial years commencing on and after the first day ofApril, 1999; or

(ii) has filed to repay its deposit or interest thereon on due date redeemits debentures on the date or pay dividend and such failure continuesfor one year or more [Clause (g) has been introduced by theCompanies (Amendment) Act, 2000].

The disqualifications mentioned in Clauses (d) and (e) may be removedby the Central Government by notification in the Official Gazette.(h) A private company which is not a subsidiary of a public company

may, by its Articles, provide that a person shall be disqualified forappointment as a director on any additional grounds.

2.3.5.6.Vacation of office and removal of directorsVacation of office by directors (Sec. 283). The office of a director shallbecome vacant if-(a) he falls to obtain within 2 months of his appointment, or at any time

thereafter ceases to hold, the share qualification, if any, required ofhim by the Articles of the company;

(b) he is adjudged to be of unsound mind;(c) he applies to be adjudicated an insolvent;(d) he is adjudged an insolvent;(e) he is convicted by a Court of any offence involving moral turpitude

and sentenced in respect thereof to imprisonment for not less than 6months,



(f) he fails to pay any call in respect of shares of the company held byhim within 6 months from the last date fixed for the payment of thecall. The Central Government may, by notification in the OfficialGazette, remove this disqualification;

(g) he absents himself from 3 consecutive meetings of the Board ofdirectors or from all meetings of the Board for a consecutive periodof 3 months, whichever is longer, without obtaining leave of absencefrom the Board;

(h) he (whether by himself or by any person for his benefit or on hisaccount), or any firm in which he is a partner or any private companyof which he is a director, accepts a loan, or any guarantee or securityfor a loan, from the company without the approval of the CentralGovernment,

(i) he fails to make disclosures to the Board of directors with regard toany contracts with the company in which he is directly or indirectlyinterested;

(j) he becomes disqualified by an order of the Tribunal from being adirector on the ground of having been convicted of an offence inconnection with the promotion, formation or management of thecompany or found guilty of fraud or misfeasance in relation to itswinding up proceedings; or

(k) he is removed before the expiry of his period of office by an ordinaryresolution; or

(l) having been appointed a director by virtue of his holding any officeor other employment in the company, he ceases to hold such officeor other employment in the company.

2.3.5.7. Removal of directorsDirectors may be removed by-1. Shareholders (Sec. 284). The shareholders may remove a directorbefore the expiry of his period of office by passing an ordinary resolution.This does not, however,(a) apply to the case of director appointed by the Central Government

under Sec. 408 (which deals with powers of the Central Governmentto prevent oppression or mismanagement).

(b) authorize, in the case of a private company, removal of a directorholding office for life on April 1, 1952.

(c) apply to the case of a company which has adopted the system ofelecting 2/3rds of its directors by the principle of proportionalrepresentation.

Right of the director to make representations: When notice is given of aresolution to remove a director, the director concerned has a right tomake representations in writing (not exceeding a reasonable length) tothe company. He may also request that these representations be notifiedto the members of the company. On being so notified, the company shall-(a) state the fact of the representations having been made in any notice

of the resolution given to the members of the company; and



(b) send a copy of the representations to every member of the companyto whom notice of the meeting is sent (whether before or after receiptof the representations by the company).

If a copy of the representations is not sent as aforesaid because they arereceived too late or because of the company’s default, the director may(without prejudice to his right to be heard orally) require that therepresentations shall be read out at the meeting.

Vacancy- A vacancy created by the removal of a director may be filledup in the same meeting provided special notice of the proposedappointment was also given. The successor can hold office until the dateup to which his predecessor would have held office if he had not beenremoved. If the vacancy is not filled at the meeting, the Board may fill itas a causal vacancy provided the director who has been removed is notappointed.

2. Central Government (Secs. 388-B to 388-E). The CentralGovernment may, in certain circumstances, remove managerial personnelfrom office on the recommendation of the Tribunal.

Case to be made out against the managerial personnel: (Sec. 388-B).The Central Government may state a case against the managerialpersonnel of a company and refer the same to the Tribunal with a requestthat the Tribunal may inquire into the case and record a finding whetherhe is a fit or proper person to hold the office of director or any otheroffice connected with the conduct and management of the company. TheCentral Government may exercise this power where in its opinion thereare circumstances suggesting-(a) that any person concerned in the conduct and management of the

affairs of the company is or has been guilty of fraud, misfeasance,persistent negligence or default in carrying out his obligations andfunctions under the law, or breach of trust; or

(b) that the business of the company is not or has not been conductedand managed by such person in accordance with sound businessprinciples or prudent commercial practices; or

(c) that the company is or has been conducted and managed by theperson concerned in a manner which is likely to cause, or has caused,serious injury or damage to the interest of the trade, industry orbusiness to which such company pertains; or

(d) that the business of the company is or has been conducted andmanaged by the person concerned with intent to defraud its creditors,members or any other person or otherwise for a fraudulent or unlawfulpurpose or in manner prejudicial to public interest.

The person against whom a case is presented shall be joined as arespondent to the application. The application made by the CentralGovernment to the Tribunal shall contain concise statement of thecircumstances and materials as the Central Government may considernecessary for the purpose of the inquiry.



3. Removal by Tribunal (Sec. 402). Where, on an application to theTribunal for prevention of oppression (under Sec. 397) or mismanagement(under Sec. 398), the Tribunal finds that the relief ought to be granted, itmay terminate, set aside or modify any agreement between the companyand the managing director or any other director or the manager. Whenthe appointment of a managerial personnel is so terminated or set aside,he cannot sue the company for damages or compensation for the loss ofoffice, not can he be appointed, except with the leave of the Tribunal, inany managerial capacity in the company for a period of 5 years from thedate of the order.

2.3.5.8. Managerial remunerationThe expression ‘managerial personnel’ refers to the(a) managing director,(b) whole-time/part-time directors, or(c) Manager.It excludes executives who are not members of the Board of directors ofthe company irrespective of salary paid to them. The term ‘whole-timedirector’ has not been defined in the Act. The expressions ‘whole-timedirector’ and ‘the director in whole-time employment’ have been used inSecs. 198 and 309 respectively.Overall maximum managerial remuneration (Sec. 198)Remuneration not to exceed 11 per cent. The total managerialremuneration of the directors and the manager in respect of any financialyear shall not exceed 11 per cent of the net profit of the company for thatfinancial year computed in the manner laid down in Sec. 349, 350 and351. The percentage shall be exclusive of the fees payable to the directorsfor attending the meetings of the Board of directors, or a committee thereof.Within the 11 per cent limit of the maximum remuneration, a companymay pay monthly remuneration to its-(a) managing or whole-time director in accordance with the provisions

of Sec. 309 (which deals with remuneration of directors), or(b) Manager in accordance with the provisions of Sec. 387 (which deals

with remuneration of manager).Remuneration in case of nil or inadequate profits-previous approval ofCentral Government required. If in any financial year a company has noprofits or its profits are inadequate, the company shall not pay to itsdirectors, including any managing or whole-time director or manager byway of remuneration any sum (excluding any fees payable to directors)except with the previous approval of the Central Government. This issubject to the provisions of Sec. 269 (which deals with appointment ofmanaging or whole-time director or manager), read with Schedule XIII.

Rules regarding directors’ remunerationOverall remuneration (Sec.198) - The remuneration payable to directorsis part of the overall managerial remuneration which cannot exceed 11per cent of the net profits.



1. The remuneration payable to the directors (including any managingor whole-time director) shall be determined in accordance with theprovisions of Secs. 198 and 309, either by the Articles, or by aresolution passed by the company in general meeting.

2. A director may receive remuneration by way of a fee for each meetingof the Board or a committee of the Board. But fees for attending themeetings of the Board cannot be paid on a monthly basis.

3. A whole-time or managing director may be paid remuneration eitherby way of a monthly payment or at a specified percentage of the netprofits of the company or partly by one way and partly by the other.Except with the approval of the Central Government suchremuneration shall not exceed 5 per cent of the net profits for onesuch director, or 10 per cent for all of them in case there is more thanone such director.

4. A part-time director may be paid remuneration either-(a) by way of the monthly, quarterly, or annual payment with the

approval of the Central Government, or(b) by way of commission if the company by a special resolution

authorizes such payment.5. The special resolution (determining remuneration of directors) shall

remain in force for a maximum period of 5 years. It may, however,be renewed, from time to time, by a special resolution for furtherperiods of 5 years but no renewal can be affected earlier than 1 yearfrom the date on which it is to come into force.The remuneration paid to part-time directors shall not exceed-

(i) 1 per cent of the net profits of the company if the company has amanaging or whole-time director or a manager, and

(ii) 3 per cent of the profits in any other case.However, the company in general meeting may, with the approval ofthe Central Government, increase these rates of remuneration.

6. The net profits of the company for the purpose of directors’remuneration shall be computed in the prescribed manner (as laiddown in Sec. 198) without deducting the directors’ remunerationfrom the gross profits.

7. If any director receives any sum in excess of remuneration due tohim, he shall hold the excess amount in trust for the company andshall refund it to the company. The company cannot waive therecovery of any such sum.

8. A whole-time director or a managing director who receives acommission from the company shall not be entitled to receive acommission or remuneration from any subsidiary of the company.

9. The above rules do not apply to a private company unless it is asubsidiary of a public company.

10. Prohibition of tax-free payment (Sec. 200). A company shall not payto any officer or employee remuneration free of tax.

2.3.5.9. Loans to directors (Sec. 295)

Without obtaining the previous approval of the Central Government, acompany (referred to as ‘the lending company’) shall not, directly orindirectly, make any loan to-



(a) (i) any director of the lending company, or (ii) to the directors of itsholding company, or (iii) to any partner or relative of any director;

(b) any firm in which any such director or relative is a partner;(c) any private company of which any such director is a director or

member;(d) any body corporate at whose general meeting any director or directors

controls or control not less than 25 per cent of the total voting power;and

(e) any body corporate whose Board of directors or manager isaccustomed to act in accordance with the directions of the Board ofdirectors, or of any director or directors, of the lending company.

Sec. 295 also prohibits a company from-(i) giving of any guarantee for a loan taken by a director from any other

person and providing of any security for any such loan, and(ii) Providing of any guarantee or security for a loan given by a director

to any other person.These restrictions do not apply to any loan made, guarantee given orsecurity provided by a private company (unless it is a subsidiary of apublic company), or by a banking company. The exclusion of bankingcompanies makes it clear that loans to directors of a bank are contemplatedas part to its business.

A holding company may also give loans to its subsidiary. Again, aguarantee or security may also be given by a holding company in respectof any loan made to its subsidiary.

2.3.5.10. Meeting of the directors (Secs. 285 to 288)

Directors of a company exercise most of their powers at the meetings ofthe Board. The Companies Act contains the following provisions relatingto Board meetings:

1. Number of meetings – once in every 3 months (Sec. 285). In thecase of every company (whether public or private) a meeting of its Boardof directors shall be held at least once in every 3 months and at least 4such meetings shall be held in every year. The Central Government may,by notification in the Official Gazette, direct that this provision shall notapply in relation to any class of companies.

Example- The meetings of Board of directors of Cherry Ltd., a publiccompany, were held on 1st January, 30th June, 1st July, and 31stDecember, during the calendar year 1999. The requirements of Sec. 285are met as one meeting was held in each quarter and 4 such meetingswere held during the year.1. Notice of meetings (Sec. 286). Notice of every meeting of the Board

of directors of a company shall be given in writing to every directorfor the time being in India, and at his usual address in India.

2. Quorum for meetings (Sec. 287). The quorum for a meeting of theBoard shall be 1/3rd of its strength (any fraction contained in that1/3rd being rounded off as one), or 2 directors, whichever is higher.



Want of quorum (Sec. 288). If a meeting of the Board cannot be held forwant of quorum, it shall automatically stand adjourned till the same day inthe next week, at the same time and place unless the Articles provideotherwise. If the day in the next week happens to be a public holiday, theadjourned meeting shall be held on the day following the public holiday.Sec. 288 does not say what is to become of the adjourned meeting ifthere is no quorum at that meeting also.Where a meeting of the Board is called but could not be held for want ofquorum, there shall be no contravention of Sec. 285.

2.3.5.11. Powers of directorsGeneral Powers of the Board (Sec. 291). The Board of directors of acompany is entitled to exercise all such powers and to do all such actsand things as the company is authorized to exercise and do. This meansthe powers of the Board of directors are co-extensive with those of thecompany. This proposition is, however, subject to two conditions:First, the Board shall not do any act which is to be done by the companyin general meeting.Second, the Board shall exercise its powers subject to the provisionscontained in the Companies Act, or in the Memorandum or the Articlesof the company or in any regulations made by the company in generalmeeting. But no regulation made by the company in general meeting shallinvalidate any prior act of the Board which would have been valid if thatregulation had not been made.Powers to be exercised at Board meetings (Sec. 292)- The Board ofdirectors of a company shall exercise the following powers on behalf ofthe company by means of resolutions passed at the meetings of the Board,viz., the power to-• make calls on shareholders in respect of money unpaid on their shares;• issue debentures;• borrow moneys otherwise than on debentures (say through public

deposits);• invest the funds of the company; and•make loans.The Board may, by a resolution passed at a meeting, delegate the lastthree powers to a committee of directors or the manager or any otherprincipal officer of the company, but the Board shall specify the limits ofsuch delegation.Sec. 292 does not in any manner affect the right of the company in generalmeeting to impose restrictions and conditions on the exercise by the Boardof any of the powers specified in Sec. 292.Powers to be exercised with the approval of company in general meeting(Sec. 293). The Board of directors of a public company, or of a privatecompany which is a subsidiary of a public company, shall exercise thefollowing powers only with the consent of the company in general meeting:



(a) To sell, lease or otherwise dispose of (say under amalgamationscheme) the whole, or substantially the whole, of the undertaking ofthe company.

(b) To remit or give time for repayment of any debt due to the companyby a director except in the case of renewal or continuance of anadvance made by a banking company to its director in the ordinarycourse of business.

(c) To invest (excluding trust securities) the amount of compensationreceived by the company in respect of the compulsory acquisition ofany undertaking or property of the company.

(d) To borrow moneys where the moneys to be borrowed (together withthe moneys already borrowed by the company) are more than thepaid-up capital of the company and its free reserves (that is to sayreserves not set apart for any specific purpose, e.g., balance in theshare premium account, general reserve, profit and loss account,capital redemption account). The amount of temporary loans raisedfrom banks in the ordinary course of business is excluded.The expression ‘temporary loans’ does not include loans raised forthe purpose of financing expenditure of a capital nature.

(e) To contribute to charitable and other funds not directly relating tothe business of the company or the welfare of its employees, amountsexceeding in any financial year Rs. 50,000 or 5 per cent of the averagenet profits of the three preceding financial years, whichever is greater.The Board may contribute up to Rs. 50,000 even if the company isincurring a loss.

Every resolution passed by the company in general meeting to borrowmoneys shall specify the total amount up to which money may beborrowed by the Board of directors. Likewise every resolution passedby the company in general meeting to contribute to charitable and otherfunds shall specify the total amount which may be contributed to charitableand other funds in any financial year.

2.3.5.12. Political contributions (Sec. 293-A)With a view to permitting the corporate sector to play a legitimate rolewithin the defined norms in the functioning of our democracy, Sec. 293-A allows companies to make contributions to political parties or for politicalpurposes to any person, directly or indirectly, out of their profits.Sec. 293-A however prohibits political contributions (to any political partyor for any political purpose to any person, whether directly or indirectly)in the case of (a) Government companies, and (b) Companies whichhave been in existence for less than 3 financial years.Any other company may contribute any amount or amounts, directly orindirectly, (a) to any political party, or (b) for any political purpose to anyperson. This is however subject to the following conditions:1. The amount or aggregate of the amounts so contributed by a company

in any financial year shall not exceed 5 per cent of its average netprofits during the three immediately preceding financial years.



2. Before any such contribution is made by the company, a resolutionauthorizing the making of the contribution shall be passed at a meetingof the Board of directors. Such resolution shall be deemed to bejustification in law for the making of the contribution authorized by it.

3. The company shall disclose in its profit and loss account the amountor amounts of such contributions during the financial year to whichthat account relates, giving

(a) particulars of the total amount contributed, and(b) the name of the party or person to which or to whom such amount

has been contributed.2.3.5.13 Duties of directors

The statutory duties of directors have been discussed at appropriate places.Again, there are certain duties of a general nature of the following type:1. Fiduciary duties, and2. Duties of care, skill and diligence.1. Fiduciary duties: As fiduciaries, the directors must-(a) exercise their powers honestly and bona fide for the benefit of the

company as a whole; and(b) not place themselves in a position in which there is a conflict between

their duties to the company and their personal interests. They mustnot make any secret profit out of their position. If they do, they haveto account for it to the company.

Fiduciary duties owed to the company. The fiduciary duties of directorsare owed to the company and not to the individual shareholders. Theleading case on the point is Percival v. Wright, (1902) a Ch. 421, alreadydiscussed in this unit.

2. Duties of care, skill and diligence: Directors should carry out theirduties with reasonable care and exercise such degree of skill and diligenceas is reasonably expected of persona of their knowledge and status. Heis not bound to bring any special qualifications to his office.

3. Standard of care: The standard of care, skill, and diligence dependsupon the nature of the company’s business and circumstances of the case.There are various standard’s of the care depending upon:(a) the type and nature of work;(b) division of powers between directors and other officers;(c) general usages and customs in that type of business; and(d) whether directors work gratuitously or remuneratively.There is a brilliant exposition of directors’ duties in relation to a company’saffairs in the following case:

City Equitable Fire Insurance Co. Ltd, Re, supra. The directors of aninsurance company left the management of the company’s affairs almostentirely in the hands of B, the managing director. Owing to B’s fraud alarge amount of the company’s assets disappeared. B and the firm in



which he was a partner had taken a huge loan from the company and thecash at the bank or in hand included, pound 7,300 in the hands of thecompany’s stock brokers, in which B was partner. The directors neverinquired as to how these items were made up. Held, the directors werenegligent. The Articles, however, protected the directors in this case fromliability as there was no willful neglect or default and consequently theywere not held liable.

Other duties of directors:

The other duties of a director are-(1) to attend Board meetings.(2) not to delegate his functions except to the extent authorized by the

Act or the constitution of the company, and(3) to disclose his interest.These duties have been discussed at appropriate places.

Contracts in which directors are interested

A director stands in a fiduciary position towards the company. Therefore,if he has any personal interest in a contract entered in to with the company,he must disclose it. The principle behind a director’s duty of disclosure isthat he is “precluded from dealing on behalf of the company with himselfand from entering into engagements in which he has a personal interestconflicting, or which possibly may conflict, with the interest of those whomhe is by fiduciary duty bound to protect”.

[North West Transportation Co. V. Beauty, (1887) 12 App. Cas. 589].

Board’s sanction required (Sec. 297), except with consent of the Boardof directors of a company, a director shall not enter into any contractwith the company-(1) for the sale, purchase or supply of any goods, materials, or services;

or(2) for underwriting the subscription of any shares in, or debentures of,

the company.These restrictions also apply to (a) the relatives of the director, (b) a firmin which such a director or relative is a partner, (c) any other partner insuch a firm, or (d) a private company of which the director is a memberor director. Where the paid-up share capital of a company is not lessthan Rs.1 crore the aforesaid contract can be entered into only with theprevious approval of the Central Government.

Exceptions: The rule contained in Clause (1) does not apply to oraffect-(a) contracts for the purchase of goods and materials from the company

or the sale of goods and materials to the company, for cash atprevailing market prices; or



(b) contracts between the company on one side and any director, relative,firm, partner or private company on the other for the sale, purchaseor supply of goods, materials, and services in which either of theparties regularly trades or does business, provided the value of thegoods does not exceed Rs. 5,000 in any year; or

(c) any transaction of banking or insurance company in the ordinary courseof business.

Disclosure of interest by director (Sec.299). Every director of a com-pany who is directly or indirectly concerned or interested in a contract orproposed contract entered into, or to be entered into, by or on behalf ofthe company, shall disclose the nature of his concern or interest at a meetingof the Board of directors. In the case of a proposed contract, such dis-closure shall be made by a director at the meeting of the Board at whichthe question of entering into the contract or agreement is first taken intoconsideration. In the case of any other contract or arrangement the re-quired disclosure shall be made at the first meeting of the Board heldafter the director becomes interested in the contract. For this purposethe director shall give a notice to the Board to this effect. This is deemedto be sufficient disclosure of concern or interest in relation to any con-tract so made. Any such general notice shall expire at the end of thefinancial year in which it is given. But it may be further renewed. Thenotice shall not be of any effect unless it is given steps to ensure that it isbrought up and read at the first meeting of the Board after it is given.

Interested director not to participate or vote in Board’s proceedings(Sec. 300). A director of a company must not place himself in a positionin which his personal interest conflicts with his duty [Parker v. Mckenna,(1874) 10 Ch. App. 96]. This conflict would invariably arise when adirector is personally interested in a transaction entered into with or bythe company. As such, he must not take any part in the discussion of, orvote as a director on, any contract or arrangement in which he is directlyor indirectly interested unless authorized by the company’sArticles. In case he votes, his vote would not be counted. Not only this,even his presence would not count towards the quorum for the transactionof business the provisions of Sec. 300 shall be punishable with fine whichmay extend to Rs. 50,000.

2.3.5.14. Register of contracts (Sec. 301). Every company shall keepone or more registers in which shall be entered separately particulars ofall contracts entered into by the company in which any of the directors isinterested. The following particulars, to the extent they are applicable ineach case, shall be given in the register:(a) the date of the contract or arrangement;(b) the names of the parties thereto;(c) the principal terms and conditions thereof;(d) the date on which it was placed before the Board of directors;(e) the names of the directors voting for and against the contract and the

names of those remaining neutral.



The register aforesaid shall be placed before the next meeting of theBoard of directors and shall then be signed by all the directors present atthe meeting.

Inspection of register- The register shall be kept at the registered officeof the company and shall also be open to the inspection of any memberof the company and extracts may be taken there from and copies thereofmay be required by any member of the company.

2.3.5.15. Liabilities of directorsThe liabilities of directors may be discussed under the following four heads:1. Liability to third parties. This may arise-(1) Under the Act. Liability of directors to third parties may arise in

connection with the issue of a prospectus which does not contain theparticulars required by the Companies Act, or which contains mate-rial misrepresentation.

Directors may also incur personal liability-(a) on their failure to repay application money if minimum subscription

has not been subscribed (Sec. 69).(b) On an irregular allotment of shares to an allottee (and likewise to the

company) if loss or damage is sustained (Sec. 71).(c) On their failure to repay application money if the application for the

securities to be dealt in on a recognized stock exchange is not madeor is refused (Sec. 73).

(d) On failure by the company to pay a bill of exchange, hundi, promis-sory note, cheque or order for money or goods wherein the name ofthe company is not mentioned in legible characters (Sec. 147).

(2) Independently of the Act. Directors, as agents of a company, are notpersonally liable on contracts entered into as agents on behalf of thecompany.

But there are a number of exceptions to this rule. If a director fails toexclude personal liability, for instance, by signing a negotiable instrumentwithout mentioning the company’s name and the fact that he is signing oncompany’s behalf, he is personally liable to the holder of such instru-ment. He is also personally liable if he acts in his own name.

2. Liability to the company. The liability of director towards thecompany may arise from-(1) Ultra vires acts : Directors are personally liable to the company in

respect of ultra vires acts and it is not necessary to prove fraud insuch cases, e.g., when they pay dividends out of capital or whenthey dissipate the funds of the company in ultra vires transactions.They are liable jointly and severally and, inter se, they have a right toratable contribution.



(2) Negligence : A director may incur liability for the negligence in theexercise of his duties. There is no statutory definition of negligence,and as such each case has to be decided after due consideration ofthe particular facts thereof. The question to be answered in eachcase is: “Has the director exercised the necessary care and shownthe necessary diligence in the discharge of his duties?” If he has not,he is liable. If he has, there can be no question of liability. It is essentialin an action for negligence that the company suffers some damage,as negligence without damage or damage without negligence is notactionable.

(3) Breach of trust : Directors of a company, being in a fiduciary position,hold the position of trustees as regards its money and property whichcomes into their hands and of the powers entrusted to them by theArticles. They must discharge their duties as such trustees in the bestinterest of the company. They are liable to the company for any lossresulting from breach of trust.

Directors are also accountable to the company for any secret profits theymight have made in transactions on behalf of the company.

(4) Misfeasance : Directors are liable to the company for misfeasancewhich means ‘willful misconduct’ of directors for which they maybe sued in a Law Court. In case of misfeasance proceedings thedirectors may apply for relief under Sec. 633.

3. Liability for breach of statutory duties. There are numerousstatutory duties of directors which they must carry out. Most of theseduties relate to maintenance of proper accounts, filing of returns orobservance of certain statutory formalities. If they fail to perform theseduties, they render themselves liable to penalties.

4. Liability for acts of his co-directors. A director is not liable for theacts of his co-directors provided he has no knowledge and he is not aparty. His co-directors are not his servants or agents who can by theiracts impose liability on him.

Validity of acts of directors (Sec. 290)

Acts done by a person as director shall be valid, notwithstanding that itmay afterwards be discovered that his appointment was invalid by reasonof any defect or disqualification or had terminated by virtue of any provisioncontained in the Articles.

De facto and de jure directors.

A director who is not duly appointed but acts as a director is known as a‘de facto’ director and is as much liable as a ‘de jure’ (properly appointed)director. Thus as between a company and third persons a ‘de facto’director is a ‘de jure’ director [Hope Mills v. Sir Kowasji, (1910) 13Bom. L.R. 748].

Dawson v. African Consolidated Land & Trading Co., (1898) 1 Ch. 6.The Articles of a company contained a clause similar to Article 80 of



Table A. Three of the directors made a call. One of the directors happenedto be disqualified by having parted with his qualification shares for a fewdays. Held, the call was valid.Sec. 290 does not validate the acts which could not have been doneeven by a properly appointed director or the acts of a director who knowsof the irregularly of his appointment.Craven-Ellis v. Canons Ltd., (1936) 2 K.B. 403. The Articles of acompany empowered the directors to appoint a managing director. Cwas appointed as managing director by the Board of directors, none ofwhom had acquired the qualification shares. C acted as managing directorfor 1 year without acquiring any qualification shares. Held, C’s appointmentas managing director was invalid as he did not hold any qualificationshares.

2.3.5.16. Disabilities of directorsIn order to protect the interest of a company and its shareholders, theCompanies Act has imposed the following disabilities on the directors:1. Avoidance of provisions relieving directors of liability (Sec. 201).

Any provision in the Articles or an agreement which exempts a director(including any officer of the company or an auditor) from any liabilityon account of any negligence, default, and misfeasance, breach ofduty or breach of trust by him shall be wholly void.

2. Undercharged insolvent disqualified from being appointed director(Sec. 274). An undercharged insolvent shall not be appointed to actas director of any company or in any way to take part in themanagement of any company.

3. No person to be director of more than 20 companies (Sec. 275).No person shall hold office at the same time as director in more than20 companies.

4. Restrictions on powers of Board (Sec. 293). These have alreadybeen discussed in this Chapter.

5. Loans to directors (Sec. 295).6. Board’s sanction for certain contracts in which particular directors

are interested (Sec. 297).7. Prohibition of assignment of office by director (Sec. 312). A director

shall not assign his office. If he does, the assignment shall be void.8. Directors, etc, not to hold office or place of profit (Sec. 314). The

following persons shall not hold any office or place of profit in acompany except with the consent of the company accorded by specialresolution;

(1) Any director of the company.(2) (a) Any partner or relative of such a director, (b) Any firm in which such a director or his relative is a partner,

(c) Any private company of which such a director is a director ormember, or any director or manager of such a company if the officeof profit carries a total monthly remuneration of such as may beprescribed. (The sum prescribed with effect from 26th March, 1992is Rs. 6,000).



Special resolution- Special resolution is necessary for every appointmentin the first instance and for every subsequent appointment. It is sufficientif the special resolution according the consent of the company is passedat a general meeting of the company held for the first time after the holdingof such office or place of profit.

2.3.5.17. Managing Director

A Managing Director means A director who is entrusted with substantialpowers of management which would not otherwise be exercisable byhim. These powers may be conferred upon him by virtue of anagreement with the company or a resolution passed by theMemorandum or Articles of Association.

The term ‘Managing Director’ includes a director occupying the positionof a managing director, by whatever name called. But the power to doadministrative acts of a routing nature when so authorized by the Boardsuch as the power to affix the common seal of the company to anydocument or to draw and endorse any cheque on the account of thecompany in any bank or to draw endorse any negotiable instrument or tosign any share certificate or to direct registration of transfer of any share,shall not be deemed to be included within substantial powers ofmanagement. Further, the managing director shall exercise his powerssubject to superintendence, control and direction of its Board of directors[Sec. 2 (26)]. He is a whole-time director and is the chief executive ofthe company.

Appointment (Sec. 269). Compulsory appointment of managing orwhole-time director or manager. Every public company or a privatecompany which is a subsidiary of a public company having a paid-upshare capital of Rs. 5 crores or more shall have a managing or whole-time director or a manager.

Prior approval of the Central Government unless appointment is inaccordance with the conditions specified in Schedule XIII. No suchappointment shall be made except with the prior approval of the CentralGovernment. However, no such approval is required where theappointment is made in accordance with the conditions specified inSchedule XIII.

Schedule XIII prescribes conditions to be fulfilled for the appointment ofa managing or whole-time director or manager without the approval ofthe Central Government. It also lays down the remuneration payable tomanagerial personnel.

Approval of the Central Government is not required in the case ofappointment of managerial personnel made on or after 15th day of June,1988 (the date when the amended provisions of Sec. 269 were enforced),in accordance with the conditions specified in Schedule XIII to the Act.

Provisions relating to appointment where it requires approval of theCentral Government. (1) Every application seeking approval to the



appointment of a managing or whole-time director or manager shall bemade to the Central Government within a period of 90 days from thedate of such appointment.(2) The Central Government shall not accord its approval to the

application if it is satisfied that-(a) the managing or whole-time director or the manager appointed is, in

its opinion, not a fit and proper person to be appointed as such orsuch appointment is not in the public interest; or

(b) the terms and conditions of the appointment of the managing or whole-time director or the manager are not fair and reasonable.

(3) The Central Government may accord approval for a period lesserthan the period for which the appointment is proposed to be made.

If the appointment is not approved by the Central Government, the personappointed shall vacate his office on the date on which the decision of theCentral Government is communicated to the company. If he omits or fails tovacate his office, he shall be punishable with fine which may extend toRs. 5,000 for every day during which he omits or fails to vacate such office.Appointment in contravention of the requirements of Schedule XIII- Anappointment without the approval of the Central Government maysometimes be made by a company, in contravention of the requirementsof Schedule XIII. In such a case if the Central Government suo motto oron any information received by it is prima facie of the opinion that suchan invalid appointment has been made, the Central Government may referthe matter to the Tribunal. On receipt of such a reference, the Tribunalshall issue a notice to (a) the company, (b) the managing or whole-timedirector or the manager, as the case may be, (c) and the director or otherofficer responsible for complying with the requirements of Schedule XIII,to show cause as to why such appointment shall not be terminated andthe penalties provided under Sec. 269 shall not be imposed.

Disqualifications of the Managing Director (Sec. 267).No person shall be appointed a managing or whole-time director who-(a) is an undercharged insolvent, or has at any time been adjudged an

insolvent;(b) suspends, or has at any time suspended, payment to his creditors, or

makes, or has at any time made, composition with them.; or(c) is, or has at any time been, convicted by a Tribunal of an offence

involving moral turpitude.The disqualifications which apply to the directors (Sec. 274) also applyto the managing director.

Number of managing directorships (Sec. 316). It cannot exceed two.Any person may be appointed as a managing director in a public companyor in a private company which is a subsidiary of a public company, providedhe is not holding the office of the managing director or the manager in anyother company (including a private company which is not a subsidiary of apublic company). He can, however, hold such office in any number ofprivate companies which are not subsidiaries of public companies.



A public company or a private company which is a subsidiary of a publiccompany may appoint or employ a person as its managing director if heis the managing director or manager of one, and not more than one, othercompany (including a private company which is not a subsidiary of apublic company). But any such appointment shall be approved by aresolution passed at a meeting of the Board of directors with the consentof all the directors present at the meeting. Specific notice of such a meetingand the resolution shall also be given to all the directors then in India.

The object of this provision is that efficiency of a person who is managinga company should not be affected by his being in management of morethan two companies. Thus a person may hold the office of managingdirector in not more than two companies simultaneously.

Central Government may permit a person to be managing director ofmore than two companies. The Central Government may permit anyperson to be appointed as a managing director of more than twocompanies if it is satisfied that it is necessary that the companies should,for their proper working, function as a single unit and have a commonmanaging director.

Term of office (Sec. 317). It cannot exceed 5 years at a time. Themaximum term of appointment of a managing director can be 5 years at atime. There is nothing to prohibit reappointment, re-employment or theextension of the term of office of the managing director. But any suchnew term shall not be sanctioned earlier than 2 years from the date onwhich it is to come into force.

Sec. 317 does not apply to a private company which is not a subsidiaryof a public company.

2.3.5.18. Manager

‘Manager’, according to Sec. 2 (24), means an individual who has themanagement of the whole or substantially the whole of the affairs of acompany. He is subject to the superintendence, control and direction ofthe Board of directors. ‘Manager’ includes a director or any other personoccupying the position of a manager, by whatever name called, andwhether under a contract of service or not.

Provisions of the Act regarding manager1. Firm or body corporate not to be appointed manager (Sec. 384).

No company shall employ a firm, or a body corporate or associationas its manager.

2. Certain persons not to be appointed managers (Sec. 385). Nocompany shall appoint or employ any person as its manager who-

(a) suspends, or has at any time within the preceding 5 years beenadjudged an insolvent; or

(b) suspends, or has at any time within the preceding 5 years suspended,payment to his creditors, or makes, or has at any time within thepreceding 5 years made, a composition with them; or



(c) has at any time within the preceding 5 years been, convicted by aCourt in India of an offence involving moral turpitude.

The Central Government may, be notification in the Official Gazette,remove these disqualifications, either generally or in relation to anycompany or companies specified in the notification.3. Number of companies of which a person may be appointed manager

(Sec. 386)- No company shall employ or appoint any person asmanager, if he is either the manager or the managing director of anyother company. However, a company may appoint or employ a personas its manager, if he is the manager or managing director of one, andnot more than one, other company. But such appointment oremployment shall be made or approved by a resolution passed by adirectors present at the meeting.

4. Remuneration of manager (Sec. 387)- The manager of a companymay, subject to the overall limit of managerial remuneration, receiveremuneration either by way of a monthly payment or by a way of aspecified percentage of the net profits of the company. Except withthe approval of the Central Government, such remuneration shall notexceed in the aggregate 5 per cent of the net profits of the company.

5. Application of Secs! 269, 310, 311, 312 and 317 to managers (Sec.388)- (a) Appointment or re-appointment of a manager to requireapproval of Central Government. The appointment or re-appointmentof a person as manager in the case of public company or a privatecompany, which is a subsidiary of a public company, shall have effectonly when approved by the Central Government (Sec. 269 asapplicable to managers).

(b) Increase in remuneration to require approval of Central Government.Any change in the regulations of the company or any agreement, bywhich the remuneration of a manager is increased, shall require theprevious approval of the Central Government (Secs. 310 and 311as applicable to managers).

(c) Office of manager not to be assigned- The office of a manager, likethat of a director, shall not be assigned (Sec. 312 as applicable tomanagers).

(d) Manager not to be appointed for more than 5 years at a time- Amanager, like a managing director, shall not be appointed for a termexceeding 5 years at a time (Sec. 317 as applicable to managers).Secs. 386, 387 and 388 do not apply to a private company unless itis a subsidiary of a public company (Sec. 388-A).

Sec. 293-A however prohibits political contributions (to any political partyor for any political purpose to any person, whether directly or indirectly)in the case of (a) Government Companies and (b) Companies whichhave been in existence for less than 3 financial years.



Any other company may contribute any amount or amounts, directly orindirectly, (a) to any political party, or (b) for any political purpose to anyperson. This is however subject to the following conditions:4. The amount or aggregate of the amounts so contributed by a company

in any financial year shall not exceed 5 per cent of its average netprofits during the three immediately preceding financial years.

5. Before any such contribution is made by the company, a resolutionauthorizing the making of the contribution shall be passed at a meetingof the Board of directors. Such resolution shall be deemed to bejustification in law for the making of the contribution authorized by it.

6. The company shall disclose in its profit and loss account the amountor amounts of such contributions during the financial year to whichthat account relates, giving

(a) particulars of the total amount contributed, and(b) the name of the party or person to which or to whom such amount

has been contributed.2.4. Winding Up of Companies

2.4.1 Meaning of winding up

Winding up or liquidation of a company represents the last stage in itslife. It means a proceeding by which a company is dissolved. The assetsof the company are disposed of, the debts are paid off out of the realizedassets (or from contributions from its members), and the surplus, if any,is then distributed among the members in proportion to their holdings inthe company. The two terms ‘winding up’ and ‘liquidation’ are usedinterchangeably. According to Prof. Gower, winding up of a company isa process whereby its life is ended and its property administered for thebenefit of its creditors and members. An administrator, called liquidator,is appointed and he takes control of the company, collects its assets,pays its debts and finally distributes any surplus among the members inaccordance with their rights.

2.4.2 Modes of winding up

There are two modes of winding up of a company, viz.,1. Winding up by the Tribunal (Secs. 433 to 483).2. Voluntary winding up (Secs. 484 to 521). This may be-(1) members’ voluntary winding up, or(2) Creditors’ voluntary winding up.Winding up by the tribunal (Secs. 433 to 483)

Winding up of a company under the order of a Tribunal is also known ascompulsory winding up.

Grounds for compulsory winding up (Sec. 433)

A company may be wound up by the Tribunal in the following cases:



1. Special resolution of the company [Sec. 433 (a)]. Winding up orderunder this head is not common because normally the members of acompany prefer to wind up the company voluntarily for in such acase they shall have a voice in its winding up. Moreover, a voluntarywinding up is far cheaper and speedier than a winding up by theTribunal.

2. Default in delivering the statutory report to the Registrar or in holdingstatutory meeting [Sec. 433 (b)]. A petition on this ground can bemade either by the Registrar or by a contributory. In the latter casethe petition for winding up can be filed only after the expiry of 14days from the day on which the statutory meeting ought to have beenheld [Sec. 439 (7)].

The Tribunal may, instead of making a winding up order, direct that thestatutory report is delivered or that a statutory meeting is held. TheTribunal may order the costs to be paid by any persona who areresponsible for the default [Sec. 443 (3)].3. Failure to commence, or suspension of business [Sec. 433 (c)].The Tribunal exercises power in this case only if the company has nointention of carrying on its business or if it is not possible for it to carryon its business.

If a company has not begun to carry on business within a year from itsincorporation or suspends its business for a whole year, the Tribunal willnot wind it up if –(a) there are reasonable prospects of the company starting business within

a reasonable time, and(b) there are good reasons for the delay, i.e., the suspension of business

is satisfactorily accounted for and appears to be due to temporarycauses.

4. Reduction in membership [Sec. 433 (d)]. If, at any time, thenumber of members of a company is reduced in the case of a publiccompany, below 7 or in the case of private company, below 2, thecompany may be ordered to be wound up by the Tribunal. If thecompany carries on business for more than 6 months while the numberis so reduced every member who is cognizant of the fact that it iscarrying on business with members fewer than the statutory minimum,will be severally liable for the payment of the whole of the debts ofthe company contracted after those 6 months (Sec. 45).

5. Inability to pay its debts [Sec. 433 (e)]. A company may be woundup by the Tribunal if it is unable to pay its debts. The test is whetherthe company has reached a stage where it is commercially insolvent-that is to say, that its existing and probable assets would be insufficientto meet the existing liabilities.

“Commercially insolvent”- means that the company is unable to paydebts or liabilities as they arise in the ordinary course of business.

When is a company unable to pay its debts? According to Sec. 434,a company shall be deemed to be unable to pay its debts in the followingcases:



(1) Demand for payment neglected. If a creditor to whom the company isindebted for a sum exceeding Rs. 1,00,000 has served on the company,at its registered office, a demand for payment and the company has for3 weeks thereafter neglected to pay or otherwise satisfy him, thecompany is unable to pay its debts. The demand may be signed by anyagent or legal adviser duly authorized or in the case of a firm, by suchagent or legal adviser or by any member of the firm.

(2) Decreed debt unsatisfied. If execution or other process issued on adecree or order of any Tribunal in favor of a creditor of the companyis returned unsatisfied in whole or in part, the company is deemed tobe unable to pay its debt.

(3) Commercial insolvency. A company is deemed to be unable to payits debts, if it is proved to the satisfaction of the Tribunal that thecompany is unable to pay its debts. In determining whether a companyis unable to pay its debts, the Tribunal shall take into account thecontingent and prospective liabilities of the company also.

6. Just and equitable [Sec. 433 (f)]. The words ‘just and equitable’are of the widest significance and do not limit the jurisdiction of theTribunal to any particular case.The principle of just and equitable clause baffles a precise definition.It must rest with the judicial discretion of the Tribunal dependingupon the facts and circumstances of each [Hind Overseas (Pvt.) Ltd.v. R.P. Jhunjhunwalla, (1976) 46 Comp. Cas. 91 (S.C.)].What is ‘just and equitable’ clause? It depends upon the facts ofeach case. The Tribunal may order winding up under the ‘just andequitable’ clause in the following cases:

(1) When the substratum of a company is gone. The substratum of acompany can be said to have disappeared only when the object forwhich it was incorporated has substantially failed, or when it isimpossible to carry on the business of the company except at a loss,or the existing and possible assets are insufficient to meet the existingliabilities.

(i) When the very basis for the survival of the company is gone.Pirie v. Stewart, (1904) 6 F. 847. A shipping company lost its onlyship, the remaining asset being a paltry sum of pound 363. A majorityin number and value of shareholder opposed this and desired to carryon the business as charter. Held, it was ‘just and equitable’ that thecompany should be would up.

(ii) When the main object of the company has substantially failed orbecome impracticable. Where a company’s main object fails, itssubstratum is gone and it may be would up even though it is carryingon its business in pursuit of a subsidiary object. German Date CoffeeCo., Re (1882) 20 Ch. D. 169. In this case, the objects clause ofthe German Date Coffee Co. stated that it was formed for the workingof a German patent which would be granted for making a partialsubstitute for coffee from dates and for the acquisition of inventionsincidental thereto and also other inventions for similar purposes. TheGerman patent was never granted but the company did acquire andwork a Swedish patent and carried on business at Hamburg where a



substitute coffee was made from dates, but not under the protectionof a patent. Held, on a petition by 2 shareholders, that the mainobject could not be achieved and, therefore, it was ‘just andequitable’ that the company should be would up.

(iii) When the existing and probable assets of the company are insufficientto meet its existing liabilities. Where a company is totally unable topay off creditors and there is ever-increasing burden of interest anddeteriorating state of management and control of business owing tosharp differences between shareholders, the Tribunal will orderwinding up.

(2) When the management is carried on in such a way that the minority isdisregarded or oppressed. Oppression of minority shareholders willbe a ‘just and equitable’ ground where those who contributecompany abuse their power to such an extent as to seriously prejudicethe interest of minority shareholders.

(3) Where there is a deadlock in the management of the company. Whenshareholding is more or less equal and there is a case of completedeadlock in the company on account of lack of probity in themanagement of the company and there is no hope or possibility ofsmooth and efficient continuance of the company as a commercialconcern, there may arise a case for winding up on the ‘just andequitable’ ground. Yenidje Tobacco Co. Ltd., Re (1916) 2 Ch. 426.A and B were the only shareholders and directors of a companywith equal rights of management and voting power. After a time theybecame bitterly hostile to each other and disagreed about theappointment of important servants of the company. All communicationbetween them was made through the secretary as they were not sospeaking terms with each other. The company made large profits inspite of the disagreement. Held, there was a complete deadlock inthe management and the company was ordered to be wound up.

(4) Where public interest is likely to be prejudiced. Having regard to theprovisions of Sec. 397 and 398 (dealing with prevention of oppressionand mismanagement) where the concept of prejudice to public interestis introduced, it would appear that the Tribunal winding up a companywill have to take to into consideration not only the interest ofshareholders and creditors but also public interest in the shape ofneed of the community, interest of the employees, etc.

(5) When the company was formed to carry out fraudulent or illegalbusiness or when the business of the company becomes illegal.

(6) When the company is a mere bubble and does not carry on anybusiness or does not have any property [London & County CoalCo., Re (1867) L.R. 3 Eq. 355].

(7) Acting against the interest of the State. If the company has actedagainst the interests of the sovereignty and integrity of India, thesecurity of the state, friendly relations with foreign states, public order,decency or morality.

(8) Winding up of a sick company. If the tribunal is of the opinion thatthe company should be wound up under the circumstances specifiedin Sec. 424G. The last two clauses in Sec. 333(i) have been addedby the Companies (Amendment) Act, 2002.



2.4.3. Petition (Sec. 439)

An application to the Tribunal for the winding up of a company is madeby a petition. A petition for the winding up of a company may be presented,subject to the provisions of this Section, in the following cases:1. Petition by the company [Sec. 439 (1) (a)]. A company may itself

present a petition to the Tribunal for winding up after it has passed aspecial resolution. A company does not often present a petition tohave itself wound up by the Tribunal as it can achieve this objectmore conveniently by passing a special resolution to wind upvoluntarily.

2. Petition by any creditor or creditors [Sec. 439 (1) (b)]. A petitionto the Tribunal for the winding up of a company may be filed by anycreditor or creditors. The term ‘creditor’ is not limited to one towhom a debt is due at the date of the petition and who can demandimmediate payment. Every person having a pecuniary claim againstthe company whether actual or contingent is a creditor and such aperson is competent to file a petition for the winding up of thecompany.

3. Petition by any contributory or contributories [Sec. 439 (1) (c)].A contributory means a person liable to contribute to the assets ofthe company on the event of its being wound up and includes theholder of shares which are fully paid-up. He can present a petitionfor winding up a company; even though he may be the holder of fullypaid-up shares or that the company may have no assets at all, ormay have no surplus assets left for distribution among the shareholders,after satisfaction of its liabilities.

A contributory can present a winding up petition if-(a) the membership is reduced below the statutory minimum; or(b) he is an original allottee of shares; or(c) he has held his shares for any out of the previous 18 months; or(d) the shares have devolved on him through the death of a former holder.4. Petition by all or any of the prior parties whether together or

separately [Sec. 439 (1) (d)]. A petition for the winding up of acompany under Sec. 433 may be presented by all or any of the parties,namely, the company, the creditors or the contributories specified inSec. 433 (a), (b) and (c) whether together or separately.

5. Petition by the Registrar [Sec. 439 (1) (e)]. The Registrar canpresent for winding up a company on the following grounds only, viz,

(a) If default is made by the company in delivering the statutory reportto the Registrar or in holding the statutory meeting.

(b) If the company does not commence its business within a year fromits incorporation, or suspends its business for a whole year.

(c) If the number of members is reduced in the case of a public companybelow 7 and in the case of a private company below 2.

(d) If the company is unable to pay its debts.(e) If the Tribunal is of opinion that it is just and equitable that the company

should be wound up.



6. Petition by the Central Government [Sec. 439 (1) (f)]. Under Sec.243 the Central Government may cause to be presented to the Tribunal(by any person authorized by it in this behalf) a petition for the windingup of a company where it appears from the report of Inspectors appointedto investigate the affairs of the company under Sec. 235 that –(1) the business of the company is being conducted with intent to-(a) defraud its creditors, members, or any other persons, or(b) otherwise for a fraudulent or unlawful purpose, or(c) in a manner oppressive of any of its members, or(d) that the company was formed for any fraudulent or unlawful pur-

pose; or(2) persons concerned in the formation of the company or the manage-

ment of its affairs have been guilty of fraud, misfeasance or othermisconduct towards the company or towards any of its members.

2.4.4. Commencement of winding up (Sec. 441)

Where, before the presentation of a petition for the winding up of acompany by the Tribunal, a resolution has been passed by the companyfor voluntary winding up, the winding up shall be deemed to havecommenced from the date of the resolution. In all other cases (i.e., wherethe company has not previously passed a resolution for voluntary windingup) the winding up of the company by the Court shall be deemed tocommence at the time of the presentation of the petition for the windingup. When an order is made for winding up, it relates back to the date ofthe presentation of the petition. If no order for winding up is made andthe winding up petition is dismissed, the date of the presentation of thewinding up petition has no relevance. As such until winding up order ismade, the company has to comply with the requirements of the CompaniesAct 1956 as are required of a company not wound up.Advertisementof petition. Every petition for winding up a company shall be advertised14 days before the hearing, stating the date on which the petition waspresented and the names and addresses of petitioners.

2.4.5. Powers of tribunal

Power of Tribunal to stay or restrain proceedings against company (Sec.442). At any time after the presentation of a winding of petition and beforea winding up order has been made, the company, or any creditor orcontributory may apply to the Tribunal for a stay of, or restraint of, furtherproceedings in the Tribunal.

Powers of Court on hearing petition (Sec. 443)

On hearing a winding up petition, the Tribunal may-(a) dismiss it, with or without costs; or(b) adjourn the hearing conditionally or unconditionally; or(c) make any interim order that it thinks fit; or(d) make an order for winding up the company with or without costs or

any other order as it thinks fit.



The Tribunal shall not refuse to make a winding up order merely becausethe assets have been fully mortgaged or because there are no assets atall. Where the petition is presented on the ground that it is just and equitablethat the company should be would up, the Tribunal may refuse to make awinding up order if the petitioners are acting unreasonably in seeking tohave the company wound up instead of pursuing some other remedyavailable to them.

2.4.6. Consequences of winding up order

Once the Tribunal makes an order for the winding up of a company, itsconsequences date back to the commencement of winding up. The otherconsequences of winding up by the Tribunal are as follows:1. Intimation to Official Liquidator and Registrar (Sec. 444). Where the

Tribunal makes an order for the winding up of a company, it shallforthwith cause intimation to be sent to the Official Liquidator andthe Registrar of the order of winding up.

2. Copy of winding up order to be filed with the Registrar [Sec. 455(1), (1-A) and (2)]. On the making of the winding up order it shall bethe duty of the petitioner and of the company to file with the Registrarwithin 30 days a certified copy of the order.

3. Order for winding up deemed to be notice of discharge [Sec. 455(3)]. The order for winding up shall be deemed to be notice dischargeto the officers and employees of the company, except when thebusiness of the company is continued. Where a servant of the companyis on a contract of service for a fixed term and that term has notexpired on the date of the order of the winding up of the company,the order operates as a wrongful discharge and damages are allowedfor breach of contract of service and the servant is free from hisagreement not to compete with the company.

4. Suits Stayed [Sec. 446 (1)]. When the tribunal has been made, nosuit or other legal proceeding shall be commenced against the companyexcept by leave of the Tribunal. Similarly pending suits shall not beproceeded with except by leave of the Tribunal.

5. Powers of the Tribunal [Sec. 446 (2) and (3)]. Where the Tribunal iswinding up the company, shall have jurisdiction to entertain, or disposeof-

(a) any suit or proceeding by or against the company;(b) any claim made by or against the company;(c) any application made under Sec. 391 for compromise with creditors

and / or members;(d) any question of priorities or any other question whatsoever, whether

of law or fact, which may relate to or arise in course of the windingup of the company.

6. Effect of winding up order (Sec. 447). An order for winding up acompany shall operate in favour of all the creditors and of all thecontributories of the company as if it had been made on their jointpetition.

7. Official Liquidator to be liquidator (Sec. 449). On a winding up order



being made in respect of a company, the Official Liquidator shall, byvirtue of his office, become the liquidator of the company.

2.4.7. Procedure of winding up by the tribunal

Official Liquidator [Sec. 448 as amended by the Companies (SecondAmendment) Act 2002]. For the purpose of winding up of companies bythe Tribunal, there may be appointed an official liquidator who-(a) may be appointed from a panel of professional firms of chartered

accountants, advocates, company secretaries, cost and worksaccountants or firms having a combination of these professions whichthe Central Government constitute for the tribunal;

(b) may be a body corporate consisting of such professionals as may beapproved by the Central Government from time to time.

(c) may be a whole-time or part-time office, approved by the CentralGovernment.

Liquidator (Sec. 449). On a winding up order being made in respect ofa company, the Official Liquidator shall, by virtue of his office, becomethe liquidator of the company.

Style, etc. of liquidator (Sec. 452). The liquidator shall be described bythe style of ‘the Official Liquidator’ of the particular company in respectof which he acts, and not by his individual name.

Provisional liquidator (Sec. 450). At any time after the presentation ofa winding up petition and before the making of a winding up order, theTribunal may appoint the Official Liquidator to be the liquidatorprovisionally.

A provisional liquidator is as much a liquidator in winding up; in fact, thename provisional liquidator is only a convenient label he has the samepowers and to the extent these powers imply duties, the same duties as aliquidator in a winding up. The Tribunal may limit and restrict his powersby the order appointing him or by a subsequent order. Otherwise, he hasthe same powers as a liquidator has.

Notice to company before appointment of provisional liquidator. Beforeappointing a provisional liquidator, the Tribunal shall give notice to thecompany and give a reasonable opportunity to it to make itsrepresentation. If the Tribunal thinks fit, it may dispense with such notice;but in that case, it shall in writing record the special reasons for not givingthe notice.

On a winding up order being made by the Tribunal, the Official Liquidatorshall cease to hold office as provisional liquidator and shall become theliquidator of the company.

Duties of liquidator1. Proceedings in winding up [Sec. 451 (1) and (3)] : The liquidator

shall conduct the proceedings in winding up the company and performduties imposed by the Tribunal. The acts of the liquidator shall be



valid notwithstanding any defect that may afterwards be discoveredin his appointment or qualification. Acts done, after his appointmenthas been shown to be invalid, shall not be deemed to be validly done.

2. Report [Sec. 455 (1)] : The Official Liquidator shall as soon aspracticable after receipt of the statement of affairs of the company(to the submitted under Sec. 454), and not later than 6 months fromthe date of the order of winding up, submit a preliminary report tothe Tribunal. The report shall contain particulars-

(a) As to the amount of the capital issued, subscribed, and paid-up, andthe estimated amount of assets and liabilities.

(b) If the company has failed, as to the cause of the failure; and(c) Whether, in his opinion, further inquiry is desirable as to any matter

relating to the promotion, formation, or failure of the company, orthe conduct of business thereof.

(2a) Additional reports. The Official Liquidator may, if he thinks fit, makefurther reports stating the manner in which the company was promotedor formed. He may further state if any fraud has been committed byany person in company’s promotion or formation, or since theformation thereof. He may also state any other matters which it isdesirable to bring to the notice of the Tribunal. If in any further reportthe Official Liquidator states that a fraud has been committed, theTribunal shall have the further powers provided in Sec. 478 as to thepublic examination of promoters and officers.

3. Custody of company’s property (Sec. 456) : Where a winding uporder has been made or where a provisional liquidator has beenappointed, the liquidator/provisional liquidator shall take into hiscustody all the property, effects and actionable claims to which thecompany is entitled. So long as there is no liquidator, all the propertyand effects of the company shall be deemed to be in the custody ofthe Tribunal.

4. Exercise and control of liquidator’s powers (Sec. 460) : (1) Theliquidator shall, in the administration of the assets of the companyand the distribution thereof among creditors, have regard to anydirections which may be given by resolution of the creditors orcontributories at any general meeting or by the committee ofinspection. Any directions by the creditors or contributories at anygeneral meeting shall override any directions given by the committeeof inspection.

5. Meeting of creditors and contributories : The liquidator any summongeneral meetings of the creditors or contributories whenever he thinksfit for the purpose of ascertaining their wishes. He shall summon suchmeetings at such times as the creditors or contributories may byresolution direct, or whenever requested in writing to do so by notless than 1/10th in value of the creditors or contributories, as thecase may be.

6. Directions from the Tribunal : The liquidator may apply to the Tribunalfor directions in relation to any particular matter arising in windingup. He shall also use his own discretion in the administration of theassets of the company and in the distribution thereof among thecreditors.



7. Proper books (Sec. 461) : The liquidator shall keep proper booksfor making entries or recording minutes of the proceedings at meetingsand such other matters as may be prescribed. Any creditor orcontributory may, subject to the control of the Tribunal, inspect anysuch books personally or by his agent.

8. Audit of accounts (Sec. 462) : The liquidator shall, at such times asmay be prescribed but at least twice each year during his tenure ofoffice present to the Tribunal an account of his receipts and paymentsas liquidator. The account shall be in the prescribed form, shall bemade in duplicate, and shall be duly verified. The Tribunal shall causethe account to be audited. For the purpose of the audit the liquidatorshall furnish the Tribunal with such vouchers, information and thebooks as the Tribunal may require. Once copy of the audited accountsshall be filed and kept by the Tribunal. The other copy of the accountshall be delivered to the Registrar for filing. Each copy shall be opento the inspection of any creditor, contributory or person interested.The liquidator shall cause the audited account or its summary to beprinted. He shall send a printed copy of the account or its summaryby post to every creditor and to every contributory. The Tribunalmay dispense with compliance with this provision.

9. Appointed of committee of inspection (Sec. 464) : May be theTribunal at the time of making an order for the winding up of a companyor at any time thereafter, direct that there ought to be appointed acommittee of inspection to act with the liquidator.

10. Pending liquidation (Sec. 551) : The liquidator shall, within 2 monthsof the expiry of each year from the commencement of winding up,file a statement duly audited by a qualified auditor of the company,with respect to the proceedings in, and position of, the liquidation.The statement shall be filed-

(a) in the case of a winding up by the Tribunal, in Tribunal; and(b) in the case of a voluntary winding up, with the Registrar.

When the statement is filed in Tribunal, a copy shall simultaneouslybe filed with the Registrar and shall be kept by him along with theother records of the company.

Powers of liquidator1. Powers exercisable with the sanction of the Tribunal [Sec. 457 (1)].

The liquidator in a winding up by the Tribunal shall have power, withthe sanction of the Tribunal,-

(1) To institute or defend suits and other legal proceedings, civil orcriminal, in the name and on behalf of the company.

(2) To carry on the business of the company so far as may be necessaryfor the beneficial winding up of the company.

(3) To sell the immovable and movable property and its auctionableclaims with power to transfer the whole or sell the same in parts.

(4) To raise money on the security of the company’s assets. The assets includeall contributions which the liquidator is entitled to get from the members,past or present, as well as all assets which have been misappropriated asagainst creditors [Stringers Case, (1869) 4 Ch. App. 45].



(5) To do all such other things as may be necessary for winding up theaffairs of the company and distributing its assets.

2. Powers exercisable without the sanction of the Tribunal [Sec. 457(2)]. The liquidator in a winding up by the Tribunal shall have power,without the sanction of the Tribunal,-

(1) to do all acts and to execute documents and deeds on behalf of thecompany under its seal;

(2) to inspect the records and returns of the company or the files of theRegistrar without payment of any fee;

(3) to prove, rank and claim in the insolvency of any contributory forany balance against his estate and to receive dividends;

(4) to draw, accept, make and endorse any bill of exchange, hundi orpromissory note on behalf of the company in the course of its business;

(5) to take out, in his official name, letters of administration to anydeceased contributory, and to do any other act necessary forobtaining payment of any money due from a contributory or his estate;

(6) to appoint an agent to do any business which he is unable to dohimself.

3. Powers exercisable in case of onerous contract (Sec. 535). The term‘onerous’ means a right to property, e.g., a lease, in which theobligations attaching to it exceed the advantage to be derived fromit. The liquidator may, with the leave of the Tribunal, disclaim onerouscontracts, and properties. This shall be done within 12 months afterthe commencement of the winding up, unless the Tribunal extendstime.

2.4.8. Statement of affairs (Sec. 454)

Content of statement- Within 21 days of the relevant date (i.e., the dateof the appointment of a provisional liquidator, or where no suchappointment is made, the date of winding up order), the company shallsubmit a statement to the Official Liquidator as to the affairs of the company.The Tribunal may in its discretion direct that the company need not submitthis statement. The statement shall be in the prescribed form, verified byaffidavit and contain the following particulars:1. The assets of the company, showing separately cash in hand and at

bank and negotiable securities.2. Its debts and liabilities.3. Names, residences and occupations, of its creditors, stating

separately the amount of secured and unsecured debts.4. In the case of secured debts, particulars of the securities held by the

creditors, their value and dates on which they were given.5. The debts due to the company and names and the addresses of

persons from whom they are due and the amount likely to be realized.6. Such further information as may be required by the Official Liquidator.The Official Liquidator or the Tribunal may extend the period of 21 daysfor the submission of the statement to a maximum period of 3 months.



Who is to submit the statement? -The statement shall be submitted andverified by one or more of the persons who are at the relevant datedirectors and by the person who is at that date the manager, secretary orother chief officer of the company. The Official Liquidator may also requireany of the following persons to submit and verify the statement. The personsrequired to submit and verify the statement may be-(a) present or past officers of the company;(b) persons who have taken part in the formation of the company at any

time within 1 year before the relevant date;(c) present employees or employees within 1 year before the relevant

date, and who are capable of giving the information required;(d) employees and officers of another company which is or was within 1

year before the relevant date, an officer of the company to which thestatement relates.

2.4.9. Committee of inspection (Secs. 464 and 465)

Appointment and composition of committee (Sec. 464). The Tribunalmay, at the time of making an order for the winding up of a company orat any time thereafter, direct that there shall be appointed a committee ofinspection to act with the liquidator. The liquidator shall then within 2months from the date of such direction convene a meeting of the creditorsof the company for the purpose of determining the membership of thecommittee. Within 14 days of the creditor’s meeting, the liquidator shallcall a meeting of the contributories to consider the decision of the creditorswith respect to the membership of the committee. The contributories mayaccept the decision of the creditors with or without modification or rejectit. If the contributories do not accept the decision of the creditors, theliquidator shall apply to the Tribunal for directions as to what shall be thecomposition of the committee and who shall be its members.

Constitution and proceedings of the committee (Sec. 465). Thecommittee of inspection shall not have more than12 members. Themembers shall be creditors and contributories of the company, in suchproportions as may be agreed on by the meetings of creditors andcontributories. In case of difference of opinion between creditors andcontributories, the proportion shall be determined by the Tribunal. Thecommittee of inspection shall have the right to inspect the accounts of theliquidator at all reasonable times. It shall meet at appointed times. Theliquidator or any member of the committee may also call its meeting asand when he thinks necessary. The quorum of its meeting shall be 1/3rdof the total number of the members or 2 whichever is higher. It may actby a majority of its members present at a meeting, but it shall not actunless a quorum is present.

2.4.10. General Powers of the tribunal

To facilitate the winding up of a company of the Tribunal, the CompaniesAct, 1956 gives the following powers to the Tribunal. These powers arein addition to the powers conferred on the Tribunal by Sec. 433 on hearingthe petition.



1. Stay of winding up proceedings (Sec. 466) : The Tribunal may, atany time after making a winding up order on the application either ofthe Official Liquidator or of any creditor or contributory, stay thewinding up proceedings. The Tribunal may, before making an order,require the Official Liquidator to furnish to the Tribunal, a reportwith respect to any facts or matters which are in his opinion relevantto the application.

2. (1) Settlement of list of contributories (Sec. 467) : The Tribunal maysettle the list of contributories that are liable to contribute to the assetsof the company, with the power to rectify the register of members.(2) Payment of debts due by contributory (Sec. 469) : The Tribunalmay also order any contributory to pay money, due by him to thecompany, apart from any call.(3) Power to make calls (Sec. 470) : The Tribunal may also makecalls on all or any of the contributories for payment of any moneywhich it considers necessary to satisfy the debts and liabilities of thecompany, for the expenses of winding up and for adjustment of therights of the contributories.(4) Adjustment of rights of contributories (Sec. 475) : The Tribunalshall adjust the rights of contributories among themselves anddistribute any surplus among persons entitled thereto.

3. Delivery of property (Sec. 468) : The Tribunal may, at any time aftermaking a winding up order, direct delivery to the liquidator of anymoney, property or books and papers in the custody or control ofany contributory, trustee, receiver, banker, agent, officer or otheremployee of the company, to which the company is prima facieentitled.

4. Exclusion of creditors (Sec. 474) : The Tribunal may fix a time withinwhich creditors shall prove their debts or claims. It may excludecreditors not proving within the time from the benefit of anydistribution made before those debts and claims are proved.

5. Order as to costs (Sec. 476) : In case of deficiency of assets tosatisfy the liabilities, the Tribunal may give priority to the payment,out of the assets, of costs, charges and expenses of the winding upproceedings.

6. Summoning of persons suspected of having property of the company(Sec. 477) : The Tribunal may, at any time after the appointment of aprovisional liquidator or the making of a winding up order, summonbefore it any officer of the company or person known or suspectedto have in his possession any property or books or papers of thecompany. It may also summon any person who is known or suspectedto be indebted to the company. The Tribunal may also summon anyperson whom the Tribunal considers capable of giving informationconcerning the promotion, formation, trade, dealings, property, booksor papers, or affairs of the company.

7. Public examination (Sec. 478) : If in the opinion of the OfficialLiquidator a fraud has been committed by any person in the promotionor formation of the company, or by any officer of the company inrelation to the company since its formation, he shall make a report to



the Tribunal. In such a case the Tribunal may direct that person orofficer shall attend before the Tribunal and be publicly examined asto the promotion or formation or the conduct of the business of thecompany, or as to his conduct and dealings as an officer thereof.

8. Arrest of absconding contributory (Sec. 479) : If at any time eitherbefore or after making a winding up order, the Tribunal believes thata contributory is about to quit India or to abscond or to remove andconceal any property for the purpose of avoiding payment or avoidingexamination, he may be arrested and the relevant books, papers andmovable property may be seized.

9. Meeting of creditors or contributories (Sec. 557) : In all mattersrelating to the winding up of a company, the Tribunal may convenemeetings of creditors or contributories for the purpose of ascertainingtheir wishes.

2.4.11. Dissolution of company (Sec. 481)

Dissolution puts an end to the existence of a company. A company whichhas been dissolved no longer exists as a separate entity capable of holdingproperty or of being sued in the Tribunal [Employer’s Liability AssuranceCorpn. V. Sidgwick Collins & Co., (1927) A.C. 95].

Grounds for dissolution. The Tribunal shall make an order for thedissolution of a company-(1) When the affairs of the company have been completely wound up, or(2) When the Tribunal is of opinion that the liquidator cannot proceed

with the winding up for want of funds and assets, or(3) For any other reason.The Tribunal shall make an order for the dissolution of the company onlywhen it is just and reasonable in the circumstances of the case that suchan order should be made. The company shall be dissolved from the dateof the order of the Tribunal. Within 30 days of the order of the Tribunal,the liquidator shall send a copy of the order to the Registrar who shallmake in his books a minute of the dissolution of the company.

2.4.12. Contributory

Definition of contributory (Sec. 428). The term ‘contributory’ meansevery person liable to contribute to the assets of a company in the eventof its being would up and includes the holder of any shares which arefully paid up.

List of contributories. The list of contributories shall be prepared intwo parts, viz., List A and List B.

List A shall include the present members of the company, i.e., memberswhose names appear in the company’s register of members at the time ofthe winding up of the company.



List B shall include the past members of the company, i.e., members whoceased to be members within one year preceding the commencement ofthe winding up of the company.

Liability of contributories (Sec. 426). In the event of a company beingwound up every present and past member shall be liable to contribute tothe assets of the company to an amount sufficient-(a) for payment of (i) its debts and liabilities, and (ii) costs, charges and

expenses of the winding up, and(b) for the adjustment of the rights of the contributories among themselves.Liability of present members: The liability of a present member (i.e., ListA contributory) shall be limited-(1) in the case of a company limited by shares, to the amount remaining

unpaid on the shares; and(2) in the case of a company limited by guarantee, to the amount

undertaken to be contributed by him to the assets of the company inthe event of its being wound up.

Liability of past members :(i.e. List B Contributory) shall not be liable tocontribute –1) If he has ceased to be a member for 1 year or more before the

commencement of the winding up;2) in respect of any debt or liability of the company contracted after he

ceased to be a member;3) If it appears to the Tribunal that the present members will be able to

satisfy the contributions required to be made by themWhere there have been several transfers of the same shares within a yearbefore the winding up, the primary liability is that of the latest transferorin case of default by the A List contributories [Humby‘s case, (1872)426 L.T. 936]Ex-contractu and ex-lege liability Under Sec. 429, the liability of amember to be included in the list of contributories is not ex-contractu,i.e. it does not arise as a result of the contract of membership. Hisliability is ex-lege which means that it arises by reason of the fact that hisname appears in the register of members even though the allotment tohim was void or that he had sold his shares to a purchaser who has notgot his name registered in the register. In the absence of rectification ofthe register, his liability is absolute under Sec. 429.Before a company goes into liquidation, the liability of a member tocontribute is measured by the contractual obligation arising frommembership. But after liquidation Sec. 429 imposes a new liability onthe shareholders in respect of unpaid calls made before or after the windingup. Such calls can be recovered even if they are barred by limitationbefore the order of winding up was made.

Voluntary winding up (Secs. 484 to 520)Voluntary winding up means winding up by the members or creditors of acompany without interference by the Tribunal. The object of a voluntary



winding up is that the company, i.e. the members as well as the creditorsare left free to settle affairs without going to the Tribunal. They mayhowever apply to the tribunal for any directions if and when necessary.

Circumstances in which a company may be wound up voluntarily (sec.484)- A company may be wound up voluntarily—1) By passing an ordinary resolution: When the period, if any, fixed for

the duration of a company by the Articles has expired, the companyin general meeting may pass an ordinary resolution for its voluntarywinding up. The company may also do so when the event, if any, onthe occurrence of which the Articles provide that the company is tobe dissolved, has occurred.

2) By passing a special resolution- A company may at any time pass aspecial resolution that it be wound up voluntarily. No reasons needbe given where the members pass a special resolution for the voluntarywinding up of the company. Even the Articles cannot prevent theexercise of this statutory right.

Commencement of voluntary winding up (Sec. 486)- A voluntary windingup shall be deemed to commence at the time when the resolution (ordinaryor special, as the case may be) for its voluntary winding up is passed.

Advertisement of resolution.(Sec. 485)- Within 14 days of the passingof the resolution for voluntary winding up of the company, the companyshall give notice of the resolution by advertisement in the Official Gazette,and also in some newspaper circulating in the district of the registeredoffice of the company.

Types of voluntary winding up

A voluntary winding up may be a1. members‘ voluntary winding up, or2. creditors‘ voluntary winding up.

1. Members‘ voluntary winding up

Declaration of solvency (Sec. 488).In a voluntary winding up of a companyif a declaration of its solvency is made in accordance with the provisionsof Sec.488, it is a members‘ voluntary winding up. The declaration shallbe made by a majority of the directors at a meeting of the Board that thecompany has no debts or that it will be able to pay its debts in full within3 years from the commencement of the winding up. The declaration shallbe verified by an affidavit.

The declaration shall have effect only when it is –a) made within five weeks immediately before the date of the resolution,

and delivered to the Registrar for registration before that date; andb) accompanied by a copy of the report of the auditors of the company

on (i) the profit and loss account of the company from the date of thelast profit and loss account to the latest practicable date immediately



before the declaration of solvency. ii) the balance sheet of the companyand iii) a statement of the company’s assets and liabilities as on thelast mentioned date.

A winding up in the case of which a declaration has been made anddelivered is referred to as a member’s voluntary winding up, and a windingup in the case of which a declaration has not been so made and deliveredis referred to as a creditors‘ voluntary winding up.

Provisions applicable to a members’ voluntary winding up

Secs. 490 to 498 shall apply in relation to a members‘ voluntary windingup (Sec. 489). The provisions of these Sections are as follows:1. Appointment and remuneration of liquidators (Sec. 490) : The

company in general meeting shall appoint one or more liquidators forthe purpose of winding up its affairs and distributing the assets. Itshall also fix the remuneration, if any, to be paid to the liquidator orliquidators. Any remuneration so fixed shall not be increased in anycircumstances. The liquidator shall not take charge of his office beforehis remuneration is fixed as aforesaid.

2. Board‘s powers to cease on appointment of a liquidator (sec. 491) :On the appointment of a liquidator, all the powers of the Board ofdirectors, the managing or whole-time directors, and manager, shallcease except when the company in general meeting or the liquidatormay sanction them to continue.

3. Power to fill vacancy in office of liquidator (sec. 492) : If a vacancyoccurs by death, resignation or otherwise in the office of any liquidatorappointed by the company, the company in general meeting may fillthe vacancy. For this purpose a general meeting may be convenedby any contributory or by the continuing liquidator or liquidators, ifany.

4. Notice of appointment of liquidator to be given to Registrar(Sec.493) : The company shall give notice to the Registrar of theappointment of a liquidator or liquidators. It shall also give notice ofevery vacancy occurring in the office of liquidator and of the namesof the liquidators appointed to fill every such vacancy. The noticeshall be given by the company within 10 days of the event to which itrelates.

5. Power of liquidator to accept shares, etc. as the consideration forsale of property (Sec. 494).

6. Duty of liquidator to call creditors‘ meeting in case of insolvency(Sec.495) : If the liquidator is at any time of opinion that the companywill not be able to pay its debts in full within the period stated in thedeclaration, he shall forthwith summon a meeting of the creditors.He shall lay before the meeting a statement of the assets and liabilitiesof the company. Thereafter the winding up shall become creditorsvoluntary winding up.

7. Duty to call general meeting at the end of each year (Sec. 496) : Inthe event of the winding up continuing for more than 1 year, the



liquidator shall call a general meeting of the company at the end ofthe first year from the commencement of the winding up. Likewise,he shall call a general meeting at the end of each succeeding year.He shall lay before the meeting an account of his acts and dealingsand of the conduct of the winding up during the year.

8. Final meeting and dissolution (Sec. 497) : As soon as the affairs ofthe company are fully wound up, the liquidator shall make up anaccount of the winding up, showing how the winding up has beenconducted and how the property of the company has been disposedof. He shall then call a general meeting of the company and laybefore it the accounts showing how the winding up has beenconducted.

The meeting shall be called by advertisement –

a) specifying the time, place and object of the meeting; andb) published not less than one month before the meeting in Official Ga-

zette, and also in some newspaper circulating in the district the reg-istered office of the company.

Within one week after the meeting, the liquidator shall sent to the Registrarand the Official Liquidator a copy each of the account and shall make areturn to each of them of the holding of the meeting and of the late thereof.If a quorum is not present at the final meeting, the liquidator shall make areturn that the meeting was duly called but could not be held for want ofquorum.

The Registrar on receiving the account and return shall register them.The Official Liquidator, on receiving them, shall make a scrutiny, the booksand papers of the company. The liquidator of the company presentofficers shall give the Official Liquidator all reasonable facilities to makethe scrutiny. On such scrutiny the Official Liquidator shall make a reportto the Tribunal. If the report shows that the affairs of the company havebeen conducted in a manner not prejudicial to the interests of its membersor to public interest, then from the date of the submission of the report tothe Tribunal, the company shall be deemed to be dissolved.9. Provisions as to annual and final meeting in case of insolvency

(Sec.498) If in the case of a member’s voluntary winding up, liquidatorfinds that the company is insolvent, Secs. 508 and 509 (what dealwith the duty of the liquidator to call a meeting of the company ofcreditors at the end of each year (Sec. 508) and final meeting anddissolution (Sec.509) in case of a creditors‘ voluntary winding up]shall apply as if the winding up were a creditors‘ voluntary windingup and a members‘ voluntary winding up. It should be noted that insuch a case Secs. 508 and 509 shall apply to the exclusion of Secs.496 and 497.

2. Creditors voluntary winding up

A voluntary winding up of a company in which a declaration of solvencyis not made is referred to as a creditors‘ voluntary winding up.



Provisions applicable to creditors‘ voluntary winding up

Secs. 500 to 509 shall apply in relation to a creditor’s voluntary windingup (Sec.499).

The provisions of these Sections are as follows:1. Meeting of creditors (Sec. 500) : The company shall call a meeting

of the creditors of the company on the day on which there is to beheld the general meeting of the company at which the resolution forvoluntary winding up is to be proposed, or on the next day. It shallsend notices of the meeting to the creditors by post simultaneouslywith the sending of the notices of meeting of the company. It shallalso cause notice of the meeting of the creditors to be advertisedonce at least in the Official Gazette and once at least in 2 newspaperscirculating in the district of the registered office of the company.

The Board of directors of the company shall cause a full statement ofthe position of the company’s affairs together with a list of the creditorsand the estimated amount of their claims to be laid before the meeting.It shall also appoint one of their members to preside at this meeting.It shall be the duty of the director so appointed to attend the meetingand beside thereat.

2. Notice of resolution to be given to Registrar (Sec. 501) : Notice ofany resolution passed at a creditors‘ meeting shall be given by thecompany the Registrar within 10 days of the passing thereof.

3. Appointment of liquidator (Sec. 502) : The creditors and the membersat their respective meeting may nominate a liquidator. If they nominatedifferent persons, the creditors‘ nominee shall be the liquidator. Butany director, member or creditor of the company may apply to theTribunal for an order that the person nominated as liquidator by thecompany or any other Tribunal within 7 days after the nomination, onwhich the nomination was made by the creditors.If no person is nominated by the creditors, the person nominated bythe members shall be the liquidator. Likewise, if no person isnominated by the company, the person nominated by the creditorsshall be the liquidator.

4. Appointment of committee of inspection (Sec. 503) : The creditorsat their meeting may, if they think fit, appoint a committee of inspectionconsisting of not more than 5 persons. If such a committee isappointed, the company may also at a general meeting appoint notmore than 5 members to the committee. However, the creditorsmay, if they think fit, dissolve that all or any of the persons appointedby the company ought to be members of the committee of inspection.If the creditors and members do not agree on a common list, theTribunal may constitute a committee of inspection.

5. Liquidator’s remuneration (Sec.504) : The committee of inspection,if there is no such committee, the creditors, may fix the remunerationof the liquidator. Where the remuneration is not so fixed, it shall bedetermined by the Tribunal. The remuneration shall not be increasedin any circumstances.



6) Board’s powers to c ease on appointment of liquidator (Sec.505) :On the appointment of a liquidator, all the powers of the Board ofdirectors shall cease. But the committee of inspection, or if there isno such committee, the creditors in general meeting, may sanctionthe continuance of the Board.

7) Power to fill vacancy in office of liquidator (Sec.506) : If a vacancyoccurs by death, resignation or otherwise, in the office of a liquidator(other than a liquidator appointed by, or by the direction of, theTribunal), the creditors in general meeting may fill the vacancy.

8) Power of liquidator to accept shares, etc., as consideration for saleof property (Sec. 507) : The provisions of Sec. 494 shall apply inthe case of a creditors‘ voluntary wounding up. However the powersof the liquidator under Sec. 494 shall not be exercised except withthe sanction either of the Tribunal or of the committee of inspection.

9) Duty of liquidator to call meeting at the end of each year (Sec.508) :The liquidator shall call a general meeting of the company and ameeting of the creditors every year, within 3 months from the closeof every year. This will be so if the winding up continues for morethan 1 year. He shall lie before the meeting an account of his actsand dealings and of the conduct of winding up during the precedingyear and position of the winding up.

10) Final meeting and dissolution (Sec. 509) : As soon as the affairs ofthe company are fully wound up, the liquidator shall make up anaccount of the winding up showing how the winding up has beenconducted and how the property of the company has been disposed.He shall then call a general meeting of the company and a meeting ofthe creditors for the purpose of laying the account before the meetingand giving explanation thereof. Thereafter the procedure shall bethe same and laid down in Sec.497.

Members’ and creditors’ voluntary winding up compared1. Declaration of solvency : In case of a member‘ voluntary winding

up, there is declaration of solvency. In case of a creditors‘ voluntarywinding up, there is no such declaration.

2. Control of winding up : In a members‘ voluntary winding up, memberscontrol the winding up of the company and the creditors do participatedirectly as the company makes a declaration of solvency. In creditors‘voluntary winding up, the creditors control the winding up thecompany as the company is deemed to be insolvent.

3. Meetings : In a members‘ voluntary winding up, there is no meetingof creditors. In a creditors‘ voluntary winding up, whenever there ismeeting of contributories, there is a corresponding meeting ofcreditors.

4. Appointment of liquidator : In a members‘ voluntary winding up,liquidator is appointed by the company and his remuneration is fixedby the company. In a creditors‘ voluntary winding up, he is appointedby the creditors and his remuneration is fixed by the committeeinspection or, if there is no such committee, by the creditors.



5. Committee of inspection : There is no committee of inspectionmembers‘ voluntary winding up; in a creditors‘ voluntary winding upcreditors may appoint a committee of inspection.

6. Powers of liquidator : In a members‘ voluntary winding up, liquidatorcan exercise certain powers with the sanction of a special resolutionof the company; in a creditors‘ voluntary winding up, he do so withthe sanction of the Tribunal or the committee of inspection of a meetingof the creditors.

2.5 Corporate governanceA Corporation is a mechanism established to allow different parties tocontribute capital, expertise, and labour for their mutual benefit. Theinvestor/shareholder participates in the profits of the enterprise withouttaking responsibility for the operations. Management runs the companywithout being responsible for personally providing the funds. To makethis possible, laws have been passed so that shareholders have limitedliability and, correspondingly, limited involvement in a corporation’sactivities. That involvement does include, however, the right to electdirectors who have a legal duty to represent the shareholders and protecttheir interests. As representatives of the shareholders, directors have boththe authority and the responsibility to establish basic corporate policiesand to ensure that they are followed.The board of directors has, therefore, an obligation to approve alldecisions that might affect the long-run performance of the corporation.This means that the corporation is fundamentally governed by the boardof directors overseeing top management, with the concurrence of theshareholders. The term corporate governance refers to the relationshipamong these three groups in determining the direction and performanceof the corporation.Over the past decade, shareholders and various interest groups haveseriously questioned the role of the board of directors in corporation.They are concerned that inside board members may use their position tofeather their own nest and that outside board members often lack sufficientknowledge, involvement, and enthusiasm to do an adequate job ofmonitoring and providing guidance to top management, Instances ofwidespread corruption and questionable accounting practices at Enron,Global Crossing, WorldCom, Tyco, and Qwest, among others, seem tojustify their concerns. Tyco’s board, for example, seemed more interestedin keeping CEO Kozlowski happy than in safeguarding shareholderinterests. They very passivity of the board (in addition to questionablefinancial dealings) was one reason the Kozlowski – era directors wereforced to resign in 2003.The general public has not only become more aware and more critical ofmany boards’ apparent lack of responsibility for corporate activities, ithas begun to push government to demand accountability. As a result, theboard as a rubber stamp of the CEO or as a bastion of the “old – boy”selection system is being replaced by more active, more professionalboards.



Responsibilities of the board

Laws and standards defining the responsibilities of boards of directorsvary from country to country. For example, board members in Ontario,Canada, face more than 100 provincial and federal laws governingdirector liability. The United States, however, has no clear nationalstandards or federal laws. Specific requirements of directors vary,depending on the state in which the corporate charter is issued. There is,nevertheless, a developing worldwide consensus concerning the majorresponsibilities of a board. Interviews with 200 directors from eightcountries (Canada, France, Germany, Finland, Switzerland, TheNetherlands, the United Kingdom, and Venezuela) revealed strongagreement on the following five boards of directors responsibilities, listedin order of importance.1. Setting corporate strategy, overall direction, mission, or vision2. Hiring and firing the CEO and top management3. Controlling, monitoring, or supervising top management4. Reviewing and approving the use of resources5. Caring for shareholder interestsDirectors in the United States must make certain, in addition to the dutiesjust listed, that the corporation is managed in accordance with the lawsof the state in which it is incorporated. They must also ensuremanagement’s adherence to laws and regulation, such as those dealingwith the issuance of securities, insider trading, and other conflict – of-interest situations. They must also be aware of the needs and demandsof constituent groups so that they can achieve a judicious balance amongthe interests of these diverse groups while ensuring the continuedfunctioning of the corporation.

In a legal sense, the board is required to direct the affairs of thecorporation but not to manage them. It is charged by law to act with duecare. If a director or the board as a whole fails to act with due care and,as a result, the corporation is in some way harmed, the careless directoror directors can be held personally liable for the harm done. This is nosmall concern, given that one survey of outside directors revealed thatmore than 40% had been named as part of lawsuits against thecorporations.

Role of the Board in Company Management

How does a board of directors fulfill these many responsibilities? Therole of the board of directors in strategic management is to carry outthree basic tasks:

Monitor: By acting through its committees, a board can keep abreast ofdevelopments inside and outside the corporation, bringing tomanagement’s attention developments it might have overlooked. A boardshould at least carry out this task.

Evaluate and influence: A board can examine management’s proposals,decisions, and actions; agree or disagree with them; give advice and offer



suggestions, and outline alternatives. Active boards perform this task inaddition to the monitoring one.

Initiate and determine: A board can delineate a corporation’s missionand specify strategic options to its management. Only the most activeboards take on this task in addition to the two previous ones.

Board of Directors Continuum

A board of directors is involved in strategic management to the extentthat it carries out the three tasks of monitoring, evaluating and influencing,and initiating and determining. The board of directors continuum shownin Figure 2-1 shows the possible degree of involvement (from law tohigh) in the strategic management process. At types, boards can rangefrom phantom boards with no real involvement to catalyst boards withvery high degrees of involvement. Research suggests that active boardinvolvement in strategic management is positively related to corporatefinancial performance.

Highly involved boards tend to be very active. They take their tasks ofmonitoring, evaluating, and influencing, plus initiating and determining,very seriously; they provide advice when necessary and keep managementalert. Their heavy involvement in the strategic management process placesthem in the active participation or even catalyst positions. For example,in a survey of directors of large U.S. corporations conducted by Korn /Ferry International, more than 60^ indicated that they were deeplyinvolved in the strategy-setting process. In the same survey, 54% of therespondents indicated that their boards participate in annual retreats orspecial planning sessions to discuss company strategy. Nevertheless, onlyslightly more than 32% of the boards help develop the strategy. Morethan two-thirds of the boards review strategy only after it has been firstdeveloped by management. Another 1% admits playing no role at all instrategy. These and other studies suggest that most large publicly ownedcorporations have boards that operate at some point between nominal.

DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENTLow (Passive) High (Active)

Phantom Rubber

Stamp

Minimal

Review

Nominal

Participation

Active

Participation

Catalyst

Never

knows what

to do, if

anything; no

degree of

involvement.

Permits

officers to

make all

decisions.

Formally

reviews

selected

issues that

officers

bring to its

attention

Involved to

a limited

degree in the

performance

or review of

selected key

decisions,

indicators,

Approves,

questions,

and makes

final

decisions on

mission,

strategy,

policies, and

Takes the

leading role

in

establishing

and

modifying

the mission,

objectives,



Low (Passive) High (Active)

Co-determination: Should Employees Serve on Boards?

Co-determination, the inclusion of a corporation’s workers on its board,began only recently in the United States. Corporations such as Chrysler,Northwest Airlines, United Airlines (UAL), and Wheeling – PittsburghSteel have added representatives from employee associations to theirboards as part of union agreements or employee stock ownership plans(ESOPs). For example, UAL workers traded 15% in pay cuts for 55%of the company (through an ESOP) and 3 of the firm’s 12 board seats.In this instance, workers represent themselves on the board not so muchas employees, but primarily as owners. At Chrysler, however, the UnitedAuto Workers union obtained a temporary seat on the board as part of aunion contract agreement in exchange for changes in work rules andreductions in benefits. In situation like this, when director represents aninternal stakeholder, critics raise the issue of conflict of interest. Can amember of the board, who is privy to confidential managerial information,function, for example, as union leader whose primary duty is to fight forthe best benefits for his or her members? Although the movement to placeemployees on the boards of directors of U.S., companies shows littlelikelihood of increasing (except through employee stock ownership), theEuropean experience reveals an increasing acceptance of workerparticipation (without ownership) on corporate boards.

Germany pioneered co-determination during the 1960s, with a two-tieredsystem: a supervisory board elected by shareholders and employees toapprove or decide corporate strategy and a policy and management board(composed primarily of top management) appointed by the supervisoryboard to manage the company’s activities. Most other Western Europeancountries have either passed similar co-determination legislation (forexample, Sweden, Denmark, Norway, Austria) or use worker councilsto work closely with management (for example, Belgium, Luxembourg,France, Italy, Ireland, and the Netherlands)

Interlocking Directorates

CEOs often nominate chief executives (as well as board members) fromother firms to membership on their own boards in order to create an

or programs

of

management

objectives,

Has active

board

committees.

Performs

fiscal and

management

adults.

strategy, and

policies. It

has a very

active

strategy

committee,



Interlocking directorate. A direct interlocking directorate occurs whentwo firms share a director or when an executive of one firm sits on theboard of a second firm. An indirect interlock occurs when twocorporations have directors who also serve on the board of third firm,such as a bank. Both inside and outside directors at the largest U.S.companies serve three boards.Although the Clayton Act and the Banking Act of 1933 prohibitinterlocking directorates by U.S. companies competing in the sameindustry, interlocking continues to occur in almost all corporations,especially large ones. Interlocking occurs because large firms have a largeimpact on other corporations these other corporations, in turn, have somecontrol over the firm’s inputs and marketplace. For example, most largecorporations in the United States, Japan, and Germany are interlockedeither directly or indirectly with financial institutions. Interlockingdirectorates are also a useful method for gaining both inside informationabout an uncertain environment and objective expertise about potentialstrategies and tactics. For example, Kleiner Perkins, the high-tech venturecapital firm, not only has seats on the boards of the companies in whichit invests, but it also have executives (whom Kleiner Perkins hired) fromone entrepreneurial venture serve as directors on others. Kleiner Perkinsrefers to it network of interlocked firms as its keiretsu. Family ownedcorporations, however, are less likely to have interlocking directoratesthan are corporations with highly dispersed stock ownership, probablybecause family owned corporations do not like to dilute their corporatecontrol by adding outsiders to board room discussions. Nevertheless,some evidence indicates that well – interlocked corporations are betterable than others to survive in a highly competitive environment.

Nomination and election of board membersTraditionally the CEO of a corporation decided whom to invite to boardmembership and merely asked the shareholders for approval in the annualproxy statement. All nominees were usually elected. There are somedangers, however, in allowing the CEO free rein in nominating directors.The CEO might select only board members who, in the CEO’s opinion,will not disturb the company’s policies and functioning. Given that theaverage length of service of a U.S board member is for five – 4 yearterms, CEO – friendly, passive board are likely to result. This is especiallylikely given that 92% of surveyed directors indicate that their companydid not have term limits for board members. Directors selected by theCEO often feel that they should go along with any proposal the CEOmakes. Thus board members find themselves accountable to the verymanagement they are charged to oversee. Because this is likely to happen,more boards are using a nominating committee to nominate new outsideboard members for the shareholders to elect. Approximately 74% oflarge U.S., corporations now uses nominating committees to identifypotential directors.Virtually every corporation whose directors serve terms of more thanone year divides the board into classes and staggers elections so that



only a portion of the board stands for election each year. This is called astaggered board. Arguments in favour of this practice are that it providescontinuity by reducing the chance of an abrupt turnover in its membershipand that it reduces the likelihood of electing people who are unfriendly tomanagement (who might be interested in a hostile takeover) throughcumulative voting. An argument against staggered boards is that they makeit more difficult for concerned shareholders to curb a CEO’s power,especially when that CEO is also Chairman of the Board. For example,out of dissatisfaction with the company’s poor performance and theirperception that the board was inactive, two unions supported ashareholder proposal in 1996 to cancel Kmart’s staggered board so thatthe entire board would be elected annually.

A survey of directors of U.S. corporations revealed the following criteriafor selecting a good director:• is willing to challenge management when necessary (85%)• has special expertise important to the company (67%)• Is available outside meetings to advise management (57%)• Has expertise on global business issues (41%)• Understands firm’s key technologies and processes (39%)• Brings external contacts that are potentially valuable to the firm (33%)• has detailed knowledge of the firm’s industry (31%)• Is highly visible in his or her field (31%)• Is accomplished at representing the firm to stakeholders (18%) 23

Organisation of the board

The size of a board in the United States is determined by the corporation’scharter and its bylaws, in compliance with state laws. Although somestates require a minimum number of board members, most corporationshave quite a bit of discretion in determining board size. The averagelarge, publicly held from has around 11 directors. The average small /medium-size privately held company has approximately seven to eightmembers.

Sixty seven percent of the top executives of large U.S. publicly heldcorporations hold the dual designation of Chairman and CEO. Thepercentage of firms having the Chair/CEO position combined in Canadaand the United Kingdom is 43% and 20%, respectively.) The combinedChair/CEO position is being increasingly criticized because of the potentialfor conflict of interest. The CEO is supposed to concentrate on strategy,planning, external relations, and responsibility to the board. TheChairman’s responsibility is to ensure that the board and its committeesperform their functions as stated in the board’s charter. Further, theChairman schedules board meetings and presides over the annualshareholders’ meeting. Critics of combining the two offices in one personask how the board can properly oversee top management if the Chairmanis also top management. For this reason, the Chairman and CEO rolesare separated by law in Germany, The Netherlands, and Finland. A similarlaw has been considered in Britain and Australia. Although research does



not clearly indicate either a definite positive or negative effect of combinedpositions on corporate performance, the stock market does respondnegatively to announcements of CEOs also assuming the Chairmanposition.

Many of those who prefer that the Chairman and CEO positions becombined agree that outside directors should elect a lead director. Thisperson would be consulted by the Chair/CEO regarding board affairsand would co-ordinate the annual evaluation of the CEO. The lead directorposition is very popular in the United Kingdom, where it originated. Ofthose U.S. companies combining the Chair and CEO positions, 30%currently have lead directors. This is one way to give the board morepower without undermining the power of the Chair/CEO.

The most effective boards accomplish much of their work throughcommittees. Although they do not usually have legal duties, mostcommittees are granted full power to act with the authority of the boardbetween board meetings to attend to matters that must be settled quickly.This committee acts as an extension of the board and, consequently, mayhave almost unrestricted authority in certain areas. The audit,compensation, and nominating committees are usually composed only ofoutside directors.

Trends in corporate governance

The role of the board of directors in the strategic management of thecorporation is likely to be more active in the future. Although neither thecomposition of boards nor the board leadership structure has beenconsistently linked to firm financial performance, a McKinsey surveyreveals that investors are willing to pay 16% more for a corporation’sstock if it is known to have good corporate governance. The investorsexplained that they would pay more because, in their opinion, (1) goodgovernance leads to better performance over time, (2) good governancereduces the risk of the company getting into trouble, and (3) governanceis a major strategic issue.

Some of today’s trends in governance (particularly prevalent in the UnitedStates and the United Kingdom) that are likely to continue include thefollowing.

Boards are getting more involved not only in reviewing and evaluatingcompany strategy but also in shaping it.

Institutional investors, such as pension funds, mutual funds, and insurancecompanies, are becoming active on boards and are putting increasingpressure on top management to improve corporate performance. Forexample, the California Public Employees’ Retirement System (CalPERS),the largest pension system in the United States, annually publishes a listof poorly performing companies, hoping to embarrass management intotaking remedial action.



Shareholders are demanding that directors and top managers own morethan token amounts of stock in the corporation. Stock is increasinglybeing used as part of a director’s compensation.

Nonaffiliated outside (non-management) directors are increasing theirnumbers and power in publicly held corporations as CEOs loosen theirgrips on boards. Outside members are taking charge of annual CEOevaluations.

Boards are getting smaller, partially because of the reduction in the numberof insiders but also because boards desire new directors to havespecialized knowledge and expertise instead of general experience.

Boards continue to take more control of board functions by either splittingthe combined Chair/CEO position into two separate positions orestablishing a lead outside director position.

As corporations become more global, they are increasingly looking forinternational experience in their board members.

Society, in the form of special interest groups, increasingly expects boardsof directors to balance the economic goal of profitability with the socialneeds of society. Issues dealing with workforce diversity and theenvironment are now reaching the board level. For example, the boardof Chase Manhattan Corporation recently questioned top managementabout its efforts to improve the sparse number of women and minoritiesin senior management.

Corporate Governance: The Role of Top Management

The top management function is usually conducted by the CEO of thecorporation in coordination with the COO or President, Executive VicePresident, and Vice Presidents of divisions and functional areas. Eventhough strategic management involves everyone in the organization, theboard of directors top management primarily responsible for the strategicmanagement of the firm.

Responsibility of top management

Top management responsibilities, especially those of the CEO, involvegetting things accomplished through and with others in order to meet thecorporate objectives. Top management’s job is thus multidimensional andis oriented toward the welfare of the total organization. Specific topmanagement tasks vary from firm to firm and are developed from ananalysis of the mission, objectives, strategies, and key activities of thecorporation. Tasks are typically divided among the members of the topmanagement team. A diversity of skills can thus be very important.Research indicates that top management teams with a diversity of functionaland educational backgrounds and length of time with the company tendto be significantly related to improvements in corporate market shareand profitability. Nevertheless, the CEO, with the support of the rest ofthe top management team, must successfully handle two primary



responsibilities that are crucial to the effective strategic management ofthe corporation: (1) provide executive leadership and a strategic visionand (2) manage the strategic planning process.

Have you under stood Questions?

Objective questions :1. A contract between ABC.Ltd and B, one of its directors, is referred

to a general meeting for its approval. At the meeting to a generalmeeting for its approval. At the meeting, B voted for the resolutionand all others against it. But as B held majority of shares and wasentitled to majority of votes, the resolution was passed. Is the contractbinding on the company?

2. A public limited company has 15 directors, 4 of whom are not subjectto retire by rotation. Is it a validly constituted Board?

3. The secretary of a company purchased some stationery for thecompany but he took it home and put it to his private use. Thecompany refused to pay to the supplier of the stationery on the pleathat it never received the stationery. Is the company liable?

4. At meeting of a company, only 15 shareholders were present. 9 votedfor a special resolution and 2 against and 4 did not vote at all. Nopoll was demanded and the chairman declared the resolution to becarried. In this a valid resolution?

5. The Articles of Association of a company require the instrumentappointing a proxy to be received by the company 75 hours beforethe meeting. Is it a valid requirement?

6. Rajesh applied for 100 shares in a company in a fictitious name. Theshares were allotted in the fictitious name. Did he incur any liabilityunder the Companies Act, 1956?

7. An allottee of share in a company brought action a director in respectof false statements in a prospectus. The director contented that thestatements were prepared by the promoters and he ha relied on them.Is the director liable under the circumstances?

8. A company, in ignorance of the fact it had been struck off the Register,borrowed money on the security of a charge on its property. On anapplication by the company, the Tribunal restored it to the Register.Is the charge valid?

9. The Articles of Association of a company require the instrumentappointing a proxy to be received by the company by the company75 hours before the meeting. Is it a valid requirement?

10. A, an allottee of shares in a company, came to know of themisrepresentations in the prospectus on the basis of which he hadapplied for shares. But he did not care to take any action for 5 monthsafter coming to know of the misrepresentations. Can he be precludedfrom obtaining relief?

Answers

1. No 2. Yes 3. Yes 4. Yes 5. No 6. Yes 7. Yes 8. Yes 9. No10. Yes



Short Questions :a. What is a Private Company?b. What is a Public Company?c. What is meant by: ‘Company limited by shares’?d. What is meant by ‘Company limited by Guarantee’?e. What is an “Unlimited Company”?f. Define a Government Company.g. Define a foreign Companyh. Define a holding and Subsidiary Companyi. What is an illegal association? What are its Consequences?j. How are directors appointed by a company?k. What do you understand by winding up of company? What are

the different modes of winding up?Extended Questions :

l. How can a private company be converted into a public company?2. Comment on the following:a) The law not only recognizes a private company but also perform

its benedictions on the sameb) A limited company can be formed without the word ‘limited’ as

the last word of its namec) A subsidiary company can be the member of its holding company.3. Briefly describe the documents to be filed with the Registrar of

Companies prior to incorporation.4. Who is a promoter? Discuss his legal position in relation to a

company which he promotes.5. What is Memorandum of Association? What are its contents?

When and how may it be altered?6. Discuss the relationship between the Art icles and the

Memorandum of Association of a company.7. What is a prospectus? What are its contents? Is it obligatory for

a company to file prospectus or a statement in lieu of prospectuswith the Registrar of Companies?

8. Briefly state the provisions of the Companies Act.1956, regardingthe mode of appointment of the directors of a company.

9. State how the managing director of a public limited company isappointed and what his duties are?

10. What do you understand by winding up of a company? What arethe different modes of winding up?

Summary

Company legislation in India owes origin to the English Company Law.The amendment to Companies Acts passed in India has been followingthe English Companies Act with certain modifications to suit Indianconditions. The first legislative enactment for “Registration of Joint StockCompanies” was passed in the year 1850. This Act was based on theEnglish Companies Act, 1844 (Known as the Joint Stock Companies



Act of 1844) which recognized the company as a distinct legal entity, butdid not grant to it the privilege of limited liability.

Any 7 or more persons could form themselves into an incorporatedcompany, with or without limited liability, by signing a Memorandum ofAssociation and complying with the requirements of the Act. Followingthe English Companies Act of 1856, the Joint Stock Companies Act of1857 was passed in India. This Act recognized, for the first time in India,the principle of limited liability.

Promotion is the first stage in the formation of a company. Promotioninvolves identification of a business opportunity or idea, analysis of itsprospects and taking steps to implement it through the formation of aCompany.

The directors are the brain of a company. They occupy a pivotal positionin the structure of the company. They are in fact the mainspring of thecompany.

Winding up or liquidation of a company represents the last stage in itslife. It means a proceeding by which a company is dissolved. The assetsof the company are disposed of, the debts are paid off out of the realizedassets (or from contributions from its members), and the surplus, if any,is then distributed among the members in proportion to their holdings inthe company. The two terms ‘winding up’ and ‘liquidation’ are used interchangeably.



3.1. Factories’s Act; 1948

3.1.1 Introduction of the Factories Act, 1948The first Factories Act in India was passed in 1881. It was designedprimarily to protect children and provide for some health and safetymeasures. It was followed by a new Act of 1934 passed to implementthe recommendations of the Royal Commission on Labour in India andthe conventions of the International Labour Organisation. The experienceof the working of this Act revealed a number of defects and weaknesses,which hampered effective administration of the Act. Further, theprovisions of this Act regarding safety, health and welfare of workerswere also found to be inadequate and unsatisfactory. It was therefore feltthat in view of the large and growing industrial activities in the country aradical overhauling of the law relating to factories was necessary. Hencethe Factories Act, 1948 came into force on the 1st day of April 1949.Its object is to regulate the conditions of work in manufacturingestablishments, which come within the definition of the term ‘factory’ asused in the Act.The Act extends to the whole of India including the State of Jammu andKashmir. Unless otherwise provided, it also applies to factories belongingto the Central or any State Government (Sec. 116).The Act was substantially amended in 1987. Some provisions of theAmending Act came into force with effect from 1st December, 1987 andothers from 1st June, 1988.

3.1.2 Learning ObjectivesAfter studying this unit you should be able to:• Understand the definition of factory.• Determine the formalities of approval, licensing and registration of

factories.

INDUSTRIAL LAW

UNIT III



• Explore the duties and power of the Inspecting staff• Know the provisions of Health, Safety and Welfare• Study the different schedule of Working Hours• Know special provisions of child workers and women.• The provisions relating to Annual Leave with Wages• Know the penalties

3.1.3 What is a factory?

According to Sec.2 (m), ‘factory’ means any premises including theprecincts thereof:(i) Wherein 10 or more workers are working or were working on any

day of the preceeding 12 months, and in any part of which a manu-facturing process is being carried on with the aid of power, or isordinarily so carried on, or

(ii) Wherein 20 or more workers are working or were working on anyday of preceeding 12 months, and in any part of which a manufac-turing process is being carried on without the aid of power, or isordinarily so carried on.

The term ‘factory’ does not include a mine, subject to the operation ofthe Indian Mines Act, 1952 or a mobile unit belonging to the armedforces of the Union, a railway running shed or a hotel, restaurant oreating place.In simple words, a factory is a premise wherein 10 or more persons areengaged if power is used, or 20 or more persons are engaged if power isnot used, in a manufacturing process. For computing the number ofworkers, all the workers in different groups and relays in a day shall betaken into account [Expl. 1 to Sec.2 (m)]. For the purposes of Sec. 2(m), the mere fact that an Electronic Data Processing Unit or a ComputerUnit is installed in any premises or part thereof, shall not be construed tomake it a factory if no manufacturing process is being carried on in suchpremises or part thereof [Expl. 2 to Sec.2 (m) as introduced by theAmendment Act of 1987]. Meaning of precincts. The definition ofthe term ‘factory’ in Sec.2 (m) envisages premises which have precincts,as the expression used in the definition is ‘premises including the precinctsthereof’. ‘Precincts’ are usually understood as a space enclosed by wallsor fences. Where premises are buildings, they would include precincts.What are the precincts of particular premises is a question of fact to bedetermined according to the circumstances of each particular case. Theword ‘premises’ is not to be confined in its meaning to buildings alone.Example- A security fence enclosed a concrete apron of an airfieldadjoining a hangar used for testing planes. Held, the airfield fell withinthe meaning of the precincts of factory [Wells v. Weather Ground Mech.Co. Ltd. (1951) All E.R. 588].Whether any establishment is a factory? In order to determine whetherany establishment is a factory, two things must be proved:



(1) that a manufacturing process is being carried on in any part of the premisesof that establishment; and

(2) that there are prescribed number of workers working in any part of thepremises where the manufacturing process is being carried on.

Mere fact that power is used in premises is not the deciding factor: thepower used must be in the aid of the manufacturing process [New TajMahal Hotel v. Inspector of Factories, (1956) 1 L.L.J. 273].

The following have been held to be factories:(a) Salt works which consist merely of open stretches of large areas of

land with some temporary shelters [Ardeshir A. Bhiwandiwala v.Stateof Bombay, A.I.R. (1962) S.C. 29].

(b) Railway workshops [Inda Singh v. Secretary of State, A.I.R.(1929) Lah.573].(c) A premises where manufacturing process is carried on with 7 persons

employed permanently and 3 persons employed temporarily in repairsof part of machinery [Hari Krishnan & Another v. State, A.I.R.,(19590 All.1974]

For proper understanding of the meaning of the term ‘factory’, thefollowing three terms should be clearly understood.1. Manufacturing process [Sec.2 (k)]. It means any process for:(i) making, altering, repairing, ornamenting, finishing, packing, oiling,

washing, cleaning, breaking up, demolishing, or otherwise treatingor adapting any article or substance with a view to its use, sale,transport, delivery or disposal, or

(ii) pumping oil, water, sewage, or any other substance, or(iii) generating, transforming or transmitting power, or(iv) composing types for printing, printing by letter press, lithography,

photogravure or other similar process or book binding, or(v) constructing, reconstructing, repairing, refitting, finishing, breaking

up ships or vessels, or(vi) preserving or storing any article in cold storage.Some of the processes which have been held to be manufacturingprocesses are as follows:(a) Bidi making [Chintaman Rao v. State of M.P., (1962) S.C.J. 388](b) Moulding and transformation of raw cinematography films into a fin-

ished product [Gemini Studio v. State, (1952-53) 4 F.J.R. 329].(c) Work done in a salt work which consists of converting sea-water

into salt [Ardeshir H. Bhiwandiwala v. State of Bombay, A.I.R.(1962) S.C.29].

(d) Use of refrigerator for treating or adapting any article with a view toits sale [New Taj Mahal Café Ltd. v. Inspector of Factories, (1956)1 L.I.J. 273].

(e) Work of composition in printing business [V.K. Press v. Authority,A.I.R. (1955) All.702].



(f) Use of electric motor for the purpose of lifting or pumping water[Syed Moosa Kazimi v. K.M. Sheriff, A.I.R. (1959) Mad. 542]

(g) Processing of moistening, stripping and packing of tobacco leaves[V.P. Gopala Rao v. Public Prosecutor, A.I.R. (1970) S.C. 66].

(h) Activities of a petrol pump [Gateway Auto Services v. Regional Di-rector, E.S.I. Corpn., (1981) Lab. I.C. 49].

In deciding whether a particular business is a manufacturing process ornot, regard must be had to the circumstances of each particular case. Toconstitute a manufacturing process, there must be some transformationi.e., the article must become commercially known as something differentfrom which it acquires its existence.

2. Worker [Sec.2 (1)]. A worker means a person employed directly orby through any agency [including a contractor] with or without theknowledge of the principal employer. He may be employed for or withoutremuneration. But he must be employed in a manufacturing process, orin cleaning some part of the machinery or premises used for themanufacturing process, or in some other kind of work incidental to, orconnected with, the manufacturing process, or the subject of themanufacturing process. A worker does not include any member of thearmed forces of the Union.

Relationship of master and servant. The expression ‘employed’ in theabove definition means that the relationship of master and servant mustexist. It makes no difference whether the worker employed in themanufacturing process is paid wages or not or is paid wages on timeratebasis or piece-rate basis.

Whether a particular person is a worker depends upon the terms ofcontract between him and the employer. A worker does not include anindependent contractor or his coolies or servants who are not under thecontrol and supervision of the employer.Obligations of workers (Sec. 111). A worker in a factory shall not:(a) willfully interfere with or misuse any appliance, convenience or other

thing provided in the factory for the purposes of securing the health,safety or welfare of the worker therein;

(b) willfully and without reasonable cause do anything likely to endangerhimself or others; and

(c) willfully neglect to make use of any appliance or other thing provided inthe factory for the purposes of securing the health or safety of the workerstherein [Sec.111(1)].

If any worker employed in a factory contravenes any of the provisions ofSec.111 or any rule or order made there under, he shall be punishablewith imprisonment for a term which may extend to Rs.100 or with both[Sec.111(2)].Rights of workers, etc. [Sec.111-A as introduced by the AmendmentAct of 1987]. Every worker shall have the right to:



(i) obtain from the occupier, information relating to workers’ health andsafety at work;

(ii) get trained within the factory wherever possible, or to get himselfsponsored by the occupier for getting trained in a training center orinstitute, duly approved by the Chief Inspector, where training is impartedfor workers’ health and safety at work;

(iii) represent to the Inspector directly or through his representative in thematter of inadequate provision for protection of his health or safety inthe factory.

3. Power [Sec.2 (g)]. It means electrical energy, or any other form ofenergy which is mechanically transmitted and is not generated by humanor animal agency.Different departments to be separate factories or two or morefactories to be a single factory (Sec.4)-The occupier of a factorymay apply to the State Government that the different departments orbranches of the factory of the occupier be treated as separate factories.He may also apply to the State Government that two or more factories ofthe occupier specified in the application be treated as a single factory.The State Government may, by an order in writing, accede to the requestof the occupier.Exemption during public emergency (Sec. 5)- In any case of publicemergency the State Government may, by notification in the Official Gazette,exempt any factory or class or description of factories from all or any ofthe provisions of this Act except Sec. 67 (which deals with prohibition ofemployment of young persons). This exemption may be for a specifiedperiod not exceeding 3 months at a time and subject to such conditions asthe State Government may think fit to impose. Public emergency means agrave emergency whereby the security of India or of any part of the territorythereof is threatened, whether by war or external aggression or internaldisturbance [Expl. to Sec.5]. Sec.86 empowers the State Government toexempt certain workshops or workplaces attached to public institutionsmaintained for the purposes of education, training, research or reformation,from all or any of the provisions of the Act.Certain premises deemed to be a factory (Sec.85)- The StateGovernment may, by notification in the Official Gazette, declare anyestablishment carrying on a manufacturing process to be a factory for thepurposes, of the Act even though the number of persons employed thereinis less than prescribed minimum number of workers. If the manufacturingprocess is being carried on by the owner only with the aid of his family.Sec.85 will not apply.

3.1.4 Definitions

1. Adult [Sec. 2 (a)]. An ‘adult’ means a person who has completed his18th year of age.

2. Adolescent [Sec. 2 (b)]. An ‘adolescent’ means a person who hascompleted his 15th year of age but has not completed his 18th year.



3. Child [Sec. 2 (c)]. A ‘child’ means a person who has not completed his15th year of age.

4. Competent person [Sec.2 (c a) as introduced by the Amendment Act of1987]. ‘Competent person’ in relation to any provision of the Act, means aperson or an institution recognized as such by the Chief Inspector. Therecognition must be for the purposes of carrying out test, examinations andinspections required to be done in a factory under the provisions of the Act.The recognition must be given having regarded to:

a) the qualifications and experience of the person and the facilities availableat his disposal; or

b) the qualifications and experience of the person employed in such institutionand facilities available therein with regard to the conduct of such tests,examinations and inspections. It may be noted that more than one personor institution may be recognized as competent persons in relation to afactory.

5. Hazardous process [Sec. 2(c b) as introduced by the Amendment Actof 1967]. It means any process or activity in relation to an industryspecified in the First Schedule where, unless special care is taken, rawmaterial used therein or the intermediate or finished products, bye-products, wastes or effluents thereof would:

a) cause material impairment to the health of the persons engaged in orconnected therewith, or

b) result in the pollution of general environment.The State Government may, by notification in the Official Gazette, amendthe First Schedule by way of addition, omission or variation of any industryspecified in the First Schedule.The definition of ‘hazardous process’ has been introduced by theAmendment Act of 1967.

6. Calendar year [Sec. 2 (bb)]-It means the period of 12 months beginningwith the 1st day of January in any year.

7. Young person [Sec. 2 (d)] - A young person’ means a person who iseither a child or an adolescent.

8. Day [Sec. 2 (e)]-It means a period of 24 hours beginning at midnight.9. Week [sec.2(j)]- It means a period of 7 days beginning at midnight on

Saturday night or such other night as may be approved in writing for aparticular area by the Chief Inspector of Factories.

10. Prime mover [Sec. 2 (h)]- It means any engine, motor or other appliancewhich generates or otherwise provides power.

11. Transmission machinery [Sec. 2(i)]- It means any shaft, wheel, drum,pulley, system of pulleys, coupling, clutch, driving belt or other applianceor device by which the motion of a prime mover is transmitted to orreceived by any machinery or appliance.

12. Occupier [Sec. 2 (n)]. ‘Occupier’ of a factory means the person who



has ultimate control over the affairs of the factory. In the case of a firmor other association of individuals, any one of the partners or membersthereof shall be deemed to be occupier. In the case of a factory ownedor controlled by the Central Government or any State Government orany local authority, the person or persons appointed to manage the affairsof the factory by the Central Government, the State Government or thelocal authority, as the case may be, shall be deemed to be occupier. Thedefinition of ‘occupier’ has been considerably enlarged by the AmendmentAct of 1987.A partner in a firm who has ultimate control over the affairs of a factoryis an occupier [Sohanlal v. State of Rajasthan, (1962), 1 L.L.J. 605].An ‘occupier’ may be an owner, a lessee or a mere licensee, but hemust have the right to occupy the property and dictate terms ofmanagement [Emperor v. Jamsehdji Nruservanji Modi, A.I.R.(1931)Bom. 308]. Hemust be in possession of the factory and control itsworking. A mere servant charged with specific duties in regard to thecontrol of the machinery, workmen or office is not an ‘occupier’.

13. Shift and relay [Sec.2(r)]- Where work of the same kind is carried outby 2 or more sets of workers working during different periods of theday, each of such sets is called a ‘relay’ and each of such periods iscalled a ‘shift’.References to time of day [Sec 3] - In the Factories Act referencesto time of day are references to Indian Standard Time, being 5-1/2 hoursahead of Greenwich Mean Time. But for any area in which IndianStandard Time is not ordinarily observed, the State Government maymake ruled (a) specifying the area, (b) defining the local mean timeordinarily observed therein, and (c) permitting such time to be observedin all or any of the factories situated in the area.

3.1.5 Approval, licensing and registration of factories

The State Government is empowered under Sec. 6 to make rules requiringthe submission of plans, and approval, licensing and registration offactories. The effect of Sec.6 is that before a site is used for a factory,previous permission in writing of the State Government or of the ChiefInspector has to be obtained. This permission is granted only when anapplicant has duly complied with directions enjoined by Sec.6.Application for permission. Under Sec. 6 the State Government maymake rules requiring the submission of plans of factories to the ChiefInspector or the State Government, Sec. 6 further requires the previouspermission in writing to be obtained for the site on which the factory is tobe situated and for the construction or extension of the factory. Anapplication for such permission may be made to the State Governmentor the Chief Inspector, a Extended with the duly certified plans andspecifications. The State Government may also make rules requiring theregistration and licensing of factories and prescribing the fees payablefor such registration and licensing and the renewal of licences. But nosuch licence shall be granted or renewed unless the notice specified inSec. 7 (as discussed below) has been given [Sec.6(1)].



Presumption of permission. If on application to the State Governmentor the Chief Inspector for permission accompanied by plans andspecification of a factory, nothing is heard within 3 months, the permissionis deemed to be granted [Sec.6 (2)].Appeal. Where a State Government refuses to grant permission to thesite, construction or extension of a factory or to the registration andlicensing of a factory, the applicant may within 30 days of the date ofsuch refusal appeal to the Central Government. Where a Chief Inspectorrefuses to grant such permission, the applicant may, within 30 days ofrefusal, appeal to the State Government. [Sec. 6(3)].

Notice by occupier [Sec.7]

The occupier shall, at least 15 days before he begins to occupy or useany premises as a factory, send to the Chief Inspector a written noticecontaining –a) the name and situation of the factory;b) the name and address of the occupier;c) the name and address of the owner of the premises or building (including

the precincts thereof);d) the address to which communications relating to the factory may be sent;e) the nature of the manufacturing process to be carried on in the factory

during the next 12 months;f) the total rated horse power installed or to be installed in the factory (not

including the rated horse power of any separate standby plant);g) the name of the manager of the factory for the purposes of this Act;h) the number of workers likely to be employed in the factory; andi) such other particulars as may be prescribed [Sec. 7 (1)].

Before a factory engaged in a manufacturing process which is ordinarilycarried on for less than 180 working days in an year resumes working,the occupier shall send a written notice to the chief Inspector containingthe particulars specified in Sec.7(1) at least 30 days before the date ofthe commencement of work [Sec.7(3)].The rules regarding the plans and specifications or a factory are essentialto ensure proper sanitation, ventilation, proper working conditions andother health measures.

General duties of the occupier (Sec. 7-A)-

A new Sec.7-A has been introduced by the Amendment Act of 1987,prescribing the general duties of the occupier in regard to the healthsafety and welfare of the workers in his factory. According to it, everyoccupier shall ensure, so far as is reasonably practicable, the health,safety and welfare of all workers while they are at work in the factory[Sec.7-A (1)]. Sec.7-A (2) enumerates the matters in regard to health,safety and welfare of the workers. These matters include:

a) the provision and maintenance of plant and systems of work in thefactory that are safe and without risks to health;



b) the arrangements in the factory for ensuring safety and absence of risksto health in connection with the use, handling, storage and transport ofarticles and substances.

c) the provision of such information, instruction, training and supervision asare necessary to ensure the health and safety of all workers at work;

d) (i) the maintenance of all places of work in the factory in a condition thatis safe and without risks to health and (ii) the provision and maintenanceof such means of access to and egress from such places as are safe andwithout such risks;

e) the provision, maintenance or monitoring of such working environment inthe factory for the workers i.e. (i) safe, (ii) without risks to health, and (iii)adequate as regards facilities and arrangements for their welfare at work[Sec.7-A(2)]. In addition to the above duties, every occupier shall also:

a) prepare, and as often as may be appropriate, revise a written statementof his general policy with respect to: (i) the health and safety of theworkers at work, and (ii) the organization and arrangements for the timebeing in force for carrying out that policy, and

b) bring the statement and any revision thereof to the notice of all theworkers. In some cases as may be prescribed an occupier may beexempted from this duty [Sec.7-A (3)].

General duties of manufactures, etc. as regards articles andsubstances for use in factories (Sec.7-B).

A new section 7-B has been introduced by the Amendment Act of 1987prescribing the general duties of manufacturer, etc., as regards articlesand substances for use in factories. The purpose of Sec.7-B is as follows:

1. Proper design and construction, testing and information. Every personwho designs, manufactures, imports or supplies any article for use in anyfactory shall:

a) ensure that the article is so designed and constructed as to be safe andwithout risks to the health of the workers when properly used;

b) carry out or arrange for the carrying out of such tests and examination asmay be considered necessary for the effective implementation of theprovisions of Clause (a);

c) take such steps as may be necessary to ensure that adequate informationwill be available:

i) in connection with the use of article in any factory;ii) about the use for which it is designed and tested; andiii) about any conditions necessary to ensure that the article when put to

such use, will be safe, and without risks to the health of the workers[Sec 7B(I)]

Articles designed or manufactured outside India. Where an article indesigned or manufactured outside India, it shall be obligatory on the partof the importer to see:



a) that the article conforms to the same standards if such article ismanufactured in India, or

b) If the standards adopted in the country outside for the manufacture ofsuch article are above the standards adopted in India, that the articleconforms to such standards [Provision to Sec. 7B(1)].

2. Research. Every person, who undertakes to design or manufacture anyarticle for use in factory may carry out or arrange for the carrying out thenecessary research, This may be necessary with a view to the discoveryand the elimination or minimization of any risks to the health or safety ofthe workers in which the design or article may give rise [Sec.7B (2)].He need not repeat the testing, examination or research which has beencarried out by some one else or at his instance if he can reasonably relyon the results of testing etc. for the purposes of Sec.7B (1) and (2)[Sec.7B(3)].

3. Duty to extend to things done in course of business. Any duty imposedon any person by Sec. 7B(1) and (2) shall extend only to things done inthe course of business carried on by him and to matters within his control[Sec.7B (4)].

4. Undertaking by the user. Some times a person may design, manufacture,import or supply an article on the basis of a written undertaking to ensurethat the article will be safe and without risks to the health of the workerswhen properly used. Such an undertaking shall have the effect of relievingthe person designing, manufacturing, importing or supplying the articlefrom the duty imposed by Sec. 7-B (1) (a) to such extent as is reasonablehaving regard to the terms of the undertaking [Sec. 7B (5)].

5. When article not properly used. For the purposes of Sec. 7B an articleis not be regarded as properly used if it is used without regard to anyinformation or advice relating to its use which has been made availableby the person who has designed, manufactured, imported or suppliedthe article [Sec.7-B(6)].For the purpose of Sec. 7-B ‘article’ shall include plant and machinery(Expl. To Sec.7-B].

3.1.6 The Inspecting staff

Inspectors (Sec. 8) Appointment- Sec. 8 provides for the appointmentof Chief Inspector, Additional Chief Inspectors, Joint Chief Inspectors,Deputy Chief Inspector and Inspectors. According to it, the StateGovernment may by notification in the Official Gazette, appoint any personto be a Chief Inspector to exercise the powers conferred on him by theFactories Act. He shall also exercise the powers of an Inspectorthroughout the State (Sec.8 (2)]. The State Government may also appointby notification in the Official Gazette, such persons as possess theprescribed qualifications to be Inspectors. It may assign to the Inspectorssuch local limits as it may think fit. [Sec.8 (1)].The State Government may appoint by notification in the Official Gazette,



also appoint as many Additional Chief Inspectors, Joint Chief Inspectors,Deputy Chief Inspectors and as many other officers as it thinks fit toassist the Chief Inspector and to exercise such of the powers of the ChiefInspector as may be specified in the notification [Sec. 8(2-A)].Every Chief Inspector, Additional Chief Inspector, Joint Chief Inspector,Deputy Chief Inspector, Inspector and every other officer appointed underSec. 8 is deemed to be a public servant within the meaning of the IndianPenal Code, 1860 [Sec.8(7)].No person who is or becomes directly or indirectly interested in a factoryor in any process or business carried on therein or in any patent ormachinery connected therewith shall act as a Chief Inspector,Additional Chief Inspector, Joint Chief Inspector, Deputy Chief Inspector,Inspector or any other officer appointed under Sec.8 (2-A) [Sec.8 (3)]. The State Government may also, by notification in the Official Gazette,appoint additional Inspectors within such local limits as it may assign tothem respectively [Sec.8(5)].In any area where there are more Inspectors than one, the StateGovernment may declare the power which such Inspectors shallrespectively exercise and the Inspector to whom the prescribed noticesare to be sent [Sec.8(6)].Powers of Inspectors [Sec.9- An Inspector may within the local limitsfor which he is appointed:a) enter, with assistants who are in the service of Government or any local

or other public authority or with an expert, the premises of a factory;b) make examination of the premises, plant, machinery, article or substance;c) inquire into any accident or dangerous occurrence, whether resulting in

bodily injury, disability or not, and take on the spot or otherwisestatements of any person which he may consider necessary for suchinquiry;

d) require the production of any prescribed register or any other documentrelating to the factory;

e) seize, or take copies of, any register, record or other document or anyportion thereof, as he may consider necessary in respect of any offenceunder this Act, which he has reason to believe, has been committed;

f) direct the occupier that any premises or any part thereof, or anythinglying therein, shall be left undisturbed (whether generally or in particularrespects) for so Extended as is necessary for the purpose of anyexamination under Clause (b);

g) take measurements and photographs and make such recordings as heconsiders necessary for the purpose of any examination under Clause(b) taking with him any necessary instrument or equipment;

h) in case of any article or substance found in any premises, being an articleor substance which appears to him as having caused or is likely to cause



danger to the health or safety of workers, direct it to be dismantled orsubject it to any process of test (but not so as to damage or destroy itunless the same is necessary for carrying out the purposes of this Act).Further, he may take possession of any such article or substance or apart thereof, and detain it for so Extended as is necessary for suchexamination;

i) exercise such other powers as may be prescribed.The above powers of an Inspector are subject to any rules which may bemade by the State Government in this behalf.Additional Powers. An Inspector has also the power:a) to require medical examination of a ‘young person’ working in a

factory(Sec.75), and alsob) to take sample of any substance used, or intended to be used, in a factory

for the purpose of finding out if the substance is injurious to the health ofthe worker[Sec.91].

Penalty for obstructing Inspector [Sec.95] - Whoever willfullyobstructs an Inspector in the exercise of any power conferred on him byor under the Act, or fails to produce on demand by an Inspector anyregisters or documents, shall be punished with imprisonment up to 6months or with fine up to Rs.10, 000 or with both.Certifying surgeons Appointment. [Sec.10] - The State Governmentmay appoint qualified medical practitioners to be certifying surgeons forspecified local limits or factories [Sec.10 (1)]. A certifying surgeon may,with the approval of the State Government, authorize any qualified medicalpractitioner to exercise any of his powers [Sec.10 (2)]. But no personshall be appointed a certifying surgeon who is or becomes the occupierof a factory or is or becomes directly or indirectly interested therein[Sec.10 (3)]. The State Government may exempt any person or class ofpersons from the provisions of Sec. 10 (3) in respect of any factory orclass or description of factories [Provision to Sec.10 (3)]. The exemptionshall however be made by order in writing and subject to such conditionsas may be specified in the order.Duties of certifying surgeons : The certifying surgeon shall carry out suchduties as may be prescribed in connection with:a) the examination and certification of young persons;b) the examination of persons engaged in factories in dangerous occupations

or processes;c) the exercising of such medical supervision as may be prescribed for any

factory where (i) cases of illness have occurred which it is reasonable tobelieve are due to the nature of the manufacturing process carried on, orother conditions of work prevailing, therein; (ii) by reason of any changein the manufacturing process carried on or in the substances used therein,there is a likelihood of injury to the health of workers employed in thatmanufacturing process; (iii) young persons are, or are about to be,employed in any work which is likely to cause injury to their health[Sec.10(4)].



3.1.7 Provisions of Health, Safety and Welfare

The act makes detailed provisions in regard to various matters relatingto health, safety and welfare of the workers. These provisions imposeupon the occupiers or managers certain obligations (a) to protect workers,unwary as well as negligent, from accidents and (b) to secure for them inemployment, conditions conducive to their health, safety, and welfare.These provisions also require the occupiers or managers to maintaininspection staff and to make provision for maintenance of health,cleanliness, prevention of overcrowding, and amenities like lighting,ventilation, drinking water, etc.

I-Health

Chapter III (Sec. 11 to 20) of the Act deals with the provisions ensuringthe health of the workers in the conditions under which work is carriedon in factories. These provisions are as follows:

1. Cleanliness (Sec.11) - Factory to be kept clean and free from effluviaand dirt:

1) Every factory shall be kept clean and free from effluvia arising from anydrain, privy, or other nuisance. Accumulation of dirt and refuse shall beremoved daily by some effective method. The floor or every work-room shall be cleaned at least once in every week by washing, usingdisinfectants, where necessary, or by some effective method.

2) Effective means of drainage : Where a floor is liable to become wet inthe course of any manufacturing process to such an extent as is capableof being drained, effective means of drainage shall be provided.

3) Use of disinfectants, etc., painting and varnishing : Use of disinfectants,detergents, painting, repainting and varnishing, re-varnishing, whitewashingor colour washing shall be resorted to.

2. Disposal of wastes and effluents (Sec.12).

(1) Treatment of wastes and effluents and their disposal : Effectivearrangements shall be made in every factory for the treatment of wastesand effluents due to the manufacturing process carried on therein, so asto render them innocuous, and for their disposal [Sec.12(1)].

2) Rules by the State Government prescribing arrangements : The StateGovernment may make rules prescribing the arrangements to be madein this regard. It may also require that such arrangements shall beapproved by such authority as may be prescribed [Sec.12 (2)].

3) Ventilation and temperature (Sec.13)

(1) Maintenance of adequate ventilation and temperature : Effective andsuitable provision shall be made in every factory for securing andmaintaining in every workroom—

a) adequate ventilation by the circulation of fresh air, and



b) such a temperature as will secure to workers therein reasonable conditionsof comfort and prevent injury to health.

2) Process producing high temperature to be separated : The walls androofs shall be of such materials and so designed that the temperatureshall not be exceeded but kept as low as practicable. The processwhich produces high temperatures shall be separated from the workroom,by insulating the hot parts or by other effective means [Sec.13 (1)].

3. Standard of adequate ventilation and temperature to be prescribed andprovision of measuring instruments : The State Government may prescribea standard of adequate ventilation and reasonable temperature for anyfactory and direct that proper measuring instruments shall be providedand such records as may be prescribed shall be maintained [Sec.13 (2)].

4. Prescription of measures by the State Government to reducetemperatures : Where excessively high temperatures can be reduced bysuch methods as whitewashing, spraying, or insulating and screeningoutside walls or roofs or windows, or by raising the level of the roof orby insulating the roof, the State Government may prescribe such of theseor other methods as shall be adopted in the factory [Sec. 13 (3)].

5. Service of notice by the Chief Inspector on the occupier to adoptmeasures for reduction of temperatures : If it appears to the ChiefInspector that excessively high temperatures in any factory can be reducedby the adoption of suitable measures, he may serve on the occupier anorder in writing specifying the measures which in his opinion should beadopted and requiring them to be carried out before a specified date[Sec. 13 (3)].

4. Dust and fume (Sec.14).

(1) Measures for prevention of inhalation or accumulation of dust and fumes :Where dust or fume or impurity of such a nature as is likely to be injuriousor offensive to the workers is given off as a result of the manufacturingprocess being carried on in a factory, effective measures shall be takenin the factory for prevention of inhalation or accumulation of dust andfumes in workrooms. If for such a purpose any exhaust appliance isnecessary, it shall be applied as near as possible to the point of origin ofthe dust, fume or other impurity and such point shall be enclosed so faras possible [Sec.14(1)].

2) Exhaust for internal combustion engine : A stationary internal combustionengine shall not be operated unless the exhaust is conducted into theopen air. Other internal combustion engines shall not be operated in anyroom unless effective measures have been taken to prevent accumulationof fumes there from which are injurious [Sec.14 (2)].

5. Artificial humidification (Sec.15).(1) Prescription of standards of humidification, ventilation and cooling of air.

In respect of all factories in which the humidity of the air is artificiallyincreased, the State Government may make rules prescribing standards



of humidification. It may also make rules regulating the methods usedfor artificially increasing the humidity of the air. It may further make rulesprescribing methods to be adopted for securing adequate ventilationand cooling of the air in the workrooms [Sec.15(1)].

2) Water used for artificial humidification to be clean. In any factory inwhich the humidity of the air is artificially increased, the water used forthe purpose shall be taken from a public supply or other source of drinkingwater, or shall be effectively purified before it is so used [Sec.15 (2)].

6. Overcrowding (Sec.16).

(1) Overcrowding injurious to health of workers to be avoided. There shallnot be overcrowding in any room of the factory so as to be injurious tothe health of the workers employed therein [Sec.16 (1)].

(2) 9.9/14.2 cubic metres of space per worker. There shall be at least 9.9cubic metres (for the factories in existence at the time of thecommencement of the Act) and 14.2 cubic metres (for the factories builtafter the commencement of the Act) of space for every worker. Incalculating the space of 9.9 or 14.2 cubic metres, no account shall betaken of any space which is more than 4.2 metres, above the level of thefloor of the room [Sec.16 (2)].

3) Notice of maximum of workers to be employed in a workroom. If theChief Inspector by order in writing so requires, there shall be posted ineach workroom of the factory a notice specifying the maximum numberof workers who may be employed in the workroom [Sec.16 (3).

7. Lighting (Sec.17).

(1) Sufficient and suitable lighting in every part of factory : In everypart of a factory where workers are working or passing there shall beprovided and maintained sufficient and suitable lighting, natural orartificial, or both (Sec.17 (1)].

2) Glazed windows and skylights to be kept clean : All glazed windowsand skylights used for the lighting of the workrooms shall be kept clean onboth the inner and outer surfaces and free from obstruction [Sec.17 (2).

3) Measures for prevention of glare and formation of shadows :Effective provision shall also be made for the prevention of (a) glare,either directly from a source of light or by reflection from a smooth orpolished surface; and (b) the formation of shadows to such an extent asto cause eye strain or the risk of accident to any worker [Sec.17 (3)].

4) Prescription of standards of sufficient and suitable lighting : TheState Government may prescribe standards of sufficient and suitablelighting for factories or for any class or description of factories or for anymanufacturing process [Sec.17 (4)].

8. Drinking Water (Sec.18).

(1) Suitable points for wholesome drinking water : In every factory,effective arrangements shall be made to provide and maintain at suitable



points conveniently situated for all workers employed therein a sufficientsupply of wholesome drinking water [Sec.18(1)].

2) Drinking points to be legibly marked and to be away from urinal,latrine etc : All points for supply of drinking water shall be legiblymarked ‘drinking water’ in a language understood by a majority of theworkers employed in the factory. Such points shall be situated beyond6 metres of any washing place, urinal, latrine, spittoon, open drain carryingsilage or effluent or any other source of contamination unless shorterdistance is approved in writing by the Chief Inspector [Sec.18(2)].

3) Cooling of drinking water where more than 250 workers employed :In every factory wherein more than 250 workers are ordinarily employed,provision shall be made for cooling drinking water during hot weatherby effective means and for distribution thereof [Sec.18 (3)].

9. Latrines and urinals (Sec.19).

(1) Separate latrines and urinals for male and female workers convenientlysituated and adequately lighted and ventilated. In every factory, separateenclosed accommodation of latrines and urinals of prescribed types ofmale and female workers shall be provided for. Such accommodationshall be conveniently situated and accessible for workers at all times. Itshall be adequately lighted and ventilated and maintained in a clean andsanitary condition. Sweepers shall also be employed for keeping cleanlatrines, urinals and washing places [Sec.19 (1)].

2) Latrine and urinal accommodation to be prescribed sanitary types-floorsand walls to be glazed and their cleaning. In factories wherein more than250 workers are ordinarily employed (1) all latrine and urinalaccommodation shall be prescribed sanitary types; (b) the floors andinternal walls, up to a height of 90 centimeters, of the latrines and urinalsand the sanitary blocks shall be laid in glazed tiles or otherwise finishedto provide a smooth polished impervious surface; (c) the sanitary pan oflatrines and urinals shall be thoroughly washed and cleaned at least oncein every 7 days with suitable detergents or disinfectants, or with both[Sec. 19(2)].

10. Spittoons [Sec.20].

(1) Sufficient number of spittoons : In every factory, there shall beprovided a sufficient number of spittoons in convenient places and theyshall be maintained in a clean and hygienic condition. [Sec.20 (1)].

2) Display of notice of provision of spittoons : No person shall spitwithin the premises of a factory except in the spittoons provided for thepurpose. A notice containing the provision of spittoons in the factoryshall be prominently displayed at suitable places in the premises. Thepenalty for spitting anywhere except in the spittoons shall also beprominently displayed [Sec.20 (3)].

3) Penalty : Whoever spits in contravention of Sec. 20 (3) shall bepunishable with fine not exceeding Rs.5 [Sec.20 (4)].



II-Safety

The safety provisions are absolute and obligatory in their character andthe occupier of every factory is bound to follow them. They are containedin Chapter IV (Secs. 21 to 41).

1. Fencing of machinery (Sec.21).

(1) Dangerous part of every machinery to be securely fenced : Inevery factory every dangerous part of every machinery shall be securelyfenced by safeguards of substantial construction which shall be constantlymaintained and kept in position while the parts of machinery they arefencing are in motion or in use.

Machineries covered by Sec. 21. The following machineries are coveredby Sec. 21, viz.a) Every moving part of a prime mover, and every fly-wheel connected

to a prime mover, whether the prime mover or fly wheel is in theengine house or not;

b) The headrace and tailrace of every water-wheel and water turbine;c) Any part of a stock-bar which projects beyond the headstock of a lathe;d) Every part of an electric generator, a motor or rotary converter;e) Every part of transmission machinery; andf) Every dangerous part of any other machinery [Sec.21 (1)]2) Prescription of further precautions by State Government : The

State Government may by rules prescribe much further precautions asit may consider necessary in respect of any particular machinery or partthereof [Sec.21(2)].

2. Work on near machinery in motion (Sec.22) : (1) Examination ofmachinery in motion by a trained adult male worker. Where in anyfactory it becomes necessary to examine any part of machinery whilethe machinery is in motion, such examination shall be made only by aspecially trained adult male worker wearing tight fitting clothing. Theclothing shall be supplied by the occupier. The name of the person soengaged shall be entered in the prescribed register. Further he shall befurnished with a certificate of his appointment (Sec. 22 (1)].

2) Restriction on women and young persons. No woman or young personshall be allowed to clean, lubricate or adjust any part of machinery inmotion if it would expose the woman or young person to risk of anyinjury, from any moving part (Sec. 22(2)].

3. Employment of young persons on dangerous machines (Sec.23).(1) Restriction on young persons to work on dangerous machines. No

young person shall be required or allowed to work on any machine towhich this Section applies unless: (a) he has been fully instructed as tothe dangers arising in connection with the machine and the precautionsto be observed; and (b) he has received sufficient training to work onthe machine, or his under adequate supervision by a person who has athorough knowledge and experience of the machine {Sec. 23 (1)].



2) Machines dangerous for young persons to be specified by the StateGovernmen:t The State Government shall specify machines which in itsopinion are of such a dangerous character that young persons ought notto work at elm unless the foregoing requirements are complied with (Sec.23(2)].

4. Striking gear and devices for cutting off power (Sec.24).(1) Suitable striking gear to be provided, maintained and used. In every

factory, suitable striking gear or other efficient mechanical appliance shallbe provided and maintained and used to move driving belt to and fromfast and loose pulleys which form part of transmission machinery. Drivingbelts when not in use shall not be allowed to rest or ride upon the shaftingin motion. (Sec.24 (1).

2) Locking device to prevent accidental starting of transmission machinery.When a device, which can inadvertently shift from ‘off to ‘on’ position,is provided in a factory to cut off power, arrangements shall be providedfor locking the device in safe position. This is preventing accidentalstarting of the transmission machinery or other machines to which thedevice is fitted (Sec. 23(3)].

5. Self acting machines (Sec. 25).Traversing part not allowed running within a distance of 45 centimetersfrom any fixed structure. No traversing part of a self-acting machinein any factory and no material carried thereon shall be allowed to runon its outward or inward traverse within a distance of 45 centimetersfrom any fixed structure which is not part of the machine. This provisionshall apply only if the space over which the traversing part of the selfacting machine runs in a space over which any person is liable topass, whether in the course of his employment or otherwise.

6. Casing of new machinery (Sec.26).(1) Casing to prevent danger : All machinery driven by power and installed

in any factory after 1st April, 1949, every set screw, bolt or key on anyrevolving shaft, spindle, wheel or pinion shall be so sunk, encased orotherwise effectively guarded as to prevent danger. Further, all spur,worm and other toothed or friction gearing not requiring frequentadjustments while in motion shall be completely encased unless it is safelysituated (Sec. 26(1)].

2) Penalty : If any one sells or lets on hire either directly or as an agent, anymachine which does not comply with the provisions of Sec. 26, he shallbe punishable with imprisonment up to 3 months or with fine up to Rs.500or with both (Sec. 26(2)].

7. Prohibition of employment of women and children near cottonopeners (Sec.27) : No woman or child shall be employed in any part ofa factory for pressing cotton in which a cotton-opener is at work. If thefeed-end of a cotton-opener is in a room separated from the deliveryend by a partition extending to the roof or to a specified height, womenand children may be employed on the side of the partition where thefeed-end is situated.



8. Hoists and lifts (Sec. 28) : (1) Hoists and lifts to be of good,mechanical construction and to be properly maintained and examinedonce in every 6 months. In every factory every hoist and lift shall be ofgood mechanical construction, sound material, and adequate strength.Further it shall be sufficiently protected by enclosures fitted with gates.It shall also be properly maintained and shall be thoroughly examined bya competent person at least once in every 6 months. A register containingthe prescribed particulars of every such examination shall be kept. Themaximum safe working load shall also be plainly marked on every hoistor lift, and no load greater than such load shall be carried thereon. Thecage of every hoist or lift used for carrying persons shall be fitted with agate on each side from which access is afforded to a landing. The gateshall be fitted with interlocking or other efficient device to secure that thecage cannot be moved unless the gate is closed.For the purposes of Sec. 28, no lifting machine or appliances shall bedeemed to be a hoist or lift unless it has a platform or cage, the directionor movement of which is restricted by a guide or guides (Expl. To Sec.28) added by the Amendment Act of 1987).

9. Lifting machines, chains, ropes and lifting tackles (Sec. 29)(1) Cranes and lifting machines etc. to be of good construction and to be

examined once in every 12 months. In every factory, cranes and otherlifting machines (and every chain, rope and lifting tackle for the purpose ofraising or lowering persons, goods or materials) shall be of goodconstruction, sound material, and adequate strength, free from defectsand properly maintained. They shall be thoroughly examined by acompetent person at least once in every 12 months. A register containing theprescribed particulars of every such examination shall be kept (Sec. 29(1)(d)].

2) Cranes and lifting machines not to be loaded beyond safe working load.The aforesaid machines shall not, except for the purpose of test, beloaded beyond the safe working load which shall be plainly markedthereon together with an identification mark and duly entered in theprescribed register. Where this is not practicable, a table showing thesafe working loads of the aforesaid machinery in use shall be displayedin prominent positions on the premises (Sec. 29(1)(b)].

3) Crane not to approach within 6 meters of a place where any person isemployed or working. If any person is employed or working on ornear the wheel track of a traveling crane in any place where he would beliable to be struck by the crane, effective measures shall be taken toensure that the crane does not approach within 6 meters of that place(Sec. 29(1)(c)].

10. Revolving machinery (Sec. 30).(1) Notice of maximum safe working speed of grindstone or abrasive wheel,

etc. to be kept near machine, In every factory in which the process ofgrinding is carried on, there shall be permanently kept near machine anotice indicating (a) the maximum safe working peripheral speed of everygrindstone or abrasive wheel. (b) the speed of the shaft or spindle upon



which the wheel is mounted, and (c) the diameter of the pulley uponsuch shaft or spindle necessary to secure such safe working peripheralspeed (Sec. 30(1)].

2) Speeds not to be exceeded. (a) The speeds indicated in notices underSec. 20(1) shall not be exceeded (Sec. 30(2)].

b) Effective measures shall be taken in every factory to ensure that the safeworking peripheral speed of every revolving vessel, cage, basket, fly-wheel, pulley, disc or similar appliance driven by power is not exceeded(Sec. 30)]

11. Pressure plant (Sec.31).1) Safe working pressure not to be exceeded : If in any factory any plant

or any machinery or part thereof is operated at a pressure aboveatmospheric pressure, effective measures shall be taken to ensure thatthe safe working pressure is not exceeded (Sec. 31(1)].

2) Rule-making power of the State Government providing for examinationand exemption. The State Government may make rules providing forthe examination and testing of any plant or machinery and providing foradditional safely measures (Sec. 31(2)].

12. Floors, stairs and means of access (Sec. 32). In every factory:a) all floors , steps, stairs passages and gangways shall be of sound

construction and properly maintained. Further they shall be kept freefrom obstructions and substances likely to cause persons to slip andhand rails shall be provided where necessary:

b) there shall, so far as is reasonably practicable, be provided andmaintained safe means of access to every place at which any person isat any time required to work;

c) when any person has to work at a height from where he is likely to fall,provision shall be made, so far as is reasonably practicable, by fencingor otherwise, to ensure the safety of the person so working. Thisrestriction is not applicable if the place provides secure foothold and,where necessary secure handhold.

13. Pits, sumps, openings in floors, etc. (Sec. 33)(1) Pits, sumps, etc. to be securely covered or fenced. In every factory,

pits, sumps, fixed vessels, tanks, openings in the ground or in the floorshall be securely covered or securely fenced (Sec. 33(1)].

2) Exemption. The State Government may, by order in writing, exemptany factory in respect of any vessel, sump, tank, pit or opening fromcompliance with the above provision (Sec. 33(2)].‘Securely fencing a pit’ means covering or fencing it in such a way that itceases to be a source of danger to those who have occasion to go nearthere [State of Mysore v. Narayana Raghvendra (1967) 2 L.L.J. 616].

14. Excessive weights (Sec. 34)1) Prohibition on lifting or carrying of excessive weights. No person shall

be employed in any factory to lift, carry or move any load so heavy as to



be likely to cause him injury (Sec. 34(1)].2) Maximum weights to be lifted or carried to be prescribed. The State

Government may make rules prescribing the maximum weights whichmay be lifted, carried or moved by adult men, adult women, adolescentsand children employed in factories or in any class or description offactories or in carrying on any specified process (Sec. 34 (2)].

15. Protection of eyes (Sec. 35).In very factory, screen or suitable goggles shall be provided for theprotection of persons employed on, or in immediate vicinity of mechanicalor other processes which involve any danger or injury to the workers‘eyesight. The risk of injury to the eyes may be from particles or fragmentsthrown off in the course of the process or by reason of exposure toexcessive light.

16. Precautions against dangerous fumes (Sec. 36)(1) Prohibition on entry into any chamber, tank, vat, pit, pipe, etc. where

any gas, fume etc. is present. No person shall be required or allowed toenter any chamber, tank, vat, pit, pipe, flue or other confined space inany factory in which any gas, fume, vapour or dust is likely to be presentto such an extent as to involve risk to persons being overcome thereby,unless it is provided with a manhole of adequate size or other effectivemeans of egress (Sec. 36(1)].

2) Practicable measures to be taken for removal of gas, fume, etc. Noperson shall be required or allowed to enter any confined space as isreferred to in Sec. 36(1), until all practicable measures have been takento remove any gas, fume, vapour, or durst, which may be present so asto bring its level within the permissible limits and to prevent any ingressof such gas, fume, vapour or dust and unless:

a) a certificate in writing has been given by a competent person, based ona test, carried out by himself that the space is reasonably free fromdangerous gas, fume, vapour or dust; or

b) Such person is wearing suitable breathing apparatus and a belt securelyattached to a rope, the free end of which is held by a person outside theconfined space (Sec. 36(2)].

17. Precautions regarding the use of portable electric light (Sec 36A).1. No portable electric light or any other electric appliance of voltage

exceeding 24 volts shall be permitted for use inside any chamber, tank,vat, pit; flue or other confined space in a factory, unless adequate safetydevices are provided. If any inflammable gas, fume or dust is likely toexplode on ignition, all practicable measures shall be taken to preventany such explosion by:

a) effective enclosure of the plant or machinery used in the process,b) removal or prevention of the accumulation of such dust, gas, fume or

vapour and



c) exclusion or effective enclosure of all possible sources of ignition (Sec.37(1)].

2) Provision of chokes, vents, etc. When the plant or machinery cannotwithstand the probable pressure which an explosion would produce, allpracticable measures shall be taken to restrict the spread, any effects ofthe explosion. This shall be done by the provision in the plant or machineryof chokes, baffles, vents or other effective appliances (Sec. 37(2)].

3) Special measures where explosive or inflammable gas or vapour is underpressure greater than atmospheric pressure. Where any part of the plantor machinery in a factory contains an explosive or inflammable gas orvapour under pressure greater than atmospheric pressure, that part shallnot be opened unless special measures prescribed for that are taken(Sec. 37(3)]. These measures are as follows:

a) The flow of gas or vapour shall be effectively stopped by a stop valve orother means;

b) All practicable measures shall be taken to reduce the pressure to theatmospheric pressure;

c) Where the fastening of such part has been loosened or removed, thefastening shall be secured or securely replaced (Sec. 37(3)].Further, a plant, tank or vessel containing explosive or inflammablesubstance shall not be welded, brazed, soldered or cut by applying heatuntil such substances and fumes are rendered non-explosive and non-inflammable (Sec. 37(4)].

4) Exemption. The State Government may by rules exempt any factoryfrom compliance with all or any of the provisions of Sec. 37, Sec. 37(5)].

19. Precautions in case of fire. (Sec. 38 as substituted by the AmendmentAct of 1967).

(1) Practicable measures to prevent outbreak of fire and its spread. Inevery factory, all practicable measures shall be taken to prevent outbreakof fire and its spread, both internally and externally, and to provide andmaintain:

a) safe means of escape for all persons in the event of a fire, andb) the necessary equipment and facilities for extinguishing fire (Sec. 38(1)].2) Familiarity of workers with means of escape. Effective measures shall

be taken to ensure that in every factory all the workers are familiar withthe means of escape in case of fire and have been adequately trained inthe routine to be followed in such cases. (Sec.38 (2)].

3) Rule-making power of the State Government. The State Governmentmay make rules, in respect of any factory or class or description offactories, requiring the measures to be adopted to give effect to theabove provisions (Sec. 38(3)].

4) Additional measures. If the Chief Inspector, having regard to the natureof the work carried on in any factory, the construction of such factory,special risk to life or safety, or any other circumstances, is of the opinion



that the measures provided in the factory are inadequate, he may, byorder in writing, require that such additional measures as he may considerreasonable and necessary be provided in the factory before such dateas is specified in the order (Sec. 38(4)].

20. Power to require specifications of defective parts or tests of stability(Sec. 39) : If it appears to the Inspector that any building or part of abuilding, machinery or plant in a factory may be dangerous to human lifeor safety, he may ask occupier or the manager or both of the factory:

a) to furnish drawings, specifications and other particulars as may benecessary to determine, whether such building, ways, machinery or plantcan be used with safety; or

b) to carry out the tests in the specified manner and inform the Inspector ofthe results thereof.

21. Safety of building and machinery (Sec. 40) :(1) Service of order by Inspector on occupier to take specified measures in

case of dangerous building or machinery or plant. If any building or partof a building or machinery or plant in a factory is in such a condition thatit is dangerous to human life or safety, the Inspector may serve on theoccupier or the measures which in his opinion shall be adopted andrequiring them to be carried out before a specified date. (Sec. 40(1)].

2) Prohibition of use where danger is imminent : Where it appears to theInspector that the use of any such building, machinery, etc. involvesimminent danger to human life or safety, he may prohibit its use until ithas been properly repaired or altered (Sec. 40(2)].

22. Maintenance of building (Sec. 40-A) : Where it appears to theInspector that any building or any part of the building in a factory is insuch a state of disrepair as is likely to lead to conditions detrimental tothe health and welfare of the workers, he may serve on the occupier ormanager or both of the factory an order in writing specifying the measureswhich should be taken. he may further require such measures to becarried out before such date as is specified in the order.

23. Safety Officers (Sec. 40-B) : In every factory (i) wherein 1,000 ormore workers are ordinarily employed, or (ii) wherein, in the opinion othe State Government, any manufacturing process or operation is carriedon, which process or operation involves any risk of bodily injury, poisoningor disease, or any other hazard to health, to the persons employed in thefactory, the occupier shall, if so required by the State Government bynotification in the Official Gazette, employ such number of Safety Officersas may be specified in that notification (Sec. 40B) (1)]. The duties,qualifications and conditions of service of Safety Officers shall be suchas may be prescribed by the State Government (Sec. 40-B (2)].Power to make rules to supplement the above provisions (Sec. 41) :The State Government may make rules requiring the provision in anyfactory of such further devices and measures for securing the safety of



persons employed therein as if may deem necessary.Provisions relating to hazardous processes(New Chapter IV A, Sec. A to 41H as introduced by theAmendment Act of 1967)

Site Appraisal Committee (Sec. 41-A)Constitution of the committee. The State Government may, for purposesof advising it to consider applications for grant of permission for theinitial location of a factory involving a hazardous process or for theexpansion of any such factory, appoint a Site Appraisal Committee. Thecommittee shall consist of:

a) the Chief Inspector of the State who shall be its Chairman;b) a representative of the Central Board for the Prevention and Con-

trol of Air Pollution referred to in Sec. 3 of the Air (Prevention andControl of Pollution Act) 1981;

c) a representative of the Central Board for the Prevention and Controlof Air Pollution referred to in Sec. 3 of the Air (Prevention and Con-trol of Pollution Act0 1981;

d) a representative of the State Board appointed under Sec. 4 of theWater (Prevention and Control of Pollution) Act, 1974;

e) a representative of the State Board for the Prevention and Controlof Air Pollution referred to the Sec. 5 of the Air (Prevention andControl of Pollution) Act, 1981 ;

f) a representative of the Department of Environment in the state;g) a representative of the Meteorological Department of the Govern-

ment of India;h) an expert in the field of occupational health;i) a representation of the Town Planning Department of the State Gov-

ernment; andj) not more than 5 other members who may be co-opted by the State

Government. The co-opted members shall be (i) a scientist havingspecialized knowledge of the hazardous process which will be involvedin the factory. (ii) a representative of the local authority within whosejurisdiction the factory is to be established, and (iii) not more than 3other persons as deemed fit by the State Government (Sec. 41A(1)].Where any process relates to a factory owned or controlled by the CentralGovernment or to a corporation or a company owned orcontrolled by the Central Government, the State Government shallco-opt in the Site Appraisal Committee. A representative nominated bythe Central Government as a member of that committee (Sec. 41-A (3)].Functions of the committee: The Site Appraisal Committee shallexamine an application for the establishment of a factory involving ahazardous process. It shall make its recommendation to the StateGovernment within a period of 90 days of the receipt of such applicationin the prescribed form (Sec. 41A (2)].The Site Appraisal Committee shall have power to call for any information



from the person making an application for the establishment or expansionof a factory involving a hazardous process (Sec. 41 A (4)].No further approval required. Where the State Government has grantedapproval to an application for the establishment or expansion of a factoryinvolving a hazardous process, it shall not be necessary for an applicant toobtain a further approval from the Central Board or the State Boardestablished under the Water (Prevention and Control of Pollution) Act, 1974and the Air Prevention and Control of Pollution Act, 1981 (sec 41A (5)].Compulsory disclosure of information by the occupier (Sec 41-B)Disclosure to whom : The occupier of every factory involving ahazardous process shall disclose all information regarding dangers,including health hazard. He shall also disclose the measures to overcomesuch hazards arising from the exposure to or handling of the materials orsubstances in the manufacturing, transportation, storage and otherprocesses. The information is required to be disclosed to (a) the workersemployed in the factory. (b) the Chief Inspector, (c) the local authoritywithin whose jurisdiction the factory is situate, and the general public in thevicinity (Sec. 41-B(1)]. The information, so furnished shall include accurateinformation as to the quantity specifications and other characteristics ofwastes and the manner of their disposal (Sec. 41-B (3)].Policy with regard to health and safety of workers : The occupiershall, at the time of registering the factory involving a hazardous process,lay down a detailed policy with respect to the health and safety of theworkers employed therein, He shall intimate such policy to the ChiefInspector and the local authority. Thereafter, he shall, at such intervalsas may be prescribed, inform the Chief Inspector and the local authorityof any change made in the said policy (Sec. 4) B (2).On site emergency plan and disaster control measure : Everyoccupier shall, with the approval of the Chief Inspector, draw up an, on siteemergency plan and detailed disaster control measures for his factory. Heshall also make known to the workers employed therein and to the generalpublic living in the vicinity of the factory the safety measuresrequired to be taken in the event of an accident taking place (Sec. 41-B (4)].Information to the Chief Inspector before commencement : If afactory proposes to engage in a hazardous process, the occupier of thefactory stall, within a period of 30 days before the commencement ofsuch process, inform the Chief Inspector of the nature and details of theprocess in such form and in such manner as may be prescribed (Sec.41-B (5)]. If the occupier contravenes this provision the license issuedunder Sec. 6 to such factory stall, not withstanding any penalty to whichthe occupier or factory shall be subjected to under the provisions of thisAct be liable for cancellation (Sec.41 – B(6)].Handling, usage, transportation of hazardous substances : Theoccupier of a factory involving a hazardous process shall get permissionwith the previous approval of the Chief Inspector lay down measures forthe handling, usage, transportation and storage of hazardous substances



inside the factory premises. He shall also lay down the measures for thedisposal of such substances outside the factory premises. He shall alsopublicize these measures in the manner prescribed among the worker sand the general public living in the vicinity. (Sec. 41-B (7)].Specific responsibility of the occupier in relation to hazardousprocesses (Sec. 41-C)

Every occupier of a factory involving any hazardous process shall:a) maintain accurate and up-to-date health records or, as the case may be,

medical records, of the workers in the factory who are exposed to anychemical, toxic or any other harmful substances which are manufactured,stored, handled or transported. Such records shall be accessible to theworker s subject to such conditions as may be prescribed;

b) appoint persons who possess qualifications and experience in handlinghazardous substances and are competent to supervise such handlingwithin the factory and to provide at the working place all the necessaryfacilities for protecting the workers in the manner prescribed :Where any question arises as to the qualifications and experience of aperson so appointed, the decision of the Chief Inspector shall be final.

c) provide for medical examination of every workeri) before such worker is assigned to a job involving the handling of or

working with a hazardous substance, andii) while continuing in such job, and after he has ceased to work in such

job, at intervals not exceeding 12 months in such manner as may beprescribed.

Power of Central Government to appoint Inquiry Committee (Sec 41-D)Appointment of an Inquiry Committee in the event of occurrenceof an extraordinary situation : The Central Government may, in theevent of the occurrence of an extraordinary situation involving a factoryengaged in a hazardous process, appoint an Inquiry Committee to Inquireinto the standards of health and safety observed in the factory. Theobject of appointing the committee is to find out the causes of any failureor neglect in the adoption of any measures or standards prescribed forthe health and safety of the workers employed in the factory or thegeneral public affected or likely to be affected due to such failure orneglect and for the prevention and recurrence of such extraordinarysituation in future in such factory or elsewhere (Sec. 41-D (1)].Membership of the Committee and its tenure of office. TheCommittee shall consist of a Chairman and 2 other members. The termsof reference of the Committee and the tenure of office of its membersshall be such as may be determined by the Central Government accordingto the requirements of the situation [Sec.41-D (2)].Recommendations of the Committee advisory- The recommendationsof the Committee shall be advisory in nature [Sec.41-D (3)].



Emergency Standards (Sec. 41-E).Sometimes standards of safety may not have been prescribed in respectof a hazardous process or class of hazardous processes, or the standardsso prescribed may be inadequate. In such a case if the CentralGovernment is satisfied, it may direct the Director General of FactoryAdvice Service and Labour Institutes or any institution specialized inmatters relating to standards of safety in hazardous processes, to laydown emergency standards for enforcement of suitable standards inrespect of such hazardous processes. [Sec. 41-E (1)].The emergency standards so laid down shall, until these are incorporatedin the rules made under this Act, be enforceable and have the sameeffect as if they had been incorporated in the rules made under this Act.[Sec. 41-E (2)].Permissible limits of exposure of chemical and toxic substances(Sec. 41-F).The maximum permissible threshold limits of exposure of chemicals andtoxic substances in manufacturing processes (where hazardous orotherwise) in any factory shall be of value indicated in the SecondSchedule [Sec.41-F (1)]. The Second Schedule, added by theAmendment Act of 1987, lays down permissible levels of certainchemical substances in work environment.The Central Government may at any time for the purpose of giving effectto any scientific proof obtained from specialized institutions or experts inthe field, by notification in the Official Gazette, make suitable changes inthe said Schedule [Sec.41-F (2)].Workers’ participation in safety management (Sec. 41-G).Appointment of Safety Committee - The occupier shall, in everyfactory where a hazardous process takes place, or where hazardoussubstances are used or handled, set up a Safety Committee. TheCommittee shall consist of equal number of representatives of workersand management to promote co-operation between the workers andthe management in maintaining proper safety and health at work. It shallreview periodically the measures taken in that behalf [Sec. 41-G (1)].Composition of the Safety Committee- The tenure of office of themembers of the Safety Committee and their rights and duties shall suchas may be prescribed [Sec.41-G (2).Exemption. The State Government may, by order in writing and for reasonsto be recorded, exempt the occupier of any factory or class of factoriesfrom setting up the Safety Committee [Provision to Sec. 41-G (1)].Right of workers to warn about imminent danger (Sec. 41-H) -Apprehension of danger to be brought to notice. Sometimes the workersemployed in a factory engaged in a hazardous process may havereasonable apprehension that there is a likelihood of imminent danger totheir lives or health due to any accident. In such a case they may bringsuch danger to the notice of the occupier, agent, and manager or, anyother person who is in charge of the factory or the process concerned



directly or through their representatives in the Safety Committee. Theymay also simultaneously bring the danger to the notice of the Inspector[Sec.41-H (1)].Duty of Occupier, etc - It shall be the duty of the occupier, agent,manager or the person in charge of the factory or process to takeimmediate remedial action if he is satisfied about the existence of suchimminent danger and send report forthwith of the action taken to thenearest Inspector [Sec. 41-H (2)].Reference of matter to Inspector - If the occupier, agent, manager orthe person in charge is not satisfied about the existence of any imminentdanger as apprehended by the workers, he shall, nevertheless, refer thematter forthwith to the nearest Inspector. The decision of the Inspectoron the question of the existence of such imminent danger shall be final[Sec. 41-H (3)].Penalty for contravention of the provisions of Section 41-B, 41-C and41-H [New Sec. 96-A as introduced by the Amendment Act of 1987]

Whoever fails to comply with or contravenes any of the provisions ofSecs. 41-B, 41-C or 41-H or the rules made there under shall, in respectof such failure or contravention is punishable with imprisonment for aterm which may extend to 7 years and with fine which may extend toRs.2, 00,000. In case the failure or contravention continues, the defaultershall be punishable with additional fine which may extend to Rs.5,000for every day during which such failure or contravention continues afterthe conviction for the first such failure or contravention [Sec. 96-A(1)].If this failure or contravention continues beyond a period of 1 year afterthe date of conviction, the offender shall be punishable with imprisonmentfor a term which may extend to 10 years [Sec. 96-A (2)].

III-WelfareChapter V (Sec.42 to 50) of the act deals with facilities for the welfareof workers. The various provisions in this regard are as follows:

1. Washing facilities (Sec 42) - In every factory (a) adequate and suitablefacilities (separately and adequately screened for the use of male andfemale worker s) shall be provided and maintained for the use of theworkers therein; and (b) such facilities shall be conveniently accessibleand shall be kept clean,

2. Facilities for storing and drying clothing (Sec. 43)- The StateGovernment may make rules requiring the provision of suitable placesfor keeping clothing of workers not worn during working hours and forthe drying of wet clothing in respect of any factory or class of factories.

3. Facilities for sitting (Sec. 44)(1) Provision of sitting arrangement for workers obliged to work in a standing

position. In every factory, suitable arrangements for sitting shall beprovided and maintained for all workers who are obliged to work in astanding position. This has been done in order that the workers maytake advantage of any opportunities for rest which may occur in thecourse of their work [Sec. 44(1)].



2) Provision of seating arrangement for workers doing work which can bedone in a sitting position. If the workers in any factory engaged in aparticular manufacturing process or working in a particular room areable to do their work efficiently in a sitting position, the Chief Inspectormay require the occupier of the factory to provide such seatingarrangements as may be practicable [Sec. 44(2)].

3) Exemption. The State Government may, by notification in the OfficialGazette, exempt any factory or class of factories or manufacturingprocess from the application of the provisions of sec. 44 [Sec.44(3)].

4. First-aid appliances [Sec. 45](1) At least one first aid box with prescribed contents for every 150 workers.

There shall in every factory be provided and maintained so as to bereadily accessible during all working hours, first-aid boxes or cupboardswith the prescribed contents. There shall be at least one such box forevery 150 workers ordinarily employed at any one time in the factory[Sec. 45(1)].

2) First Aid box to have prescribed contents. Only the prescribedcontents shall be kept in a first aid box or cupboard [Sec.45 (2)].

3) First aid box to be in the charge of responsible person. Each first aidbox or cupboard shall be kept in the charge of a separate responsibleperson who holds a certificate in the first aid treatment recognized bythe State Government. Further, such person shall always be readilyavailable during the working hours of the factory [Sec. 45(3)].

4) Ambulance room in a factory employing more than 500 workers. Inevery factory wherein more than 500 workers are ordinarily employedthere shall be provided and maintained an ambulance room containingthe prescribed equipment.The room shall be in the charge of such medical and nursing staff as maybe prescribed and those facilities shall always be made readily availableduring the working hours of the factory [Sec. 45(4)].

5. Canteens [Sec. 46(1) Canteen in factory employing more than 250workers-the State Government may make rules.

1. The State Government may make rules requiring that in any specifiedfactory wherein more than 250 workers are ordinarily employed, acanteen or canteens shall be provided and maintained by the occupierfor the use of the workers (Sec. 46(1)].

2) Provisions in rules. The rules made by the State Government as tocanteens may provide for (a) the date by which canteen shall be provided,(b) the standards in respect of construction, accommodation, furnitureand other equipment of the canteen, (c) the foodstuffs to be servedtherein and the charges which may be made thereon, (d) the constitutionof a managing committee for the canteen and representation of theworkers in the management of the canteen, (e) the items of expenditurein the running of the canteen which are not to be taken into account infixing the cost of foodstuffs and which shall be borne by the employer,and (f) the delegation to the Chief Inspector, subject to such conditions



as may be prescribed, of the power to make rules under Clause (c)[Sec. 46(2)].

6. Shelters, rest rooms and lunch rooms [Sec. 47](1) Provision for shelters, rest rooms, lunch rooms in factories employing

more than 150 workers. In every factory wherein more than 150 workersare ordinarily employed, there shall be a provision for shelters, rest roomsand a suitable lunch room where workers can eat meals brought bythem with provision for drinking water. However, any canteen maintainedin accordance with the provisions of Sec. 46 shall be regarded as part ofthis requirement. Where a lunch room exists, no worker shall eat anyfood in the workroom [Sec.47 {1)].

(2) Shelters etc. to be sufficiently lighted ventilated and cooled. Theshelters or rest room or lunch rooms shall be sufficiently lighted and ventilatedand shall be maintained in a cool and clean condition [Sec. 47 (2)].

7. Crèches (Sec.48).1) Provision of crèches in factories employing more than 30 women workers.

In every factory wherein more than 30 women workers are ordinarilyemployed, there shall be provided and maintained a suitable room or roomsfor use of children under the age of 6 years of such women [Sec.48 (1)].

2) Crèches to be adequately lighted and ventilated and to be under thecharge of trained women. Rooms for use of children shall provideadequate accommodation, shall be adequately lighted and ventilated.Further they shall be maintained in a clean and sanitary condition andshall be under the charge of women trained in the care of children andinfants [Sec. 48 (2)].

3) Prescription of rules by the State Government. The State Governmentmay make rules prescribing the location and the standards in respect ofconstruction, accommodation, furniture and other equipment of roomsfor use of children. it may also make rules for the provision of additionalfacilities for the care of children beExtendeding to women workers,including suitable provision of facilities (a) for washing and changing theirclothing, (b) of free milk or refreshment or both for the children, and(c) for the mothers of children to feed them at the necessary intervals[Sec.48 (3)].

8. Welfare Officers (Sec.49).(1) Employment of welfare officers in factories employing more than 500 or

more workers. In every factory wherein 500 or more workers areordinarily employed the occupier shall employ in the factory such numberof welfare officers as may be prescribed [Sec. 49 (1)].

2) Duties, qualifications and conditions of service to be prescribed by theState Government. The State Government may prescribe the duties,qualifications and conditions of service of welfare officers [Sec. 49 (2)].Even if a factory (say, a sugar factory) employs over 500 workers onlyfor a few months in the year and not continuously, the occupier shallemploy the prescribed number of welfare officers [Employers’ Assn. ofNorthern India v. Secretary of Labour, A.I.R. (1952) All. 109].



Power to make rules (Sec. 50).The State Government may make rules—a) exempting subject to compliance with such alternative arrangements for

the welfare of workers as may be prescribed, any factory or class ordescription of factories from compliance with any of the provisions ofSecs. 42 to 49;

b) requiring in any factory or class or description of factories thatrepresentatives of the workers employed in the factory shall be associatedwith the management of the welfare arrangements of the workers.

3.1.8 Working HoursWorking Hours of Adults The rules as to the regulation of hours of work of adult workers in a

factory and holidays are as follows:1) Weekly hours (Sec. 51). No adult worker shall be required or allowed

to work in a factory for more than 48 hours in any week.2) Daily hours (Sec. 54). Subject to the above rule as contained in

(Sec. 51) no adult worker shall be required or allowed to work in afactory for more than 9 hours in any day. But in order to facilitate thechange of shift, this limit may be exceeded. This can, however, be donewith the previous approval of the Chief Inspector of Factories.

3. Intervals for rest (Sec. 55). The periods of work of adult workers in afactory each day shall be so fixed that no period shall exceed 5 hours.Further no worker shall work for more than 5 hours before he has aninterval for rest of at least half an hour (Sec. 55 (1)]. The StateGovernment or Chief Inspector may, by written order and for the reasonsspecified therein, exempt any factory from the provisions of Sec. 55 (1).But in that case also, the total number of hours worked without an intervalshall not exceed 6 [Sec. 55 (2)].

Spread over, night shifts and overlapping shifts.Spread over (Sec.56). The periods of work of an adult worker in a factoryshall be so arranged that inclusive of his intervals for rest, they shall notspread over more than 10-1/2 hours in any day. But the Chief Inspectormay for reasons to be specified in writing increase the spread over up to12 hours.Night Shifts (Sec. 57). Where a worker in a factory works on a shiftwhich extends beyond midnight:a) his weekly or compensatory holiday for a whole day means a period of

24 consecutive hours beginning when his shift endsb) the following day for him shall be deemed to be the period of 24 hours

beginning when such shift ends, and the hours he has worked aftermidnight shall be counted in the previous day. Prohibition of overlappingshifts (Sec. 58). Work shall not be carried on in any factory by meansof a system of shifts so arranged that more than one relay of workers isengaged in work of the same kind at the same time [Sec. 58 (1)].



The State Government or the Chief Inspector may, by written order andfor the reasons specified therein, grant exemption to any factory or classor description of factories or any department or section of a factoryfrom the provisions of Sec. 58 (1) [Sec. 58 (2)].Extra wages for overtime (Sec. 59).

1) Wages at twice the ordinary rate. Where a worker works in a factoryfor more than 9 hours in any day or more than 48 hours in any week, heshall in respect of overtime work be entitled to wages at the rate of twicehis ‘ordinary rate of wages’ [Sec. 59 (1)].

2) Ordinary rate of wages. It means the basic wages plus such allowances,including the cash equivalent of the advantage accruing through theconcessional sale of workers of food grains and other articles, as theworker is for the time being entitled to. It does not include a bonus andwages for overtime work (Sec.59 (2)].

3) Workers paid on piece rate basis. The time rate in case of workers paidon piece rate shall be deemed to be equivalent to the daily average of theirfull time earnings for the days on which they actually worked on the sameor identical job during the month immediately preceding the calendar monthduring which the overtime work was done and such time rates shall bedeemed to be the ordinary rates of wages of those workers [Sec. 59 (3)].But in the case of a worker who has not worked in the immediately precedingcalendar month on the same or identical job, the time rate shall be deemedto be equivalent to the daily average of the earnings of the worker for thedays on which he actually worked in the week in which the overtime workwas done [Provision to Sec. 59 (3)].

4) Cash equivalent of the concessional sale of food grains and otherarticles. It shall be computed as often as prescribed on the basis of themaximum quantity of food grains and other articles admissible to a‘standard family’.Standard family means a family consisting of the worker, his or her spouseand 2 children below the age of 14 years requiring in all 3 ‘adultconsumption units’. Adult consumption unit means the consumptionunit of a male above the age of 14 years. The consumption unit of afemale above the age of 14 years and that of a child below the age of 14years shall be calculated at the rate of 0.8 and 0.6 respectively of oneadult consumption unit [Sec. 59 (4)].

5) Rule-making power of the State Government. The State Governmentmay make rules prescribing (a) the manner in which the cash equivalentof the advantage accruing through the concessional sale to a worker offood grains and other articles shall be computed, and (b) the registersthat shall be maintained in a factory for the purpose of securing compliancewith the provisions of Sec.59 [Sec. 59 (5)].Restriction on double employment (Sec. 60) - No adult worker shall berequired or allowed to work in any factory on any day on which he hasalready been working in any other factory save in such circumstances asmay be prescribed.



Notice of periods of work for adult workers (Sec.61)

1) Notice to be displayed at some conspicuous place : A notice of periodsof work for adult workers shall be displayed and correctly maintained inevery factory. It shall show clearly for every day the periods duringwhich adult workers may be required to work [Sec. 61 (1)]. The noticeshall be in English and in a language understood by the majority of theworkers in the factory. It shall be displayed at some conspicuous andconvenient place at or near the main entrance to the factory and shall bemaintained in a clean and legible condition [Sec. 108 (2)].

2) Periods to be fixed beforehand : (a) The periods shown in the noticeshall be fixed beforehand and shall not contravene the provisions ofweekly and daily hours, weekly holidays, intervals for rest, spread overand prohibition of overlapping shifts [Sec.61 (2)].

b) Where all the adult workers in a factory are required to work during thesame period, the manager shall fix generally the periods [Sec. 61 (3)].

3) Classification of workers : (a) Where all the adult workers in a factoryare not required to work during the same periods, the manager of thefactory shall classify them into groups according to the nature of theirwork indicating the number of workers in each group [Sec. 61 (4)].

b) For each group which is not required to work on a system of shifts, themanger of the factory shall fix the periods during which the group maybe required to work [Sec.61 (5)].

4) Groups working on a system of shifts : (a) Where any group is required towork on a system of shifts and the relays are not to be subject topredetermined periodical changes of shift, the manger shall fix the periodsduring which each relay of the group may be required to work [Sec. 61 (6)].

b) Where any group is to work on a system of shifts and the relays aresubject to predetermined periodical changes of shifts, the manager shalldraw up a scheme of shifts. This provision has been made so that theperiods during which any relay of the group may be required to workand the relay which will be working at any time of the day may beascertained for any day [Sec. 61 (7)].

5) Form of notice of periods of work : The State Government may prescribeforms of the notice of periods of work for adults and the manner inwhich it shall be maintained [Sec. 61 (8)].

6) Copy of notice in duplicate and any change to be sent to Inspector :(a) A copy of the notice shall be sent in duplicate to the Inspector beforethe day on which work is begun in the factory [Sec. 61 (9)].

b) Any proposed changes in the system of work in any factory which willnecessitate a change in the notice shall be notified to the Inspector induplicate before the change is made. Further, except with the previoussanction of the Inspector, no such change shall be made until 1 week haselapsed since the last change [Sec. 61 (10)].



Register of adult workers (Sec. 62 and 63)

The manager of every factory shall maintain a register of adult workers showing(a) the name of each adult worker in the factory(b) the nature of his work(c) the group, if any, in which he is included(d) where his group works on shifts, the relay to which he is allotted and(e) such other particulars as may be prescribed.

The register shall be available to the Inspector at all times during workinghours, or when any work is being carried on in the factory.

If the Inspector is of opinion that any muster-roll or register maintainedas part of the routine of a factory gives the above particulars in respect ofworkers, he may direct that such muster-roll or register shall be treatedas the register of adult workers in that factory. [Sec. 62 (1)].

No adult worker shall be required or allowed to work in any factoryunless his name and other particulars have been entered in the register ofadult workers [Sec. 62(1-A)].

The State Government may prescribe the form of the register of adultworkers, the manner in which it shall be maintained and the period forwhich it shall be preserved [Sec. 62 (2)]. Further no adult worker shallbe required or allowed to work in any factory otherwise than inaccordance with the notice of periods of work for adults displayed inthe factory and the entries made beforehand against his name in theregister of adult workers of the factory (Sec. 63).

HolidaysWeekly holidays (Sec. 52). Every adult worker in a factory shall beallowed a holiday during a week. As such no adult worker shall berequired or allowed to work in factory on the first day of the weekwhich is a Sunday. But the manager can substitute for Sunday any of the3 days preceding or following it. He shall, however, deliver a notice atthe office of the Inspector of his intention to require the worker to workon that day. Such notice shall also be displayed in the factory. Nosubstitution can, however, be made which results in any worker workingfor more than 10 days consecutively without a holiday for a whole day[Sec. 52 (1)].Where any worker works on a Sunday and has had a holiday on one ofthe 3 days immediately before it, Sunday shall, for the purpose ofcalculating his weekly hours of work, be included in the preceding week[Sec. 52 (3)].Compensatory holidays (Sec. 53). Where a worker is deprived of anyof the weekly holidays under Sec. 52 or by any of the rules made by theState Government exempting a factory from the provisions of Sec. 52,he shall be allowed compensatory holidays of equal number to theholidays so lost. Such compensatory holidays shall be allowed withinthe month in which the holidays were due to the workman or within 2



months immediately following that month [Sec. 53 (1)].The State Government may prescribe the manner in which thecompensatory holidays shall be allowed [Sec. 53 (2)].Further restrictions on employment of women (Sec. 66). These arediscussed later in this chapter under the heading “Employment ofWomen”.Employment of Young Persons: Prohibition of employment of youngchildren (Sec. 67). No child who has not completed his 14th year shallbe required or allowed to work in a factory.Non-adult workers to carry tokens (Sec. 68). A child who hascompleted his 14th year or an adolescent may be allowed to work in afactory if:

a) a certificate of fitness for such work is in the custody of the manager ofthe factory; and

b) such child or adolescent carries, while he is at work, a token giving areference to such certificate.A provision is made for a certificate of fitness under Sec.69. Such acertificate entitles a young person who has completed his 14th hear towork in a factory as a child. But if the young person has completed his15th hear, the certificate of fitness entitles him to work in a factory as an adult.Certificate of fitness [Sec. 69] - It is a certificate granted to a youngperson by a certifying surgeon after examining him and ascertained hisfitness for work in a factory. An application for such examination may bemade by the young person himself or by his guardian. It shall however,be accompanied by a document signed by the manager of the factorythat such person will be employed therein if certified to be fit for work ina factory. The manager of the factory may also apply for such examinationof the young person. The certifying surgeon shall examine the place ofwork and the manufacturing process before granting a certificate unlesshe has the personal knowledge of it [Sec. 69 (1)].Certificate of fitness to entitle a young person to work as a child or adult- The certifying surgeon, after examination, may grant to a young personor may renew a certificate of fitness to work in a factory as:

a) a child, if he is satisfied(i) that the young person has completed his 14th year, (ii) that he hasattained the prescribed physical standards, and (iii) that he is fit for suchwork;

b) an adult, if he is satisfied(i) that the young person has completed his 15th year, and (ii) that he isfit for a full day’s work in a factory [Sec. 69 (2)].Certificate valid for 12 months- A certificate of fitness granted or renewedis valid for 12 months from the date of issue, but it can be renewed isvalid for 12 months from the date of issue, but it can be renewed. It maybe issued subject to conditions in regard to the nature of the work in



which the young person may be employed, or requiring re-examinationof the young person before the expiry of the period of 12 months [Sec. 69 (3)].Revocation of certificate of fitness- A certificate of fitness can be revokedany time by the certifying surgeon if the holder of it is not fit to work inthe capacity stated therein in a factory [Sec. 69 (4)]. Where a certifyingsurgeon refuses to grant or renew a certificate of fitness, or revokes acertificate, he shall, if so requested, state his reasons in writing for sodoing [Sec. 69 (5)].

Fees payable by the employer- Fees for a certificate of fitness or itsrenewal shall be payable by the occupier and shall not be recoverablefrom the young person, his parents or guardian [Sec. 69 (7)].Effect of certificate of fitness (Sec. 70) - An adolescent who has beengranted a certificate of fitness to work in a factory as an adult and whocarries a token giving reference to the certificate shall be deemed to bean adult for the purposes of hours of work of an adult and the annualleave [Sec. 70 (1)].No female adolescent or a male adolescent who has not attained the ageof 17 years but who has been granted a certificate of fitness to work ina factory as an adult shall be required or allowed to work in any factoryexcept between 6 A.M. and 7 P.M. [Sec. 70 (1-A), as introduced bythe Amendment Act of 1987].The State Government may, by notification in the official gazette, in respectof any factory or group or class or description of factories:

i) vary the limits laid down in Sec. 70 (1-A), but no female adolescent canbe employed between 10 P.M. and 5 A.M;

ii) grant exemption from the provisions of Sec. 70 (1-A) in case of seriousemergency where national interest is involved [Proviso to Sec. 70 (1-A)].An adolescent who has not been granted a certificate of fitness to workin a factory as an adult is deemed to be a child for all the purposes of theFactories Act, [Sec. 70 (2): Jhunjhunwala v. B.K. Patnaik, (1964) 2L.L.J. 551].

3.1.8 Working hours (Sec. 71 and 72).

1) Working hours limited to 4-1/2. No child shall be employed or permittedto work in a factory:

a) for more than 4-1/2 hours in a day;b) during the night [Sec. 71 (1)].

‘Night’ means a period of at least 12 consecutive hours which shallinclude the interval between 10 P.M. and 6 A.M. [Expl. to Sec. 71 (1)].

2) Period of work of children limited to 2 shifts. The period of work of allchildren employed in a factory shall be limited to 2 shifts. These shiftsshall not overlap or spread over more than 5 hours each. Each childshall be employed in only one of the relays which shall not, except withthe previous permission in writing of the Chief Inspector, be changedmore frequently than once in a period of 30 days [Sec.71(2)].



3) Child workers entitled to weekly holidays. The provisions of weeklyholidays (Sec. 52) shall apply also to child workers and no exemptionfrom these provisions may be granted in respect of any child [Sec. 71 (3)].

4) Prohibition if the child worker has already been working in another factory.No child shall be required or allowed to work in any factory on any dayon which he has already been working in another factory [Sec. 71 (4)].

5) Female child to work only between 8 A.M. to 7 P.M. No female childshall be required or allowed to work in any factory except between 8A.M. and 7 P.M. [Sec. 71 (5)] as introduced by the Amendment Act of1987].

6) Display of notice of work of child workers. There shall be displayedand correctly maintained in every factory in which children are employeda notice of periods of work for children showing clearly for every daythe periods during which children may be required or allowed to work[Sec. 72 (1)]. The provisions of Sec. 61(8), (9) and (10) (discussedearlier) also apply to the notice required under Sec. 72 (1) [Sec.72 (3)].

7) Fixation of periods of work beforehand. The periods shown in the noticeshall be fixed beforehand in accordance with the method laid down foradult workers [Sec.72 (2)].

3.1.9 Register of child workers and women (Sec. 73).

The manager of every factory in which children are employed shallmaintain a register of child workers showing (a) the name of each childworker in the factory, (b) the nature of his work, (c) the group, if any, inwhich he is included, (d) where his group works on shifts, the relay towhich he is allotted, and (e) the number of his certificate of fitness. Theregister shall be available to the Inspector at all times during workinghours or when any work is being carried on in a factory [Sec. 73 (1)].

No child worker shall be required or allowed to work in any factoryunless his name and other particulars have been entered in the register ofchild workers [Sec. 73 (1-A)].The State Government may prescribe the form of register of child workers,the manner in which it shall be maintained and the period for which itshall be preserved [Sec. 73 (2)].The hours of work of a child shall correspond with the notice of periodsof work for children displayed in the factory and the entries madebeforehand against his name in the register of child workers (Sec. 74).Power to require medical examination (Sec. 75) - An Inspector maydirect the manager of a factory to have a person or young person medicallyexamined by a certifying surgeon when he is of opinion:

a) that the person working in the factory without a certificate of fitness is ayoung person, or

b) that the young person working in the factory with a certificate of fitnessis no Extendeder fit to work in the capacity stated in the certificate and



that such a person shall not be employed or permitted to work in thefactory until he has been examined and granted a certificate of fitness ora fresh certificate of fitness.

Power to make rules. The State Government may make rules:a) prescribing the forms of certificates of fitness to be granted to the

young persons and the procedure for their issue;b) prescribing the physical standards to be attained by children and

adolescents working in factories;c) regulating the procedure of certifying surgeons and prescribing other duties

which the certifying surgeons may be required to perform in connectionwith the employment of young persons in factories (Sec. 76).The provisions relating to the employment of young persons are in additionto, and not in derogation of, the provisions of the Employment of ChildrenAct, 1931 (Sec.77).Safety provisions for young persons -

1) Work on or near machinery in motion [Sec. 22 (2)].2) Employment of young persons or dangerous machines [Sec. 23 (1)].3) Prohibition of employment near cotton-openers (Sec. 27).

Sections 22 (2), 23 (1), 27 have already been discussed in this Chapter.4) Dangerous Operations [Sec. 87 (b)]. No young person shall be

employed on any operation carried on in a factory which exposesthe young person to a serious risk of bodily injury, poisoning or dis-ease.

Employment of WomenAll the provisions of the Factory Act regarding employment and work ofadult male workers apply to adult female workers except the followingprovisions which apply to adult female workers only.

1) Work on or near machinery in motion [Sec. 22 (2)].2) Prohibition of employment near cotton-openers (Sec. 27).3) Crèches (Sec. 48).4) Working hours (Sec. 51 and 54). A woman shall not be required or

allowed to work in a factory for more than 48 hours in any week or 9hours in any day.

5) Restriction on employment of women (Sec.66). A woman shall berequired or allowed to work in a factory only between the hours of 6A.M. and 7 P.M. The State Government may by notification in theOfficial Gazette in respect of any factory or group or class or descriptionof factories, vary these limits. But no such variation shall authorize theemployment of any woman between the hours of 10 P.M. and 5 A.M.Again there shall be no change of shifts in the case of women workers ina factory except after a weekly or any other holiday [Sec. 66 (1)].The State Government may make rules providing for the exemption fromthe restrictions imposed by Sec. 66 (1) in case of women working infish-curing or fish canning factories, where the employment of women



beyond the specified hours is necessary to prevent damage to, ordeterioration in, any raw material [Sec. 66 (2)]. The rules so made shallremain in force for not more than 3 years at a time [Sec.66 (3)].

6) Effect of certificate of fitness granted to female adolescent[Sec. 70 (1-A)]. This has already been discussed.

7) Dangerous operations [Sec. 86 (b)]. Where the State Government is ofopinion that any operation carried on in a factory exposes any personemployed in it to a serious risk of bodily injury, poisoning or disease, itmay make rules prohibiting or restricting the employment of women inthat operation.

3.1.10 Annual Leave with Wages

Sections 78 to 84 (Chapter VIII) provide for the grant of a certain periodof leave with wages to workmen.

Application of Chapter VIII (Sec. 78)

According to Sec. 78, the provisions relating to annual leave with wagesas contained in Chapter VIII (Sec. 78 to 84) of the Act shall not prejudiceany rights of workers under any other law, award or agreement (includingsettlement) or contract of service. When such award, agreement (includingsettlement) or contract of service provide for a Extendeder annual leavewith wages than under the provisions of Secs 79 to 82, the worker shallbe entitled to such annual leave. But in relation to matters not providedfor in such award, agreement or contract of service or matters which areprovided for less favourably therein, the provisions of Secs. 79 to 82, sofar as may be, shall apply [Sec. 78 (1)]. Further the provisions of ChapterVIII shall not apply to workers in any factory of any railway administeredby the Government who are governed by leave rules approved by theCentral Government [Sec. 78 (2)].

Rules relating to annual leave with wages

1) Leave entitlement—One day for 20/15 days of work performed in caseof adult/child. Every worker who has worked for a period of 240 daysor more in a factory during a calendar year shall be allowed during thesubsequent calendar year leave with wages for a certain number of days.These days of leave shall be calculated at the rate of:

i) if an adult, one day for every 20 days of work performed by him duringthe previous calendar year;

ii) if a child, one day for every 15 days of work performed by him duringthe previous calendar year [Sec.79 (1)];The leave admissible under the above rule shall be exclusive of all holidayswhether occurring during or at either end of the period of leave [Expl. 2to Sec.79 (1)].

2) Computation of period of 240 days. For computing the period 240days, the days of lay-off, maternity leave to a female worker notexceeding 12 weeks, and the leave earned in the previous year shall be



included in this period of 240 days, but he/she shall not earn leave forthese days [Explanation 1 to Sec. 79 (1)].A worker who is employed on any day after the first day of January shallbe entitled to leave with wages at the rates laid down in Sec. 79 (1) if hehas worked for 2/3rds of the total number of days in the remainder ofthe calendar year [Sec. 79 (2)].

3) Discharge, dismissal, superannuation, death or quitting of employment.If a worker is discharged or dismissed from service or quits hisemployment or is superannuated or dies while in service, during the courseof the calendar year, he or his heir or nominee, as the case may be, shallbe entitled to wages. These wages shall be in lieu of the quantum ofleave to which he was entitled calculated at the rates specified in Sec. 79(1). He shall be entitled to these wages even if he had not worked for theentire period specified in Sec.79 (1) making him eligible to avail of suchleave. The payment of wages shall be made:

(i) where the worker is discharged or dismissed or quits employment, beforethe expiry of the second working day from the date of such discharge,dismissal or quitting; or

(ii) where the worker is superannuated or dies while in service, before theexpiry of 2 months from the date of such superannuation or death[Sec. 79 (2)].

4) Treatment of fraction of leave. In calculating leave period, fraction ofleave of half a day or more shall be treated as one full day’s leave, andfraction of less than half a day shall be omitted [Sec. 79 (4)].

5) Treatment of un- availed leave. If a worker does not in any one calendaryear take the whole of the leave allowed to him, any leave not taken byhim shall be added to the leave to be allowed to him in the succeedingcalendar year. But the total number of days of leave that may be carriedforward to a succeeding year shall not exceed 30 in the case of an adultor 40 in the case of child. However, annual leave not allowed becauseof any scheme for leave in operation shall be carried forward withoutany limit [Sec. 79 (5)].

6) Application for leave to be made in writing within a specified time. Aworker may at any time apply for annual leave in writing to the managerof the factory at least 15 days before the date on which he wishes hisleave to begin. In a public utility service the application shall likewise bemade at least 30 days before the date on which the worker wishes hisleave to begin. But the number of times the leave may be taken duringany year shall not exceed 3 [Sec. 79 (6)].

7) Application for leave covering a period of illness may not be made withinthe specified time. If a worker wants to avail himself of the leave withwages due to him to cover a period of illness, he shall be granted suchleave even if the application for leave is not made within the time specified.In such a case, advance payment of wages (as admissible under Sec.81)shall be made not later than 15 days, or in the case of a public utilityservice not later than 30 days, from the date of the application for leave[Sec. 79 (7)].



8) Scheme for the grant of leave. For the purpose of ensuring the continuityof work, the occupier or the manager of the factory, in agreement withthe Works Committee (constituted under Sec.3 of the Industrial DisputesAct, 1947 in an industrial establishment in which 100 or more workmenare employed), if any, or the representatives of workers, may draw upand lodge with the Chief Inspector a scheme for regulating the grant ofleave [Sec. 79 (8)].

9) Display of the scheme for grant of leave. The scheme shall be displayedat some convenient and conspicuous places in the factory. It shall be inforce in the first instance for 12 months, and may be renewed for afurther period of 12 months at a time. A notice of renewal shall be sentto the Chief Inspector before it is renewed [Sec. 79 (9)].

10) Refusal of leave to be in accordance with scheme. An application forleave submitted in proper time shall not be refused, unless refusal is inaccordance with the scheme for leave for the time being in operation[Sec. 79 (10)].

11) Payment of wages to worker for leave period if he is discharged or if hequits service. If a worker is being entitled to leave according to therules, is discharged, or if having applied for is refused leave and quitsservice before he has taken the leave, he shall be paid wages in respectof the leave not taken. The payment shall be made before the expiry ofthe second working day after discharge or on or before the next paydayin case the worker quits his employment [Sec. 79 (11)].

12) Un availed leave not to be taken into account while computing period ofnotice. The un availed leave of a worker shall not be taken intoconsideration in computing the period of any notice required to be givenbefore discharge or dismissal [Sec. 79 (12)].Wages during leave period (Sec. 80). For the leave allowed to aworker he shall be entitled to wages at a rate equal to the daily averageof his total full time earnings for the days on which he actually workedduring the month immediately preceding his leave. The full time earningsshall be exclusive of any overtime and bonus but inclusive of dearnessallowance and the cash equivalent of the advantage accruing through theconcessional sale to the worker of food grains and other article[Sec. 80 (1)].In the case of worker who has not worked on any day during the calendarmonth immediately preceding his leave, he shall be paid at a rate equalto the daily average of his total full time earnings for the days on whichhe actually worked during the last calendar month preceding his leave inwhich he actually worked. These full time earnings shall be exclusive ofany overtime wages and bonus but inclusive of dearness allowance andthe cash equivalent of the advantage accruing through the concessionalsale to the workers of food grains and other articles[Proviso to Sec. 80 (1) as added by the Amendment Act of 1987].

The calculation of cash equivalent of advantage accruing through theconcessional sale to the worker of food grains and other articles shall becalculated in the same manner as laid down in Sec. 59 (4) explained inconnection with ‘Extra wages for overtime’ [Sec. 80 (2)].



The State Government may make rules prescribing—-a) the manner in which the cash equivalent of the advantage accruing through

the concessional sale to a worker of food grains and other articles shallbe computed; and

b) the register that shall be maintained in a factory for the purpose ofcompliance with the provisions of Sec. 80 [Sec. 80 (3)].

Other provisions of Chapter VIII

Payment in advance in certain cases (Sec. 81). A worker who has beenallowed leave for not less than 4 days, in case of an adult, and 5 days, inthe case of a child, shall, before his leave begins, be paid the wages duefor the period of the leave allowed.Mode of recovery of unpaid wages (Sec 82). Any such required to bepaid by an employer as wages but not paid by him shall be recoverableas delayed wages under the provisions of the Payment of Wages Act,1936.Power to make rules (Sec. 83). The State Government may make rulesdirecting managers of factories to keep registers containing prescribedparticulars and requiring the registers to be available for examination byInspectors.Power to exempt factories (Sec. 84). The State Government may exempta factory from the operation of the leave rules if it is satisfied that its ownleave rules provide benefits which are not less favourable to the workersthan the statutory leave rules.Power to apply the Act to certain premises (Sec. 85). The StateGovernment may, by notification in the Official Gazette, declare that allor any of the provisions of the Factories Act shall apply to any placewherein a manufacturing process is carried on with or without the aid ofpower or is so ordinarily carried on. This provision may be madeapplicable ever where—-

i) the number of persons employed in the place of work is less than 10 ifworking with the aid of power, and less than 20, if working without theaid of power, or

ii) the persons working in the place of work are not employed by the ownerthereof but are working with the permission of, or under agreement withsuch owner.If the manufacturing process is being carried on by the owner only withthe aid of his family, the above provision shall not apply [Sec. 85 (1)].After a place is so declared under Sec. 85 (1), it shall be deemed to bea factory for the purposes of the Act and the owner shall be deemed tobe the occupier and any person working therein, a worker[Sec. 85 (2)].

Power to exempt public institutions (Sec. 86). The State Governmentmay exempt, subject to necessary conditions, any workshop or



workplace where a manufacturing process is carried on and which isattached to a public institution maintained for the purposes of education,training, research or reformation, from all or any of the provisions of theFactories Act. This shall, however, be subject to a scheme for theregulation of hours of work, intervals for meals and holidays, to beprepared by the person having the control of the institution and to besubmitted to the State Government for its approval. If the StateGovernment is satisfied that the provisions of the scheme are not lessfavourable than the corresponding provisions of this Act, the exemptionshall be granted from the provisions of work and holidays.Dangerous operations (Sec. 87). A manufacturing process or operationcarried on in a factory might expose any person employed in it to aserious risk of bodily injury, poisoning or disease. The State Governmentmay make rules applicable to any such factory or class or description offactories in which the manufacturing process or operation is carried on:

a) specifying the manufacturing process or operation and declaring it to bedangerous;

b) prohibiting or restricting the employment of women, adolescents orchildren in the manufacturing process or operation;

c) providing for the periodical medical examination of persons employed,or seeking to be employed, in the manufacturing process or operationand prohibiting the employment of persons not certified as fit for suchemployment and requiring the payment by the occupier of the factory offees for such medical examination;

d) providing for the protection of all persons employed in the manufacturingprocess or operation or in the vicinity of the places where it is carried on;

e) prohibiting, restricting or controlling the use of any specified materials orprocesses in connection with the manufacturing process or operation;and

f) requiring the provision of additional welfare amenities and sanitary facilitiesand the supply of protective equipment and clothing, and laying downthe standards thereof, having regard to the dangerous nature of themanufacturing process or operation.Power to prohibit employment on account of serious hazard(Sec. 87-A as introduced by the Amendment Act of 1987).Sometimes it may appear to the Inspector that conditions in a factory orpart thereof are such that they may cause serious hazard by way ofinjury or death to the persons employed therein or to the general publicin the vicinity. In such a case, he may, by order in writing to the occupierof the factory, state the particulars in respect of which he considers thefactory of part thereof to be the cause of such serious hazard. He mayfurther prohibit such occupier from employing any person in the factoryor any part thereof other than the minimum number of persons necessaryto attend to the minimum tasks till the hazard is removed[Sec. 87-A (1)]. The order so issued by the Inspector shall have effect



for a period of 3 days until extended by the Chief Inspector by asubsequent order [Sec. 87 – A (2)].Any person aggrieved by an order of the Inspector and the ChiefInspector, as the case may be, shall have the right to appear to the HighCourt [Sec. 87 – A (3)].Any person whose employment has been affected by an order issued bythe Inspector shall be entitled to wages and other benefits. Further itshall be the duty of the occupier to provide alternative employment tothe person so affected wherever possible and in the manner prescribed[Sec. 87 – A (4)]. This provision shall however be without prejudice tothe rights of the parties under the Industrial Dispute Act, 1947[Sec. 87 – A (5)].Notice of certain accidents (Sec. 88). Where in any factory an accidentoccurs which causes death, or which causes any bodily injury by reasonof which the person injured is prevented from working for a period of48 hours or more immediately following the accident, the manager of thefactory shall send notice thereof to such authorities, and in such formand within such time, as may be prescribed [Sec. 88 (1)].Where a notice given under Sec. 88 (1) relates to an accident causingdeath, the authority to whom the notice sent shall make an inquiry intothe occurrence within 1 month of the receipt of the notice. If such authorityis not the Inspector, it shall cause the Inspector to make an inquiry withinthis period [Sec. 88 (2)].Notice of certain dangerous occurrences (Sec. 88 – A). Where, in afactory, any dangerous occurrence of such nature as may be prescribedoccurs, whether causing any bodily injury or disability or not, the managerof the factory shall send notice thereof to such authorities, and in suchform and within such time, as may prescribed.Power to direct inquiry into cases of accident or disease (Sec. 90).The State Government may appoint a competent person to inquire intothe causes of any accident occurring in a factory or into any case wherea disease specified in the Third Schedule to the Act has been, or issuspected to have been, contracted in a factory. It may also appointone or more persons possessing legal or special knowledge to act asassessors in such inquiry [Sec. 90 (1)]. The person appointed to holdan inquiry under Sec. 90 shall have the powers of a Civil Court and alsoof an Inspector under the Act [Sec. 90 (2)].The person holding an inquiry under Sec. 90 shall make a report to theState Government stating the causes of the accident, or as the case maybe, disease and any attendant circumstances. He shall also add anyobservations which he or any of the assessors may think fit to make[Sec. 90 (3)]. The State Government may, if it thinks fit, cause to bepublished any report made under Sec. 90 or any extracts there from[Sec. 90 (4)].



3.1.11 Penalties and Procedure

Sections 92 to 106 (Chapter X) provide for penalties for certain offencesand procedural matters. The Amendment Act of 1987 has considerablyenhanced these penalties so that they serve as a deterrent for thecommission of offences.General penalty for offences (Sec. 92). If in any factory there is anycontravention of any of the provisions of the Act or of any rules madethere under, the occupier and the manager of the factory shall each beguilty of an offence and punishable with imprisonment for a term up to 2years or with fine up to Rs. 1, 00,000 or with both. If the contraventionis continued after conviction, they shall be punishable with a further fine,which may extend to Rs. 1,000 for each day on which the contraventionis so continued. This is subject to other express provision in the Act andSec. 93 (which deals with liability of owner of premises in certaincircumstances).Where the contravention of any of the provisions of Chapter IV (dealingwith ‘safety’) or any rule made there under or under Sec. 87 (dealingwith ‘dangerous operations’) has resulted in an accident causing deathor serious bodily injury, the fine shall not be less than Rs. 25,000 in thecase of an accident causing serious bodily injury (Proviso to Sec. 92).‘Serious bodily injury’ means an injury which involves, or in allprobability will involve, the permanent loss of the use of , or permanentinjury to, any limb or the permanent loss of, or injury to, sight or hearing,or the facture of any bone. It does not include the facture of bone orjoint (not being fracture of more than one bone or joint) of any phalangesof the hand or foot [Explanation to Sec. 92].Enhanced penalty after conviction (Sec. 94). If any person who hasbeen convicted of any offence punishable under Sec. 92 is again guiltyof an offence involving a contravention of the same provision, he shall bepunishable on a subsequent conviction with imprisonment for a termwhich may extend to 3 years or with fine which shall not be less thanRs.10, 000 but which may extend to Rs.2, 00,000 or with both. But theCourt may for any adequate and special reasons to be mentioned in thejudgment, impose a fine of less than Rs.10, 000.Where, however, the contravention of any of the provisions of ChapterIV (dealing with ‘safety’) or any rules made there under or under Sec.87 (dealing with ‘dangerous operations’) has resulted in an accidentcausing death or serious bodily injury, the fine shall not be less thanRs.35, 000 in the case of an accident causing death and Rs.10, 000 inthe case of an accident causing serious bodily injury [Sec. 94 (1)].No cognizance shall be taken of any conviction made more than 2 yearsbefore the commission of the offence for which the person is subsequentlybeing convicted [Sec. 94 (2)].Cognizance of Offences (Sec. 105). No Court shall take cognizanceof any offence under this Act except on a complaint by, or with the



previous sanction in writing of an Inspector [Sec. 105 (1)]. Further, noCourt below that of a Presidency Magistrate or a Magistrate of the firstclass shall try any offence punishable under the Act [Sec. 105 (2)].

The complaint must be filled within 3 months of the date on which thealleged commission of the offence comes to the knowledge of anInspector. But where the offence consists of disobeying a written ordermade by an Inspector, complaint thereof may be made within 6 monthsof the date on which the offence will alleged to have been committed(Sec. 106). The ‘explanation’ to Sec. 106 lays down the procedurefor the computation of the period of limitation.Appeals (Sec. 107). The manager of the factory on whom an order inwriting by an Inspector has been served under the provisions of this Actor the occupier of the factory may, within 30 days of service of theorder, appeal against it to the prescribed authority. Such authority may,subject to rules made in this behalf by the State Government, confirm,modify or reverse the order.Display of notices (Sec. 108). In addition to the notices required to bedisplayed in any factory by or under this Act, there shall be displayed inevery factory a notice containing such abstracts of this Act and of therules made there under as may be prescribed and also the name andaddress of the Inspector and the certifying surgeon [Sec. 108 (1)]. Thenotices shall be in English and in a language understood by the majorityof the workers in the factory. They shall be displayed at someconspicuous and convenient place at or near the main entrance to thefactory, and shall be maintained in clean and legible condition[Sec. 108 (2)]. The Chief Inspector may, by order in writing served onthe manager of the factory, require the display of posters relating to thehealth, safety and welfare of workers [Sec. 108 (3)].

Returns (Sec. 110). The State Government may make rules requiringowners, occupiers or managers of factories to submit such returns,occasional or periodical, as may in its opinion be required.Power to make rules and give directions (Secs. 112, 113, and 115).The State Government may make rules providing for any matter whichmay be considered expedient in order to give effect to the purposes ofthe Act (Sec. 112). The Central Government may also give directions toa State Government as to the carrying into execution of the provisions ofthe Act (Sec. 113). Sec. 115 provides for the publication of rules madeunder t6he Act in the Official Gazette.Restriction on disclosure of information (new Sec. 118 –A) asintroduced by the Amendment Act of 1987). Every Inspector shalltreat as confidential the source of any complaint brought to his notice onthe breach of any provision of this Act [Sec. 118-A (1)]. Further, heshall not, while making any inspection under this Act, disclose to theOccupier, manager or his representative that the inspection is made inpursuance of the receipt of a complaint. This rule shall not apply to anycase in which the person who has made the complaint has consented todisclose his name [Sec. 118 – A (2)].




I-Objective Questions :

1. If a person completes______________years of age he is called as adult.a. 20 b. 21 c. 18 d. 19

2. Adolescent is a person who has completed _______of age but notcompleted his ________ year.

a. 14, 17 b. 15, 18 c. 20, 21 d. 13,173. In the hierarchy of the Inspecting staff who is the third level _________.

a. Additional chief inspectors b. Joint chief inspectorsc. Deputy chief inspectors d. Inspectors

4. No adult worker shall be allowed to work in a factory for more than____________ hours in any week.a. 45 b. 48 c. 47 d. 46

Answers1. d 2. b 3. c. 4.b

Short Questions :5. List the powers of Inspectors of factories.6. Explain the general duties of occupier.7. Who is a certifying surgeon?8. Write short note on overcrowding.

Extended Questions :9. Discuss the procedure relating to approval, licensing and registra-

tion of factories.10. Describe the provisions relating to Health, Safety and Welfare of

employees.11. What are the provisions relating to the working hours of women and

children.12. Explain the provision of annual leave with wages.

Summary

The Factories Act paves a way for proper functioning of the factories.The original regulations and the notified amendments guide the employersand help to understand the formalities of approval, licensing andregistration of factories. The Inspecting staff roles and responsibilitiesare also clearly mentioned in the Act. Factories Act describe the detailsrelating to provisions of Health, Safety and Welfare of employees andthe liabilities of the employers. The working hours of the adult, womenand children are also notified in the Act. The eligibility to the annual leavewith wages is clearly explained.



3.2 The Payment of Wages Act 1936

3.2.1 Introduction of the Payment of Wages Act, 1936

In a country where even living wages are not paid to workers, the needto protect the wages earned by them can hardly be over emphasized.Before the Payment of Wages Act, 1936 was passed, evils of withholdingwages, delays in paying wages and making unreasonable deductions outof wages were quite prevalent.The Payment of Wages Act, 1936 was passed to regulate the paymentof wages to certain classes of persons employed in industry[D‘Costa, A.V.G.I.P.Rly. V. B.C.Patel, A.I.R.(1955) S.C.412). It isessentially meant for the benefit of industrial employees not getting veryhigh salaries and the provisions of the Act were enacted to safeguardtheir interest (Milkhi Ram v. State of Punjab. A.I.R. (1964) Punj.513).It also provides against irregularities in payment of wages andunauthorized deductions therefrom by the employers (Arvind Mills Ltd.V. Gadgil, A.I.R. (1941) Bom.26: Arumugham v. Jawahar Mills, A.I.R.(1956) Mad. 79). Further it ensures payment of wages in a particularform and at regular intervals, without unauthorized deductions.Extent of the ActThe Act extends to the whole of India (Sec. 1 (2). It was extended toJammu and Kashmir by the Central Labour Laws (Extension to Jammuand Kashmir) Act, 1970.

3.2.2 Learning Objectives

After studying this unit you should be able to:• Understand the definition of wages.• Determine the objectives and application of the Act.• Explore the rules of the Wages Act.• Know the provisions of deductions from wages.• Study the maintenance of registers and records.• Know the method and procedure of enforcement of the Wages Act.• Determine the claims arising out of the deductions from the wages.

3.2.3 Application of the Act

The Act applies to the payment of wages to persons employed in anyfactory, to persons employed (otherwise than in a factory) upon anyrailway by a railway administration and to an industrial or other;establishment specified in Clauses (a) to (g) of sec. 2 (i) (which definesindustrial or other establishment). The persons employed upon a railwayby a railway administration may have been employed either directly orthrough a sub-contractor by a person fulfilling a contract with a railwayadministration (Sec.1 (4)]. The State Government may after giving 3months‘ notice extend the provisions of the Act to the payment of wagesto any class of persons employed in any industrial establishment or classof establishments specified by the Central Government or a State



Government under Clause (h) of Sec. 2 (ii) Sec. 1 (5)]. In case ofindustrial establishments owned by the Central Government suchnotification can be issued with the concurrence of the Central Government[Provision to Sec. 1 (5)].In various States the Act has been extended to shops and establishmentsalso. The Act does not apply to persons whose wages exceed Rs.1,600 per month [Sec. 1(6)]. This limit was raised from Rs.1, 000 toRs.1, 600 by the Payment of Wages (Amendment) Act, 1982.The latest amendment to the Act was made in 1982. The Amending Actcame into force with effect from 15th October 1982.

3.2.4 Definitions

1. Employed person [Sec. 2(1). ‘Employed person’ includes the legalrepresentative of a deceased employed person.

2. Employer [Sec. 2 (a). ‘Employer’ includes the legal representative of adeceased employer.When there is a manager who is entrusted with the affairs of a company,the directors of the company cannot be said to be employers[Superintendent & Remembrance of Legal Affairs v. B.C.Saha. (1974)45 F.J.R.489].

3. Factory. [Sec.2 (b)]. It means a factory as defined in Sec. 2 (m) of thefactories Act, 1948 have been applied under Sec. 85(1) of that Act.

4. Industrial or other establishment [Sec. 2(ii). It means any-a) tramway service, or motor transport service engaged in carrying

passengers or goods or both by road for hire or reward:-b) air transport service other than such service beExtendeding to or

exclusively employed in the military, naval or air force of the Union orthe Civil Aviation Department of the Government of India;

c) dock, wharf or jetty;d) inland vessel, mechanically propelled;e) mine, quarry or oil-field;f) plantation;g) workshop or other establishment in which articles are produced, adapted

or manufactured, with a view to their use, transport or sale;h) establishment in which any work relating to the construction, development

or maintenance of buildings, roads, bridges or canals or relating tooperations connected with navigation, irrigation or supply of water orrelating to the transmission or distribution of electricity or any other formof power is being carried on ;

i) any other establishment or class of establishments which the CentralGovernment or a State Government may, having regard to the naturethereof, the need for protection of persons employed therein and otherrelevant circumstances, specify, by notification in the Official Gazette.



5. Mine [Sec.2 (ii a). It has the meaning assigned to it in Sec. 2(1) (f) ofthe Mines Act, 1952.

6. Plantation [Sec. 2(iii). It has the meaning assigned to it, in Sec. 2 (f) ofthe Plantation Labour Act, 1951.

7. Railway administration [Sec. 2(v). It has the meaning assigned to it inSec. 2 (32) of the Railways Act, 1989.

8. Wages [Sec.2 (vii). ‘Wages’ means all remuneration (whether by way ofsalary, allowances or otherwise) expressed in terms of money or capableof being so expressed which would, if the terms of employment, expressor implied, were fulfilled, be payable to a person employed in respect ofhis employment or of work done in such employment. Simply stated,‘Wages’ means all remuneration due to any worker or employee if theterms of contract of employment are fulfilled.

The definition of expression ‘wages’ is made sufficiently wide by includ-ing within the expression;

a) any remuneration payable under any award or settlement between theparties or order of a Court;

b) any remuneration to which the person employed is entitled in respect ofovertime work or holidays or any leave period;

c) any additional remuneration payable under the terms of employment(whether called a bonus or by any other name);

d) any sum which by reason of termination of employment of the personemployed is payable under any law, contract or instrument which providesfor the payment of such sum, whether with or without deductions, butdoes not provide for the time within which the payment is to be made;

e) any sum to which the person employed is entitled under any schemeframed under any law for the time being in force.The expression ‘wages’ does not include:

1) any bonus (whether under a scheme of profit-sharing or otherwise) whichdoes not form part of the remuneration payable under the terms ofemployment or which is not payable under any award or settlementbetween the parties or order of a Court;

2) the value of any house accommodation, or of the supply of light, water,medical attendance or other amenity or of any service excluded from thecomputation of wages by a general or special order of the StateGovernment;

3) any contribution paid by the employer to any pension or provident fund,and the interest which may have accrued thereon;

4) any traveling allowance or the value of any traveling concession;5) any sum paid to the employed person to defray special expenses entailed

on him by the nature of his employment;6) any gratuity payable on the termination of employment in cases other

than those specified in Clause (d) above.



The definition of the expression ‘wages’ comprises 3 parts:The first part declares that ‘wages’ means all remuneration which would,if the terms of the contract of employment, express or implied, werefulfilled, be payable to a person employed, in respect of his employment.This clause presents no difficulty whatsoever for it declares in anunambiguous language that an employee is entitled to receive wages inaccordance with the terms of his contract.The second part says that the expression ‘wages’ shall include any bonusor other remuneration of the nature aforesaid which would be so payable,i.e. payable in accordance with the terms of contract.

The third part declares that the expression ‘wages’ shall include ‘anysum’ payable to such person by reason of the termination of hisemployment. The language of this clause is wide enough to embrace notonly a sum payable to an employee under the terms of a contract butalso a sum payable to him under the provisions of any law.

3.2.5 Rules for Payment of Wages (Section 3 to 6)Responsibility for payment of wages (Sec. 3).

Every employer shall be responsible for the payment to persons employedby him of all wages required be paid under the Payment of Wages Act(Sec. 3). But in the case of persons employed (otherwise than by acontractor) in factories, industrial establishments or upon railways, thefollowing persons shall also be responsible for the payment of wages:

a) in factories, the person named as the manager;b) in industrial or other establishments, the person, if any, who is responsible

to the employer for the supervision and control of the industrial or otherestablishment;

c) upon railways (otherwise than in a factories), the person nominated bythe railway administration in this behalf for the local area concerned[Proviso to Sec. 3].

Fixation of wage-periods (Sec. 4)

Every person responsible for the payment of wages under Sec. 3 shallfix periods, known as wage-periods, in respect of which such wagesshall be payable {Sec. 4 (1)]. A wage-period shall not exceed one month[Sec. 4 (2)].

Time of payment of wages (Sec.5)

The rules relating to time of payment of wages are as follows:1) Wages to be paid before 7th or 10th day - The wages of every person

employed upon or in any railway, factory or industrial or other establishmentupon or in which less than 1,000 persons are employed, shall be paidbefore the expiry of 7th day of the following wage-period. In case thenumber of workers exceeds 1,000, the wages shall be paid before theexpiry of the 10th day of the following wage-period [Sec. 5 (1)].



In the case of persons employed on a dock, wharf or jetty or in a mine,the balance of wages due on completion of the final tonnage account ofthe ship or wagons loaded or unloaded, as the case may be, shall bepaid before the expiry of the 7th day from the day of such completion[Proviso to Sec. 5 (1)].

2) Wages in case of termination of employment - Where the employmentof any person is terminated by or on behalf of the employer, the wagesearned by him shall be paid before the expiry of the 2nd working dayfrom the day on which his employment is terminated [Sec. 5 (2)]. Wherethe employment of any person in an establishment is terminated due tothe closure of the establishment for any reason other than a weekly orother recognized holiday, the wages earned by him shall be paid beforethe expiry of the 2nd day from the day on which his employment is soterminated [Proviso to Sec. 5 (2)].

3) Exemption. The State Government may, by general or special order,exempt the person responsible for the payment of wages from theoperation of the above provisions in certain cases [Sec. 5 (3)].

4) Wages to be paid on a working day - All payment of wages shall bemade on a working day [Sec. 5 (4)].

Medium of payment of wages (Sec. 6).

All wages shall be paid in current coin or currency notes or both(Sec. 6). Payment of wages in kind is not permitted. The process ofpayment of wages in cash is very cumbersome where the number ofworkers is very large. It is also risky where the sum involved is largeand the factory or industrial establishment is situated at a remote palace.In order to obviate these difficulties and save the worker from carryingcash on the pay day and mis-spending it, a Proviso has been added toSec.6 by the Payment of Wages (Amendment) Act, 1976. According toit, the employer may after obtaining the written authorization of theemployed person, pay him the wages either by cheque or by creditingthe wages in his bank account. The provision in the Amendment Act forpaying wages by cheque or depositing wages in bank account will alsoinculcate the banking habit among the workers and also make the processof payment simpler for the employer.

3.2.6 Deductions from Wages (Sec. 7 to 13)

Deductions which may be made from wages (Sec. 7) Sec. 7 provides that the wages of an employed person shall be paid to

him without deductions of any kind except those authorized by or underthe Payment of Wages Act, 1936 [Sec. 7 (1)].

Kinds of deductionsThe deductions from wages of an employed person referred to in Sec. 7(1) may be of the following kinds only, namely;



1) Deductions for fines [Sec.7 (2) (a) and 8]1) No fine shall be imposed on any employed person save in respect of

such acts or omissions on his part as the employer, with the previousapproval of the State Government or of the prescribed authority, mayhave specified by a notice [Sec. 8 (1)].

2) The notice specifying the acts and omissions for which fines may beimposed shall be exhibited in the prescribed manner on the premises(and in case of persons employed upon a railway, at the prescribedplace or places) in which the employment is carried on [Sec. 8 (2)].

3) No fine shall be imposed on an employed person until he has been givenan opportunity of showing cause against the fine and has completed theage of 15 years [Sec. 8 (3) and (5)].

4) The total amount of fine which may be imposed in any one wage periodon any employed person shall not exceed 3 per cent of the wages payableto him in respect of that wage-period [Sec. 8 (4)]. Such a fine shall notbe recovered from the employed person by installments or after theexpiry of 60 days from the day on which it was imposed [Sec. 8 (6)].

5) Every fine shall be deemed to have been imposed on the day of the actor omission in respect of which it was imposed [Sec. 8 (7)].

6) All fines and all realizations thereof shall be recorded in a register to bekept by the person responsible for the payment of wages, in such formas may be prescribed. All realizations of fines shall be applied only suchpurposes as are beneficial to the persons employed in the factory[Sec. 8 (8)].

2. Deductions for absence from duty [Sec. 7 (2) (b) and 9] Deductions may be made on account of the absence of an employed

person from duty [Sec. 7 (2) (b)] from the place or places where, by theterms of his employment, he is required to work. The absence may befor the whole or any part of the period during which he is so required towork [Sec. 9 (1)]. But the ratio between the amount of such deductionsand the wages payable shall not exceed the ratio between the period ofabsence and total period within such wage-period [Sec. 9 (2)]. It hashowever been held in K.S.R.T. Employees’ Assn. v. General Manager,K.S.R.T., (1985) Lab. I.C. 552 (Ker.) that in a strike by workers in apublic utility like transport service, if employees absent for a part of theday without notice, deduction of full day’s wages would not be unjustifiedor illegal.

If, however, 10 or more employed persons, acting in concert, absentthemselves without due notice and without reasonable cause, thededuction for absence from duty from any such person may includesuch amount not exceeding his wages for 8 days as may be due to theemployer in lieu of notice [Proviso to Sec. 9 (2)]. In this regard anyemployed person shall be deemed to be absent from the place where heis required to work if he refuses, in pursuance of a stay-in-strike or for



any other cause which is not reasonable in the circumstances, to carryout his work (Explanation to Sec.9).

3. Deductions for damage or loss [Sec. 7 (2) (c), (m), (n) and (o) and 10]A deduction for damage to or loss of goods expressly entrusted to theemployed person for custody or for loss of money for which he is requiredto account shall not exceed the amount of damage or loss caused to theemployer by the neglect or default of the employed person. Same is thecase as regards losses sustained by a railway administration on accountof any rebates or refunds incorrectly granted by the employed person[Sec. 7 (2) (c) and 10 (1)].Sec. 10 (1-A) also provides that a deduction for damage or loss shallnot be made until the employed person has been given an opportunity ofshowing cause against the deduction. A similar opportunity shall also hegiven to the employed person in case of deductions for recovery oflosses sustained by a railway administration on account of:

a) acceptance by the employed person of counterfeit or base, coins ormutilated or forged currency notes [Sec. 7 (2) (m)];

b) the failure of the employed person to invoice, to bill, to collect or toaccount for the appropriate charges due to the railway administration.The loss may relate to fares, freight, demurrage, wharfage and carnageor in respect of sale of food in catering establishments or in respect ofsale of commodities in grain shops or otherwise [Sec. 7 (2) (n)];

c) any rebates or refunds incorrectly granted by the employed person wheresuch loss is directly attributable to his neglect or default [Sec. 7 (2) (o)].Sec. 10 (2) requires that all deductions and realizations in respect ofdamage to or loss of goods shall be recorded in a register to be kept bythe person responsible for the payment of wages under Sec. 3.

4. Deductions for services [Sec. 7 (2) (d), (e) and 11]. A deduction for house accommodation [Sec. 7 (2) (d)] and such amenities

and services supplied by the employer as have been authorized by theState Government [Sec.7 (2) (e)] shall not be made from the wages ofan employed person, unless such services have been accepted by himas a term of employment or otherwise. Deductions in respect of theseservices shall not exceed the value thereof. In case of deductions asregards services and amenities, the State Government may imposeconditions (Sec. 11).

5. Deductions for recovery of advances [Sec. 7 (2) (f) and 12].A deduction for recovery of an advance given to an employed person issubject to the following conditions, viz.,

1) recovery of an advance of money given before employment began shallbe made from the first payment of wages in respect of complete wage-period, but no recovery can be made of such advance given fortravelling expenses;



2) recovery of an advance of money given after employment began shallbe subject to such conditions as the State Government may impose;

3) recovery of advances of wages not already earned shall be subject toany rules made by the State Government in this regard. The StateGovernment may regulate the extent to which such advances may begiven and the installments by which they may be recovered (Sec.12).The advance may be of any nature (including advance for travelingallowance or conveyance allowance) and the interest due in respectthereof, or for adjustment of over-payment of wages [Sec.7 (2) (f)].Deductions for adjustment of over-payment of wages is also authorisedunder the Act [Sec. 7 (2) (f)]. But there is no provision in the Actlimiting the period within which the employers should make the deductionfor adjustment of over-payment of wages [M.G. Koshi v. A.D. CottonMills, A.I.R. (1959) Ker. 332].

6. Deductions for recovery of loans [Sec. 7 (2) (fff) and 12-A].Deductions for loans granted for house-building or other purposes andthe interest due in respect thereof [Sec. 7 (2) (fff)] approved by theState Government shall be subject to any rules made by the StateGovernment regulating the extent to which such loans may be grantedand the rate of interest payable thereon (Sec. 12-A).

7. Deductions for payment to co-operative societies and insuranceschemes [Sec. 7 (2) (j) and (k) and 13].

These deductions shall include:a) deductions for payments to co-operative societies approved by the State

Government or to a scheme of insurance maintained by the Indian PostOffice [Sec. 7 (2) (j)]; and

b) deductions made with the written authorization of the person employedfor the payment of any premium on his life insurance policy to the LifeInsurance Cooperation of India or for the purchase of securities of theGovernment of India or of any State Government or for being depositedin any Post Office Saving Bank in furtherance of any saving scheme ofany such Government [Sec. 7 (2) (k)].

These deductions shall be subject to such conditions as the StateGovernment may impose (Sec. 13).Other deductions :The following deductions shall also be permitted under the Act:1) deductions of income-tax payable by the employed persons

[Sec.7 (2) (g)];2) deductions required to be made by order of a Court or other authority

competent to make such order [Sec. 7 (2) (h)];3) deductions for payments to co-operative societies of advances from

any provident fund to which the Provident Fund Act, 1925 applies orany recognized provident fund (as defined in Sec. 58-A of the Indian



Income-tax Act, 1922) or any provident fund approved in this behalf bythe State Government [Sec. 7 (2) (i)];

4) deductions for payment of insurance premium on Fidelity GuaranteeBonds [Sec.7(2)(l)];

5) deductions for recovery of losses sustained by a railway administrationon account of any default by the employed person. The default mayconsist of acceptance of counterfeit or base coins or forged currencynotes, or allowing excess rebates or refunds [Sec. 7 (2) (m)];

6) deductions made, with the written authorization of the employed person,for contribution to the Prime Minister’s National Relief Fund or to suchother Fund as may be specified by the Central Government [Sec. 7 (2)(p)]; This Clause was added by the Payment of Wages (Amendment)Act, 1976]; and

7) deductions for contributions to any insurance scheme framed by theCentral Government for the benefit of its employees [Sec. 7 (2) (q)];This Clause was added by the Payment of Wages (Amendment) Act,1977].

Limit on deductions [Sec. 7 (3)]

The total amount of deductions which may be made under the aboveheads [Sec. 7 (2)] in a wage-period from the wages of any employedperson shall not exceed 75 per cent of such wages in cases where suchdeductions are wholly or partly made for payments to co-operativesocieties under Sec. 7 (2) (j). In any other case, they shall not exceed 50per cent of such wages [Sec. 7 (3)]. Where the total deductions authorizedunder Sec. 7 (2) exceed 75 per cent, or as the case may be, 50 per centof the wages, the excess may be recovered in such manner as may beprescribed [Proviso to Sec. 7 (3)].

3.2.7 Maintenance of Registers and Records (Sec. 13-A)

Every employer shall maintain registers and records giving the followingparticulars of the persons employed by him:a) the work performed by them;b) the wages paid to them;c) the deductions made from their wages;d) the receipts given by them [Sec. 13-A (1)].The registers and records shall be in such form as may be prescribed.They shall be preserved for a period of 3 years after the date of the lastentry made therein [Sec.13-A(2)].

3.2.8 Enforcement of the ActInspectors (Sec. 14)

An Inspector of Factories appointed under Sec. 8 (1) of the FactoriesAct, 1948 shall be an Inspector for the purposes of the Payment of Wages



Act in respect of all factories within the local limits assigned to him[Sec. 14 (1)].The State Government may also, by notification in the Official Gazette,appoint such other persons as it thinks fit to be Inspectors for the purposesof the Act. It may define the local limits within which and the class offactories and industrial or other establishments in respect of which theyshall exercise their functions [Sec. 14 (3)]. It may also appoint Inspectorsfor the purposes of the Act in respect of persons employed upon a railway(otherwise than in a factory) to whom the Act applies [Sec.14 (2)].Powers and functions of Inspectors.An Inspector may:a) make such examination and inquiry as he thinks fit in order to ascertain

if the provisions of the Act or rules made there under are being observed;b) with such assistants, if any, as he thinks fit, enter, inspect and search any

premises of any railway, factory or industrial or other establishment atany reasonable time for the purpose of carrying out the objects of theAct;

c) supervise the payment of wages to persons employed upon any railwayor in any factory or industrial or other establishment;

d) require by a written order the production at such place, as may beprescribed, of any register or record maintained in pursuance of the Act.He may also take on the spot or otherwise statements of any personswhich he considers necessary for carrying out the purposes of the Act.

e) seize or take copies of registers or documents or portions thereof as hemay consider relevant in respect of an offence under this Act which hehas reasons to believe has been committed by an employer;

f) exercise such other powers as may be prescribed [Sec. 14 (4)].But no person shall be compelled under Sec. 14 (4) to answer any question ormake any statement tending to incriminate himself [Proviso to Sec. 14 (4)].The provisions of the Code of Criminal Procedure, 1973 shall, so far asmay be, apply to any search or seizure as they apply to any search orseizure made under the authority of a warrant issued under Sec. 94 ofthe said Code [Sec.14 (4-A)].Inspector deemed to be a public servant. Every employer shall bedeemed to be a public servant within the meaning of the Indian PenalCode 1860 [Sec. 14(5)].Facilities to be afforded to Inspectors. Every employer shall afford andInspector all reasonable facilities for making any entry. Inspection,supervision, examination or inquiry under the Act. (Sec. 14-A)

3.2.9 Claims arising out of deductions from wages

The scheme of Payment of Wages Act is that all claims arising out ofdeductions from wages or delay in the payment of wages are to be decided



by the Authority appointed by the State Government under(Sec 15) and not by a Civil Court [Marute M.Mullik v. Poison Ltd. (1970)Lab. I.C. 308). It was further observed in Authority Sabastian Almendav. Taylor R.M. A.I.R.(1956) Bomb.737 that the Authority under thePayment of Wages Act constitutes a Court or a Tribunal of summaryjurisdiction and the clear object of the Legislature in setting up this Courtor tribunal is to give facilities to the employee to recover his wages asexpeditiously as possible. (Rameshwar Lal v. jogender Dass. A.IR.(1970)Ori.76).Sec. 15 empowers the State Government to appoint some person as theAuthority to hear and decide for any specified area all claims arising outof (a) deductions from the wages, or (b) delay in payment of the wagesof persons employed or paid in that area, including all matters incidentalto such claims. The appointment shall be made by notification in the OfficialGazette. The following may be appointed as the Authority as aforesaid:1) a presiding officer of any Labour Court or Industrial Tribunal, constituted

under the Industrial Disputes Act, 1947, or under any correspondinglaw relating to the investigations and settlement of industrial disputes inforce in the State; or

2) any Commissioner for Workmen’s Compensation, or3) any other officer with experience as a Judge of a Civil Court or as a

stipendiary Magistrate (Sec. 15(1)].The State Government may, where it considers necessary so to do, appointmore than one Authority for any specified area. It may, by general orspecial order, also provide for the distribution or allocation of work to beperformed by them under this Act [Provision to Sec. 15(1)].Powers of Authorities appointed under Sec. 15. Sec. 18 provides thatevery Authority appointed under Sec. 15(1) shall have all the powers of aCivil Court under the Code of Civil Procedure, 1908, for the purpose of –a) taking evidence and enforcing the attendance of witnesses andb) compelling the production of documentsFurther every such Authority shall be deemed to be a Civil Court for allthe purposes of Sec. 195 and of Chapter XXVI of the Code of CriminalProcedure, 1973.Who may file application? An application for claims arising under theAct may be filed by –a) the person employed himself, orb) any legal practioner, orc) any official of a registered trade union authorized in writing to act on his

behalf, ofd) any Inspector under the act, ofe) any other person acting with the permission of the Authority appointed

under Sec. 15(1) [Sec. 15(2)].



Application to be filed within 12 months. Every application for claimsunder the Act shall be presented within 12 months from the date on whichthe deduction from the wages was due to is made[Proviso 1 to Sec. 15 (2)]. An application may also be admitted after 12months if the applicant satisfies the Authority that there was a sufficientcause for not making the application within 12 months [proviso 2 toSec. 15(2)].Procedure : When any application for claims under the Act is entertained,the authority shall hear the applicant and the employer or other personsresponsible for the payment of wages under sec. 3 or give them anopportunity of being heard. The Authority shall make such further inquiryas may be necessary. It may direct the refund to be made to the employedperson of the amount deducted or the payment of the delayed wagestogether with such compensation as it may think fit. The compensationshall not exceed 10 times the amount improperly deducted, and Rs. 25 incase of delayed wages. Even where the deducted or delayed wages arepaid before the disposal of the application, the Authority may direct thepayment of such compensation as it may think fit. This amount ofcompensation shall however not Rs.25 [Sec. 15(3)] exceeds.No direction if the Authority is satisfied. No direction for the paymentof compensation shall be made in the case of delayed wages if theAuthority is satisfied that the delay was due to:a) a bona fide error or dispute; orb) the occurrence of an emergency or the existence of exceptional

circumstances; orc) the failure of the employed person to apply for or accept payment

[Proviso to Sec. 15 (3)].Malicious or vexatious application. If the Authority hearing an applicationis satisfied that the application was malicious or vexatious, it may direct apenalty not exceeding Rs.50 to be paid to the employer or other personresponsible for payment of wages, by the person presenting the application[Sec. 15 (4) (a)]. The authority may further direct that a penalty notexceeding Rs.50 be paid to the State Government by the employer orother person responsible for the payment of wages in cases where theapplicant ought not to have been compelled to seek redress under Sec.15[Sec. 15 (4) (b)].Dispute as to legal representatives. Where there is any dispute as to theperson or persons being the legal representative or representatives of theemployer or of the employed person, the decision of the Authority onsuch dispute shall be final [Sec. 15 (4-A)].Inquiry under Sec. 15 is a judicial proceeding. Any inquiry under Sec. 15shall be deemed to be a judicial proceeding within the meaning of Secs.193, 219 and 228 of the Indian Penal Code, 1860 [Sec. 15 (4-B)].Recovery of amount. Any amount directed to be paid under Sec.15may be recovered:



a) if the Authority is a Magistrate, by the Authority as if it were a fine imposedby him as Magistrate [Sec. 15 (5)].

Single application in respect of claims (Sec. 16).

A single application may be presented under Sec. 15 on behalf of or inrespect of any number of employed persons beExtendeding to the sameunpaid group. When a single application is made, every person on whosebehalf such application is presented may be awarded maximumcompensation to the extent specified in Sec. 15 (3) [Sec. 16 (2)].Employed persons are said to beExtended to the same unpaid group ifthey are borne on the same establishment and:1) if deductions have been made from their wages in contravention of the

Act for the same cause and during the same wage-period or periods, or2) if their wages for the same wage-periods have remained unpaid after the

day fixed by Sec. 5 [Sec. 16 (1)].The authority may deal with any number of separate pending applica-tions, presented under Sec. 15 in respect of persons beExtendeding tothe same unpaid group, as a single application [Sec. 16 (3)].

Appeal (Sec. 17).An appeal may be preferred in a Presidency-town before the Court ofSmall Causes and elsewhere before the District Court against:i) an order dismissing either wholly or in part an application made under

Sec. 15 (2), orii) a direction made under Sec. 15 (3) by the Authority to refund to the

employed person the amount deducted from wages or under Sec. 15(4) by the Authority for payment of penalty to the employer.

The appeal may be preferred within 30 days of the date on which theorder or direction was made [Sec. 17 (1)].The Court may, if it thinks fit, submit any question of law for the decisionof the High Court and, if it so does, shall decide the question in conformitywith such decision [Sec.17 (4)].Who may appeal? The appeal may be preferred by:a) the employer or other person responsible for the payment of wages

under Sec.3, if the total sum directed to be paid by way of wages andcompensation exceeds Rs.300 or such direction has the effect of imposingon the employer or the other person a financial liability exceedingRs.1,000 [Sec. 17 (1) (a)]; or

b) an employed person, if the total amount of wages claimed to have beenwithheld from the employed person exceeds Rs.20 or from the unpaidgroup to which the employed person beExtendeds or beExtendededexceeds Rs.50. The appeal may also be made by any legal practitioneror any official of a registered trade union authorized in writing to act on



behalf of the employed person or any Inspector under the Act, or anyother person permitted by the Authority to make an application underSec. 15 (2) [Sec. 17 (1) (b)]; or

c) any person directed to pay a penalty under Sec.14 (4) [Sec. 17 (1)(d)].Where an employer prefers an appeal under Sec. 17 the authority againstwhose decision the appeal has been preferred may, and if so directedby the Court shall, pending the decision of the appeal, withhold paymentof any sum in deposit with it [Sec.17 (3)].

Penalty for offences under the Act (Sec. 20).Penalty for delaying payment of wages within the prescribed period ormaking unauthorized deductions. Whoever being responsible for thepayment of wages to an employed person delays payment of wages withinthe period laid down under the Act or makes unauthorized deductionsshall be punishable with fine which shall not be less than Rs.200 butwhich may extend to Rs.1,000 [Sec. 20 (1)].Penalty for not paying wages on a working day or in current coin or notrecording fines or not displaying the abstracts of the Act. Not paying thewages on a working day, or not paying wages in current coin or currencyor both, or not displaying by notice abstracts of the Act and rules, arealso offences punishable with a fine which may extend to Rs.500 foreach offence [Sec. 20 (2)].Penalty for failure to maintain, furnish records and returns. Whoeverbeing required under the Act to maintain any records or registers or tofurnish any information or return-a) fails to maintain such register or record; orb) willfully refuses or without lawful excuse neglects to furnish such

information or return; orc) willfully furnishes or causes to be furnished any information or return

which be knows to be false;d) refuses to answer or willfully gives a false answer to any question

necessary for obtaining any information required to be furnished underthe Act;Shall, for each such offence, be punishable with fine which shall not beless than Rs.200 but which may extend to Rs.1, 000 [Sec. 20 (3)].

Penalty for obstructing, etc. Inspector. Whoever:a) willfully obstructs an Inspector in the discharge of his duties under the

Act; orb) refuses or willfully neglects to afford an Inspector any reasonable facility

for making any entry, inspection, examination, supervision, or inquiryauthorized by or under the Act in relation to any railway, factory orindustrial or other establishment; or

c) willfully refuses to produce on the demand of an Inspector any registeror other document kept in pursuance of the Act; or



d) prevents or attempts to prevent any person from appearing before anInspector acting in pursuance of his duties under the Act.

Shall be punishable with fine which shall not be less than Rs.200 butwhich may extend to Rs.1, 000 [Sec. 20 (4)].Subsequent offence. If any person who has been convicted of anyoffence punishable under the Act is again guilty of an offence involvingcontravention of the same provision, he shall be punishable on asubsequent conviction with imprisonment for a term which shall not beless than 1 month but which may extend to 3 months, or with fine whichshall not be less than Rs.500 but which may extend to Rs.3, 000 or withboth [Sec. 20 (5)]. But no cognizance shall be taken of an earlierconviction made more than 2 years before the date of the commission ofthe present offence [Proviso to Sec. 20 (5)].Additional fine for failure to pay wages by the fixed date. If anyperson fails or willfully neglects to pay the wages of any employed personby the fixed date, he shall, without prejudice to any other action that maybe taken against him, be punishable with an additional fine which mayextend to Rs.100 for each day for which such failure or neglect continues[Sec. 20 (6)]. The words ‘additional fine’ do not contemplate a finesubsequent to one imposed earlier [Kanta Press v. Prescribed Authority,(1988) 56 F/L/R/ 301 (All.) (D.B.)].

3.2.10 MiscellaneousBar of suits (Sec. 22).

No Court shall entertain any suit for the recovery or wages or of anydeduction from wages in so far as the sum so claimed:a) forms the subject of an application under Sec. 15 which has been

presented by the plaintiff and which is pending before the Authorityappointed under that Section or of an appeal under Sec. 17; or

b) has formed the subject of a direction under Sec. 15 in favour of theplaintiff; or

c) has been adjudged, in any proceeding under Sec. 15, not to be owed tothe plaintiff; or

d) could have been recovered by an application under Sec.15.Protection of action taken in good faith (Sec.22-A). No suit,prosecution or other legal proceeding shall lie against the Government orany officer of the Government for anything which is in good faith done orintended to be done under the Act.Contracting out (Sec. 23). Any contract or agreement whereby anemployed person relinquishes any right conferred by the Act shall be nulland void in so far as it purports to deprive him of such right [Armughamv. Jawahar Mills, A.I.R. (1956) Mad. 76].If a deduction is unauthorized, no agreement, even if true, could give anemployer a right to make such deduction [Bharat Airways Ltd. v. S.R.Chakrabarti, (1955) 1 L.L.J. 89].



Display by notice of abstracts of the Act (Sec. 25). The personresponsible for the payment of wages to persons employed in a factoryor an industrial or other establishment shall cause to be displayed a noticecontaining such abstracts of the Act and of the rules made there under inEnglish and in the language of the majority of the persons employed inthe factory or an industrial or other establishment, as may be prescribed.Payment of undisguised wages in case of death of employedperson (Sec. 25-A). In case of death of an employed person or in caseof his whereabouts not being known, all amounts payable to him as wages,shall:a) be paid to the person nominated by him in this behalf in accordance with

the rules made under the Act;b) be deposited with the prescribed Authority:i) where no nomination has been made, orii) where for any reasons such amounts cannot be paid to the person

nominated.The prescribed Authority shall deal with the amounts deposited in theprescribed manner. The above rule is subject to the other provisions ofthe Act [Sec. 25-A (1)].Where the amounts payable by an employer as wages are disposed of inthe manner referred to in Sec. 25-A (1), the employer shall be dischargedof his liability to pay those wages [Sec. 25-A (2)].Rule-making power (Sec.26). Rules to regulate procedure ofAuthorities. The State Government may make rules to regulate theprocedure to be followed by the Authorities and Courts referred to inSecs. 15 and 17 [Sec. 26 (1)].Contravention of rule punishable with fine. In making any rule under Sec.26, the State Government may provide that a contravention of the ruleshall be punishable with fine which may extend to Rs.200 [Sec. 26 (4)].Previous publication of rules. All rules made under Sec. 26 shall besubject to the condition of previous publication and the date to bespecified under Sec. 23(3) of the General Clauses Act, 1897 shall not beless than 3 months from the date on which the draft of the proposed ruleswas published [Sec. 26(5)].Rules made by the Central Government to be laid before the Parliament.Every rule made by the Central Government under Sec. 26 shall be laid,as soon as may be after it is made, before each House of Parliamentwhile it is in session for a total period of 30 days. This period of 30 daysmay be comprised in one session or in 2 or more successive sessions. Ifboth Houses agree in making any modification in the rule, the rule shallthereafter have effect only in such modified form. If both Houses agreethat the rule should not be made. It shall have no effect. But any suchmodification or annulment of the rule shall be without prejudice to thevalidity of anything previously done under that rule [Sec. 26(6)].



Have you understood ?Objective Questions :1. The payment of the Wages Act was enacted in the year _____________.

a. 1936 b. 1835 c. 1836 d. 19462. Bonus is not included as a component of wage.

a. true b. false3. Wages should be paid on or before ____________of the month.

a. before 11th or 12th b. 13th or 14th c. 7th or 10th d. 14th or 15th4. Wages can be paid on any day.

a. True b. FalseShort Questions :5. Define Wages.6. What are the powers of the Inspectors of Wages?7. What sort of claim is available for unauthorized deductions?Extended Questions :8. Explain the various types of deductions in the payment of Wages.9. Discuss about the procedures to be followed in the maintenance of regis

ter and records.Summary : The Wages Act applies to the method and procedures to be adapted to

the payment of wages for persons employed in any factory. This Actspecify that, how the wages as to be determined and the eligibility fordeductions. The deductions should be according to the Wages Act. Ifthere is any violation against the deductions, there is provision for claims.The State Government may give 3 months‘ notice to extend the provisionsof the Act to any class of persons employed in any industrial establishmentor class of establishments specified by the Central Government or aState Government.

3.3 The Payment of Bonus Act 1965

3.3.1 Introduction- The Payment of Bonus Act, 1965

The dictionary meaning of the word ‘bonus’ is ‘something to the good’especially extra dividend to the shareholders of a company, ‘distributionof profits to insurance policy-holders’ or ‘gratuity to workmen beyondtheir wages’. It is the last meaning of the word, which has acquiredsignificance for labour management relations in India. Till recently, bonuswas regarded as an ex gratia, payment [payment as an act of grace)made by an employer to his workers to provide a stimulus for extra effortby them in the production process; on occasions, it also represented thedesire of the employer to share with his workers the surplus generated



by common endeavor and enterprise. From this limited connotation ofthe word, we have traveled a Extended way to reach the stage ofenactment of the Payment of Bonus Act, 1965, which makes this annualpayment obligatory on the employers.The term ‘bonus’ is not defined in the Payment of Bonus Act, 1965 or inany other enactment.The Act came into force on 5th September, 1965. It was amended twicein 1985. The payment of Bonus (Amendment) Act, 1985 abolished Sec.12 of the Act. The Payment of Bonus (Second Amendment) Act, 1985again introduced a new Sec. 12.


After studying this unit you should be able to:• Understand the objects of Payment of Bonus Act 1965.• Explore the application of the Bonus Act.• Know the definitions of the Bonus Act.• Study the eligibility and disqualifications for bonus• Determine the computations of bonus• Study the possible deductions in bonus

3.3.3 Object to the Act

In Hutti Gold Mines Kamgar Sangh v. Government of India, (1973), 1l.L.J.46 (A.P.), it was observed that the object of the Payment of BonusAct, 1965 is to maintain peace and harmony between labour and capitalby allowing the employees, in recognition of their right, to share in theprosperity of the establishment reflected by the contributions made bycapital, management and labour. In Associated Cement Cos. Ltd.(Dwaraka & Bombay) v. Their Workmen, A.I.R. (1956), S.C.967, theSupreme Court observed:“The theory of social justice on which the workmen’s right to bonus isfounded has a dual basis, namely, the contribution which the workmenhave made to the earning of profits by the industry, and the need to fill upthe gap between the living wage and the actual wages paid”.The object of the Act is to provide for the payment of bonus to personsemployed in certain establishments and for matters connected therewith.The Scheme of the Act, broadly stated, is four dimensional, i.e.1) to impose statutory liability upon an employer of every establishment

covered by the Act to pay bonus to employees in the establishment ;2) to define the principle of payment of bonus according to the prescribed

formula;3) to provide for payment of minimum and maximum bonus and linking the

payment of bonus with the scheme of ‘set-off and set-on’ and4) to provide machinery for enforcement of the liability for payment of bonus



(Jalan Trading Co. (Pvt) v. Mills Mazadoor Union, A.I.R. (1967)S.C.961].

A minimum bonus of 8.33 percent of the wage of salary (up to Rs.1,600) of an employee (Rs.60 in case of employees below the age of 15years) is payable irrespective of the fact whether the establishment hasmade a profit or loss. Bonus is no Extendeder linked with productionand profitability. Liability for bonus is a statutory liability and not acontingent liability.

3.3.4 Application of the Act

The Act extends to the whole of India [Sec. 1(2)]. It applies to:a) every factory [as defined in Sec. 2(m) of the Factories Act, 1948];b) every other establishment in which 20 or more persons are employed on

any day during any accounting year [Sec. 1(3)].A provision introduced in Sec. 1(3) by the Amendment Act of 1976 nowempowers the appropriate Government to make the provisions of thePayment of Bonus Act, 1965 applicable to any establishment employingless than 20 but not less than 10 persons. The appropriate Governmentcan do so after giving a notice of not less than 2 months by issuing anotification in the Official Gazette and specifying therein the accountingyear from which the enforcement of the provisions will be made. Thisamendment has benefited the employees of smaller concerns which werenot formerly covered by the Act.The application of the Act to a factory or an establishment is subject tothe other provisions of the Act (as contained in Secs. 16, 20 and 32).An establishment to which this Act applies shall continue to be governedby the act notwithstanding that the number of persons employed thereinfalls below 20 or the number specified in the notification issued underProviso to Sec. 1(3) [Sec.1(5)].The employment of 20 or more persons even for 1 day in a year is sufficientto attract the provisions of the Act [Ramanujam Press v. R.P.F.Commr.A.I.R. (1970) Mad, 224].In deciding the number of persons employed in an establishment, allemployees even those drawing up to Rs.3, 500 must be taken intoconsideration. The strength of the employees of an establishment wouldbe taken into consideration, irrespective of their place of work. As towhat is an establishment would be in each case a question of fact.

Definition of establishment

The term ‘establishment’ is not defined in the Act. It is a far wider termthan ‘factory’ which has a special legal connotation and meaning. Sec. 3,however, provides that where an establishment consists of differentdepartments or undertakings or has branches. Whether situated in thesame place or in different places, all such departments or undertakings orbranches shall be treated as parts of the same establishment for the purposeof computation of bonus under the Act.



Establishments to departments, undertakings and branches (Sec. 3)Where an establishment consists of different departments or undertakingsor has branches, whether situated in the same place or in different places,all such departments or undertakings or branches shall be treated as partsof the same establishment for the purpose of computation of bonus underthis Act. (Sec.3). Where for any accounting year a separate balance sheetand profit and loss account are prepared and maintained in respect ofany such department or undertaking or branch, then, such department orundertaking of branch shall be treated as a separate establishment for thepurpose of computation of bonus under this Act for that year, unless suchdepartment or undertaking or branch was, immediately before thecommencement of that accounting year, treated as part of the establishmentfor the purpose of computation of bonus [Proviso to Sec. 3].Act not to apply to certain categories of employees (Sec. 32).Sec. 32 lays down that the Act shall not apply to certain categories ofpersons mentioned therein. It excludes the following persons from theoperation of the Act:1) employees employed by the Life Insurance Corporation of India,2) seamen as defined in Sec. 3 (42) of the Merchant Shipping Act, 1958;3) employees registered or listed under any scheme made under the Dock

Workers (Regulation of Employment) Act, 1948, and employed byregistered or listed employers;

4) employees employed by an establishment engaged in any industry carriedon by or under the authority of any department of the Central Governmentor State Government or a local authority :

5) employees employed by –a) the Indian Red Cross Society or any other Institution of a like nature

including its branches);b) universities and other educational institutions;c) institutions (including hospitals, chambers of commerce and social welfare

institutions) established not for purposes of profit;6) employees employed through contractors on building operations;7) employees employed by the Reserve Bank of India;8) employees employed by -a) the Industrial Finance Corporation of India;b) any Financial Corporation established under Sec. 3 or any Joint

Financial Corporation established under Sec. 3A of the StateFinancial Corporations Act, 1951;

c) the Deposit Insurance Corporation;d) the National Bank for Agriculture and Rural Development;e) the Unit Trust of India;f) the Industrial Development Bank of India;g) the Small Industries Development Bank of India;h) the National Housing Bank;



i) any other financial institution (other than a banking company) being anestablishment in public sector, which the Central Government may, bynotification in the Official Gazette, specify having regard to (i) its capitalstructure (ii) its objective and the nature of its activities (iii) the natureand extent of financial assistance or any concession given to it by theGovernment, and (iv) any other relevant factor:

9) employees employed by inland water transport establishments,operating on routes passing through any other country.

Power of exemption (Sec. 36)The appropriate Government may, having regard to the financial positionand other relevant circumstances of any establishment or class ofestablishments, exempt, by notification in the Official Gazette, suchestablishment or class of establishments from all or any of the provisionsof the Payment of Bonus Act. It may do so if it is of opinion that it willnot be in public interest to apply all or any of the provisions of suchestablishment or class of establishments. It may exempt such establishmentor class of establishments from the application of such provisions of theAct for such period as may be specified in the notification and imposesuch conditions as it may thing fit to impose.Order refusing exemption under sec. 36 should be speaking one andobjective. An order passed in a proceeding under Sec. 36 refusingexemption must be speaking one as the proceedings under this Sectionare quasi-judicial. It is passed without giving reasons, it is invalid. In caseof general observations in the order that a company is not entitled forexemption in public interest in view of its financial position and otherrelevant circumstances, the order is not speaking one. Financial positiondetailing liabilities and assets etc, of the company and specificcircumstances which weighed refusal of exemption, should find place inorder. [Associated Publishers (Madras) Ltd. V. Govt. of Tamil Nadu.(1985) I L.L.J. 63 (Mad)].

3.3.5 Definitions

1. Accounting year [Sec. 2(1)]. It means: i) in relation to a corporation, the year ending on the day on which the

books and accounts of the corporation are to be closed and balanced ;ii) in relation to a company, the period in respect of which any profit and

loss account of the company laid before it in annual general meeting ismade up, whether that period is a year or not ;

iii) in any other case (a) the year commencing on the first day of April, or(b) if the accounts of an establishment maintained by the employer thereofare closed and balanced on any day other than the 31st day of March,then at the option of the employer, the year ending on the day on whichits accounts are so closed and balanced.An option once exercised by the employer under Clause (iii) (b) shallnot again be exercised except with the previous permission in writing of



the prescribed authority and upon such terms as the authority may thinkfit to impose.

2. Allocable surplus [Sec.2 (4)]. It means:a) in relation to an employer, being a company (other than a banking

company) which has not made the arrangements prescribed under theIncome-tax Act, 1961 for the declaration and payment within India ofthe dividends payable out of its profits in accordance with the provisionsof Sec. 194 of the Income-tax Act, 1961, 67 per cent of the availablesurplus in an accounting year;

b) in any other cause, 60 per cent of the available surplus.The allocable surplus is the workers’ share in the available surplus asdefined in Sec.2 (6).

3. Appropriate Government (Sec. 2(5)]. It means:i) in relation to an establishment in respect of which the appropriateGovernment, under the Industrial Disputes Act, 1947, is the CentralGovernment, the Central Government.ii) in relation to any other establishment, the Government of the State inwhich that establishment is situate.

4. Available surplus (Sec. 2(6)]. It means the available surplus computedunder Sec. 5.The other relevant Sections which deal with calculation of available surplusare Secs. 4, 6 and 7.Under Sec. 4 gross profits are to be calculated in the manner specifiedin the First and Second Schedules.The available surplus in respect of any accounting year is the gross profitfor that year after deducting there from the sums referred to in(Sec. 6 and Sec. 5).According to Sec. 6 the sums to be deducted from the gross profitas priority charges are any amount of depreciation, any amount by wayof development rebate or investment allowance or developmentallowance any direct tax calculated according to the provisions of Sec.7(which deals with calculation of direct tax by the employer) and othersums mentioned in the Third Schedule.

5. Award [Sec. 2 (7)]. It means an interim or final determination of anyindustrial dispute or of any question relating thereto by any Labour Court,Industrial or National Tribunal constituted under the Industrial DisputesAct, 1947, or by any other authority constituted under any correspondinglaw relating to investigation and settlement of industrial disputes in forcein a State. It also includes an arbitration award made under Sec. 10A ofthat Act.

6. Banking company {Sec. 2 (8)]. It means banking company as definedin Sec.5 of the Banking Regulation Act, 1949, and includes the StateBank of India, any subsidiary bank as defined in the State Bank of India



(Subsidiary Banks) Act, 1959, any corresponding new bank specifiedin the First Schedule to the Banking Companies (Acquisition and Transferof Undertakings) Act, 1970, any corresponding new bank constitutedunder Sec. 3 of the Banking Companies (Acquisition and transfer ofUndertakings) Act, 1980, any co-operative bank as defined in Sec. 2(b) (ii) of the Reserve Bank of India Act, 1934 and any other bankinginstitution which may be notified in this behalf by the Central Government.

7. Company [Sec. 2 (9)]. It means any company as defined in Sec.3 ofthe Companies Act, 1956 and includes a foreign company.

8. Co-operative Society [Sec. 2 (10)]. It means a society registered ordeemed to be registered under the Co-operative Societies Act, 1912,or any other law for the time being in force in any State relating to co-operative societies.

9. Corporation [Sec .2 (11)]. It means any body corporate established byor under any Central, Provincial or State Act but does not include acompany or a co-operative society.

10. Direct Tax [Sec.2 (12)]. It means:a) any tax chargeable under (i) the Income-tax Act, 1961, (ii) the Super

Profits Act, 1963, (iii) the Companies (Profits) Surtax Act, 1964, (iv)the agricultural Income-tax laws, and

b) any other tax which, having regard to its nature or incidence may bedeclared by the Central Government, by notification in the Official Gazette,to be direct tax for the purposes of the Act.

11. Employee [Sec.2 (13)]. ‘Employee’ means any person (other than anapprentice) employed on a salary or wage not exceeding Rs.3,500 [thelimit was raised from Rs.2,500 to Rs.3,500 by the payment of Bonus(Amendment) Ordinance, 1995] per mensem in any industry to do anyskilled or unskilled, manual, supervisory, managerial, administrative,technical or clerical work for hire or reward. It makes no differencewhether the terms of employment are express or implied.Where the salary or wage of an employee exceeds Rs.2,500 per mensem,the bonus payable to such employee under Sec. 10 or, as the case maybe, under Sec. 11, shall be calculated as if his salary or wage wereRs.2,500 per mensem (Sec. 12). This means employees getting salaryor wage up to Rs.3, 500 will be covered by the Act, but for payment ofbonus or wage will be taken as Rs.2, 500.

12. Employer [Sec. 2 (14)]. ‘Employer’ includes:i) in relation to an establishment which is a factory, the owner or occupier

of the factory, including the agent of such owner or occupier, the legalrepresentative of a deceased owner or occupier and the manager of thefactory;

ii) in relation to any other establishment, the person who, or the authoritywhich, has the ultimate control over the affairs of the establishment. Wherethe said affairs are entrusted to a manager or managing director, suchmanager or managing director is the employer.



13. Establishment in private sector [Sec. 2 (15)]. It means any establishmentother than an establishment in public sector.

14. Establishment in public sector [Sec. 2 (16)]. It means any establishmentowned, controlled or managed by:

a) a Government company as defined in Sec. 617 of the Companies Act,1956;

b) a corporation in which not less than 40 per cent of the capital is heldwhether singly or taken together by:

i) the Government, orii) The Reserve Bank of India, oriii) a corporation owned by the Government or the Reserve Bank of India.15. Factory [Sec. 2 (17)]. It shall have the same meaning as in Sec. 2 (m)

of the Factories Act, 1948.16. Gross profits [Sec. 2 (18)]. It means the gross profits calculated under

Sec. 4.17. Income-tax Act [Sec. 2 (19)]. It means the Income-tax Act, 1961.18. Salary or wage [Sec. 2 (21)]. It means all remuneration (other than

remuneration in respect of overtime work) capable of being expressedin terms of money, which would, if the terms of employment, express orimplied, were fulfilled, be payable to an employee in respect of hisemployment or of work done in such employment. It includes dearnessallowance (that is to say, all cash payments, by whatever name called,paid to an employee on account of rise in the cost of living). But it doesnot include:

i) any other allowance which the employee is for the time being entitled to;ii) the value of any house accommodation or of supply of light, water,

medical attendance or other amenity or of any service or of anyconcessional supply of food grains or other articles;

iii) any traveling concession;.iv) any bonus (including incentive, production and attendance bonus);

The definition of the term ‘wages’ does not include bonus because forthe purposes of the Act bonus has to be distinguished from wages andhas to be determined in relation to the wages paid to the employee[Gopalan v. Angamali Chit Fund, A.I.R. (1977) Ker. 120)].

v) any contribution paid or payable by the employer to any pension fund orfor the benefit of the employee under any law for the time being in force;

vi) any retrenchment compensation or any gratuity or other retirement benefitpayable to the employee or any ex gratia payment made to him;

vii) any commission payable to the employee.Explanation to Sec. 2 (21) further provides that where an employee is



given in lieu of the whole or part of the salary or wages payable to him,free food allowance or free food by his employer, such food allowanceor the value of such food shall, for the purpose of Sec.2 (21), be deemedto form part of the salary or wage of such employee.

3.3.6 Eligibility and disqualification for Bonus

Eligibility for bonus (Sec. 8). Every employee shall be entitled to be paidby his employer in an accounting year, bonus, in accordance with theprovisions of the Act, provided he has worked in the establishment fornot less than 30 working days in that year (Sec. 8). Where an employeehas not worked for all the working days in any accounting year, the bonuspayable to him under Sec. 10 shall be proportionately reduced (Sec.13).Disqualification for bonus (Sec. 9). Notwithstanding anything containedin the Act, an employee shall be disqualified from receiving bonus underthe Act, if he is dismissed from service for:a) fraud, orb) riotous or violent behaviour while on the premises of the establishment, orc) theft, misappropriation or sabotage of any property of the establishment.

3.3.7 Determination of Bonus

Bonus, under the Payment of Bonus Act, cannot be claimed by workersas a matter of right. The Bonus Formula under the Act rests on thecalculation of the ‘available surplus’ and “allocable surplus” it envisagesthe following steps;Computation of gross profit (Sec.4).The computation of gross profits for an accounting year for the purposeof the bonus formula is the first step. It is calculated according to theSec. 4 of the Act.Item 1 – Net profit as per P&L account.Item 2- Add back – Bonus to employees + Depreciation + Developmentrebate to the extent charged to P&L account + Any other reserves to theextent charged to P & L account.Item 3 – Add back – Bonus paid in respect of previous year to the extentcharged to P& L account + Provision in P & L account in respect ofgratuity over and above the payment made to approved gratuity fund orin excess of amount actually paid to employees on their retirement ortermination + Dominations in excess of amount admissible to income tax+ any amount certified by RBI in terms of section 34A(2) of BankingRegulation Act + Capital expenditure to the extent charged to P&L account+ losses or expenditure relating to business situated outside India.Item 4 – Add also – Income directly credited to reserves other thancapital receipts, profit relating to business out of India and Income of



foreign concerns from investment outside India.Item 5- Total of items No. 1, 2, 3 and 4Item 6 – Deduct – Capital receipts and profits to the extent credited toP& L account- Profits of business outside India – Income of foreignconcerns from investment outside India to the extent credited to P & Laccount- Expenditure or losses directly debited to reserves other thancapital expenditure and capital losses – proportionate administrativeexpenses of foreign head office allocable to Indian business in theproportion of Indian gross profit to total world gross profit adjustedconsolidated P & L account –Refund of direct taxes to the extent creditedto P & L account – cash subsidy given by the Government.Item 7 – Gross profit for purpose of bonus –Item 5- Item 6Computation of gross profits in case of banking company [Sec. 4 (a)].The gross profits derived by an employer from an establishment inrespect of any accounting year shall, in the case of banking company, becalculated in the manner specified in the First Schedule.3.3.8 DeductionsDeductions of Prior ChargesIn addition, some minimum return on capital employed allowed asdeduction, to be calculated as provided in Third schedule to the BonusAct. These are termed as “prior charges “. Thus following are to bededucted from “gross profit”.• Depreciation• Development rebate or investment allowance• Deduction of direct tax• Reduction capital employedDeduction of direct taxes• No account of arrears of depreciation or carry forward losses• Provisions in respect of religious or charitable institutions• HUF/ Individual as employer• Export rebate to be considered• No rebate for development of Industry to be consideredAllocable SurplusAllocable surplus is equal to 60 % of available surplus calculated as perprovisions of section 5. This allocable surplus has to be distributed asbonus among employees during the year. However, this is subject tominimum 8.33 % and maximum 20 %.Salary or wages for calculating bonusEmployees drawing salary or wages between Rs. 2,500 to Rs 3, 500 permonth are entitled to bonus on the bonus of Rs 2,500 per month salaryonly.



Adjustments of customary or interim bonusWhere in any accounting year an employer has paid any puja bonus orother customary to an employee, or an employer has paid a part of thebonus payable this Act to an employee before the date on which suchbonus becomes payable, the employer shall be entitled to deduct theamount of bonus so paid from the amount of bonus payable by him to theemployee under this Act in respect of that accounting year and theemployee shall be entitled to receive only the balance.Time limit for the payment of bonusAll amounts payable to an employee by way of bonus under this Act shallbe paid in cash by the employer. Bonus should be paid within a period ofeight months from the close of the accounting year. Where there is adispute regarding payment of bonus pending before any authority undersection 22, bonus shall be payable within a month from the date on whichthe award becomes enforceable or the settlement comes into operation,in respect of such dispute.Disqualification of an employee for bonusAn employee shall be disqualified from receiving bonus under this Act, ifhe is dismissed from service for Fraud, Riotous or Violent behaviourwhile on the premises of the establishment or Theft, misappropriation orsabotage of any property of the establishment. I- Objective Questions :1. The minimum bonus payable is _________________ a. 7.33 % b. 6.33 % c. 8.33 % d. 9.33 %2. The maximum bonus shall not exceed ______________

a. 19 % b. 20 % c. 25 % d. 27%3. Financial year for the purpose of bonus is_____________________

a. July – June b. November – October c. March- Februaryd. February- March

II-Short Questions :4. Explain the meaning of allocable surplus.5. What is eligibility for Bonus.6. Explain the various reasons for deductions from bonus.III- Extended Questions :7. State the special provisions of Payment of Bonus Act.8. Does this Act prescribe any disqualifications also for claiming

bonus? Explain.SummaryBonus is really a reward for good work or share of profit of the unitwhere the employee is working. Often there were disputes betweenemployer and employees over bonus to be paid. It was thought that



legislation will solve the problem and hence Bonus Act was passed.Unfortunately, in the process, bonus has become almost as deferredwages due to provision of payment of minimum 8.33 % and maximum 20% bonus. Bonus Act has not in way reduced. Now, Bonus is acceptedby Trade Unions as per Bonus Act and disputes are raised about “exgratia” amount to be paid.

3.4 Minimum Wages Act, 1948

3.4.1 Introduction

The object of the Act is to secure the welfare of the workers in acompetitive labour market by fixing the minimum rates of wages in certainemployments. The Legislature undoubtedly intended to apply the Act tothose industries or localities in which, by reason of causes such as,unorganised labour or absence of machinery for regulation of wages,wages paid to workers were, in the light of general level of wages andsubsistence level, inadequate [Bhikusa Yamasa Kshatriya v. SangammerAkola Taluka, Bidi Kamgar Union, A.I.R. (1963) S.C. 806].The Minimum Wages Act was passed in 1948 enabling the Central andState Governments to fix minimum rates of wages payable to employeesin a selected number of ‘sweated’ industries.The Act applies to the whole of India.


After studying this unit you should be able to:• Understand the definition of Minimum Wages.• Determine the schedules of the Minimum Wages Act.• Know the provisions of fixation and revision of Minimum Wages.• Study the governing procedures of Advisory Board and Central Advisory

Board• Know the method and procedures of safeguards in Payment of Minimum

Wages

3.4.3 Definitions

1. Adolescent [Sec. 2 (a)] - ‘Adolescent’ means a person who hascompleted his 14th year of age but not completed his 18th year.

2. Adult [Sec.2 (aa)] - ‘Adult’ means a person who has completed his18th year of age.

3. Appropriate Government [Sec. 2 (b)] - Appropriate Government, inrelation to any scheduled employment carried on by or under the authorityof the Central Government or a railway administration, or in relation to amine, oilfield or major port, or any corporation established by a CentralAct, means the Central Government [Sec. 2 (b) (i)]In relation to any other scheduled employment (which means an



employment specified in the Schedule to the Act), the appropriateGovernment means the State Government [Sec. 2 (b) (ii)].

4. Child [Sec. 2 (bb)] - ‘Child’ means a person who has not completed his14th year of age.

5. Competent authority [Sec. 2 (c)] - ‘Competent authority’ means theauthority appointed by the appropriate Government by notification in itsOfficial Gazette to ascertain from time to time the cost of living indexnumber applicable to the employees employed in the scheduledemployment (i.e. employments specified in the Schedule to the Act)specified in such notification..

6. Cost of living index number [Sec. 2 (d)] - ‘Cost of living index number’,in relation to employees in any scheduled employment in respect of whichminimum rates of wages have been fixed, means the index numberascertained and declared by the competent authority by notification inthe Official Gazette to be the cost of living index number applicable toemployees in such employment.

7. Employer [Sec. 2 (e)] - ‘Employer’ means any person who employs,whether directly or through another person, or whether on behalf ofhimself or any other person, one or more employees, in any scheduledemployment in respect of which minimum rates of wages have beenfixed under the Act. It includes:

i) in a factory where there is carried on any scheduled employment inrespect of which minimum rates of wages have been fixed under theAct, any person named as manager of the factory under Sec. 7 (1) (f) ofthe ‘Factories Act’, 1948;

ii) in any scheduled employment under the control of any Government inIndia in respect of which minimum rates of wages have been fixed underthe Act, the person or authority appointed by such Government for thesupervision and control of employees or where no person or authority isso appointed, the head of the department;

iii) in any scheduled employment under any local authority in respect ofwhich minimum rates of wages have been fixed under the Act, the personappointed by such authority for the supervision and control of employeesor where no person is so appointed, the chief executive officer of thelocal authority;

iv) in any other case where there is carried on any scheduled employment inrespect of which minimum rates of wages have been fixed under the Act,any person responsible to the owner for the supervision and control ofthe employees or for the payment of wages.

8. Scheduled employment [Sec. 2 (g)] - It means an employment specifiedin the Schedule to the Act (reproduced below), or any process or branchof work forming part of such employment.



3.4.4 The schedule [Sec. 2 (g) and 27]

PART-I1. Employment in any woolen carpet making or shawl weaving

establishment.2. Employment in any rice mill, flour mill or dal mill.3. Employment in any tobacco (including bidi making) manufactory.4. Employment in any plantation, that is to say, any estate which is maintained

for the purpose of growing cinchona, rubber, tea or coffee.5. Employment in any oil mill.6. Employment under any local authority.7. Employment on the construction or maintenance of roads or in building

operations.8. Employment in stone-breaking or stone-crushing.9. Employment in any lace manufactory.10. Employment in any public motor transport.11. Employment in any mica works.12. Employment in public motor transport.13. Employment in tanneries and leather manufactory.14. Employment in gypsum mines.15. Employment in barytes mines.16. Employment in bauxite mines.17. Employment in manganese mines.18. Employment in the maintenance of buildings and employment in the

construction and maintenance of runways.19. Employment in china clay mines.20. Employment in kyanite mines.21. Employment in copper mines.22. Employment in clay mines covered under the Mines Act, 1952.23. Employment in magnesite mines covered under the Mines Act, 1952.24. Employment in white clay mines.25. Employment in stone mines.26. Employment in steatite (including the mines producing soapstone and tale).27. Employment in ochre mines.28. Employment in asbestos mines.29. Employment in fire clay mines.



30. Employment in chromite mines.31. Employment in quartizite mines.32. Employment in quartz mines.33. Employment in silica mines.34. Employment in graphite mines.35. Employment in feldspars mines.36. Employment in laterite mines.37. Employment in dolomite mines.38. Employment in redoxide mines.39. Employment in wolfram mines.40. Employment in iron ore mines.41. Employment in granite mines.42. Employment in rock phosphate mines.43. Employment in hematite mines.44. Employment in loading and unloading in:

i) railways, goods sheds,ii) docks and ports.

45. Employment in marble and calcite mines.

PART II9. Employment in agriculture - that is to say, in any form of farming,

including the cultivation and tillage of the soil, dairy farming, theproduction, cultivation, growing and harvesting of any agricultural orhorticultural commodity, the raising of live-stock, bees or poultry,and any practice performed by a farmer or on a farm as incidental toor in conjunction with farm operations (including any forestry ortimbering, operations and the preparations for market and deliveryto storage or to market or to carriage for transportation to market offarm produce).

10. Wages [Sec.2 (h)]. ‘Wages’ means all remuneration, capable of beingexpressed in terms of money, which would, if the terms of the contractof employment, express or implied, were fulfilled, be payable to aperson employed in respect of his employment or work done in suchemployment. It includes house rent allowance but does not include:

i) the value ofa) any house accommodation, supply of light, water, medical attendance,

orb) any other amenity or any service excluded by general or special order of

the appropriate Government;ii) any contribution paid by the employer to any Pension Fund or Provident

Fund or under any scheme of social insurance;



iii) any sum paid to the person employed to defray special expenses entailedon him by the nature of his employment; or

v) any gratuity payable on discharge.11. Employee [Sec. 2 (1)]. ‘Employee’ means any person who is employed

for hire or reward to do any work, skilled or unskilled, manual or clerical,in a scheduled employment in respect of which minimum rates of wageshave been fixed. The term includes an out-worker to whom any articlesor materials are given out by another person to be made up, cleaned,washed, altered, ornamented, finished, repaired, adapted or otherwiseprocessed for sale for the purpose of the trade or business of that otherperson where the process is to be carried out either in the home of theout-worker or in some other premises not being premises under thecontrol and management of that other person. The term also includes anemployee declared to be an employee by the appropriate Government.It does not however include any member of the Armed Forces of theUnion.

3.4.5 Fixation and Revision of Wages (Sec. 3 to 5)

Fixing of minimum rates of wages (Sec.3)The responsibility for fixing the minimum rates of wages is that of theappropriate Government. Sec. 3 provides that the appropriateGovernment:

a) shall fix the minimum rates of wages payable to employees employed inan employment specified in Part I or Part II of the Schedule (reproducedearlier) and in an employment added to either Part by notification in theOfficial Gazette [Sec.3(1)(a)];

b) may, in respect of employees employed in an employment specified inPart II of the Schedule, instead of fixing minimum rates of wages for thewhole State, fix such rates for a part of the State or for any specifiedclass or classes of such employment in the whole State or part thereof[Provison to Sec. 3 (1)(a)];

c) shall review at such intervals not exceeding 5 years, the minimum ratesof wages so fixed and revise the minimum rates if necessary[Sec. 3 (1) (b)].

Minimum number of employees. The appropriate Government mayrefrain from fixing minimum rates of wages in respect of any scheduledemployment in which there are in the whole State less than 1,000 em-ployees engaged in such employment. But if at any time, the appropriateGovernment comes to a finding after an inquiry that the number of em-ployees in any scheduled employment has risen to 1,000 or more, it shallfix minimum rates of wages payable as soon as may be after such find-ings [Sec. 3 (1-A)].



Minimum rates. The appropriate Government may fix—a) a minimum rate of wages for time work (referred to as ‘a minimum time

rate’);b) a minimum rate of wages for piece work (referred to as ‘a minimum

piece rate’);c) a minimum rate of remuneration to apply in the case of such employees

employed on piece work for purpose of securing to such employees aminimum rate of wages on a time work basis (referred to as ‘a guaranteedtime rate’);

d) a minimum rate (whether a time rate or a piece rate) to apply in substitutionfor the minimum rate which would otherwise be applicable, in respect ofovertime work done by employees (referred to as ‘overtime rate’)[Sec. 3 (2)].Different minimum rates. In fixing or revising minimum rates of wages,different minimum rates of wages may be fixed for—

i ) different scheduled employments;ii) different classes of work in the same scheduled employment;iii) adults, adolescents, children and apprentices;iv) different localities [Sec. 3 (3) (a)].

Further in fixing or revising minimum rates of wages under Sec. 3,minimum rates of wages may be fixed by any one or more of the followingwage-periods, namely:

i) by the hour,ii) by the day,iii) by the month, oriv) by such other larger wage-period as may be prescribed. Where such rates are fixed by the day or by the month, the manner of

calculating wages for a month or for a day, as the case may be, may beindicated [Sec. 3 (3)(b)]. Also where any wage-periods have beenfixed under Sec.4 of the Payment of Wages Act, 1936 minimum wagesshall be fixed in accordance therewith [Proviso to Sec. 3 (3) (b)].

Minimum rate of wages (Sec.4).Any minimum rate of wages fixed or revised by the appropriate Govern-ment in respect of scheduled employments under Sec.3 may consist of—

i) a basic rate of wages and a special allowance (hereinafter referred to asthe ‘cost of living allowance’). The rate of cost of living allowance shallbe adjusted at such intervals and in such manner as the appropriateGovernment may direct. The rate-shall accord as nearly as practicablewith the variation in the cost of living index number applicable to suchworkers; or

ii) a basic rate of wages with or without the cost of living allowance, andthe cash value of the concessions in respect of supplies of essential



commodities at concessional rates, where so authorized; iii)an all inclusiverate allowing for the basic rate, the cost of living allowance and the cashvalue of the concessions, if any [Sec. 4 (1)].

The cost of living allowance and the cash value of the concessions inrespect of supplies of essential commodities at concessional rates shallbe computed by the competent authority. The computation shall bedone by the competent authority at such intervals and in accordancewith such directions as may be specified or given by the appropriateGovernment [Sec. 4 (2)].

Procedure for fixing and revising minimum wages (Sec. 5). Sec.5 provides 2 separate modes of procedure for fixing and revising

minimum wages and the primary object of both the procedures is toenable the Government to reach a balanced conclusion with regard tofixation of a minimum wage. In one case a committee [Sec. 5 (1) (a)] isappointed and in the other a notification [Sec. 5 (1) (b)] is made andobjections are invited [Mohan Bros. v. State, A.I.R. (1967) Punj. 491; P.Gangadharan v. State, A.I.R., (1968) Ker. 218].

The provisions of Sec.5 are summed up as follows:In fixing minimum rates of wages in respect of any scheduledemployment for the first time or in revising minimum rates of wages sofixed, the appropriate Government shall follow either of the following 2methods:

a) Appointment of Committees The appropriate Government shallappoint as many committees and sub-committees as it considersnecessary to hold inquiries and advise it in respect of fixation or revisionof minimum rates of wages, as the case may be [Sec. 5 (1) (a)]; or

b) Publication of proposals in the Official Gazette The appropriateGovernment shall, by notification in the Official Gazette, publish itsproposals for the information of persons likely to be affected by thefixation or revision of minimum rates of wages. It shall also specify adate on which the proposals will be taken into consideration. The dateso specified shall not be less than 2 months from the date of the notification[Sec.5 (1) (b)].After considering the advice of the committee or committees[under Sec. 5 (1)(a)] or all representations received by it before thedate specified in the notification [under Sec.5 (1) (b)], the appropriateGovernment shall, by notification in the Official Gazette, fix or revise theminimum rates of wages in respect of each scheduled employment. Thefixation or revision shall come into force on the3 expiry of 3 monthsfrom the date of the issue of notification, unless the notification otherwiseprovides [Sec. 5 (2)]. The power of the Government under Sec.5 (2)to issue notification revising minimum wages includes power to giveretrospective effect to notification [Mizar Govinda Annappa Pai & Sonsv. State of Karnataka, (1986) Lab. I.C. 1555 (Kant.)].



Consultation with Advisory Board. Where the appropriate Governmentproposes to revise the minimum rates of wages by the mode specified inSec. 5 (1) (b), it shall also consult the Advisory Board (constituted underSec. 7)[Proviso to Sec. 5 (2)].

Government not bound to accept the recommendation of the committeeappointed under Sec. 5 (1) (a). A committee appointed under Sec. 5 (1)(a) is only an advisory body and the Government is not bound to acceptits recommendation in every case [Management of All Tea Estates inAssam v. Indian National Trade Union Congress, A.I.R. (1957) S.C.206]. Further any irregularity in the constitution of this committee or aprocedure adopted by it cannot affect the validity of the notification issuedby the appropriate Government under Sec. 5 (1) (b) [Edwards Mills Co.Ltd., Marwar v. State of Ajmer, A.I.R. (1955) S.C. 25]. If no advice isgiven by the committee or if inadequate advice is given, Sec. 5 does notdeprive the appropriate Government of its power and duty to fix or revisethe minimum rates of wages [Tourist Hotel v. State of A.P., (1975) 1L.L.J. 211].

The notification of the Government that employees who are in receipt ofhigher wages than those fixed under the notification should continue toenjoy the same is not warranted by the provisions of the Act. TheGovernment cannot convert a voluntary payment into a compulsorypayment [Bengal Motion Picture Employees’ Union v. Kohinoor PicturesPvt. Ltd. A.I.R. (1964) Cal. 519].

Correction of errors (Sec. 10).

The appropriate Government may, at any time, by notification in the Of-ficial Gazette, correct clerical or arithmetical mistakes in any order fixingor revising minimum rates of wages under the Act, or errors arising thereinfrom any accidental slip or omission [Sec. 10 (1)]. Every such notifica-tion shall, as soon as may be after it is issued, be placed before theAdvisory Board (constituted under Sec. 7) for information [Sec. 10 (2)].

3.4.6 Advisory Board and Central Advisory Board (Sec. 7 to 9 and 29)

Advisory Board (Sec. 7).For the purpose of co-ordinations of the work of committees and subcommittees appointed under Sec.5 and advising the appropriateGovernment generally in the matter of ‘fixing and revising minimum ratesof wages, the appropriate Government shall appoint an Advisory Board(Sec. 7).No procedure is prescribed in the Act for the Advisory Board to function.It can devise its own procedure [State of Rajasthan v. Hari Ram Nathwani,A.I.R. (1976) S.C. 277].Composition of Committees and Advisory Board (Sec. 9) Each ofthe committees, sub-committees and the Advisory Board shall consist ofpersons to be nominated by the appropriate Government representingemployers and employees in the scheduled employment, who shall be



equal in number, and independent persons not exceeding 1/3rd of itstotal number of members. One of the independent persons shall beappointed the Chairman by the appropriate Government.Central Advisory Board (Sec. 8)The Central Government shall appoint a Central Advisory Board:a) or the purpose of advising the Central and State Governments in the

matters of the fixation and revision of minimum rates of wages and othermatters under the Act, and

b) for coordinating the work of the Advisory Boards [Sec. 8 (1)].Composition of the Central Advisory Board. It shall consist of personsnominated by the Central Government representing employers andemployees in the scheduled employments, who shall be equal in number,and independent persons not exceeding 1/3rd of its total number ofmembers. One of the independent persons shall be appointed theChairman of this Board by the Central Government [Sec. 8 (2)].According to Sec. 29, the Central Government may, subject to thecondition of previous publication, by notification in the Official Gazette,make rules prescribing the term of office of the members, the procedureto be followed in the conduct of business, the method of voting, themanner of filling up casual vacancies in membership and the quorumnecessary for the transaction of business of the Central Advisory Board.

3.4.7 Safeguards in Payment of Minimum Wages

Wages in kind (Sec. 11)Minimum wages payable under the Act shall be paid in cash [Sec. 11(1)]. But where it has been the custom to pay wages wholly or partly inkind, the appropriate Government may, by notification in the OfficialGazette, authorize the payment of minimum wages either wholly or partlyin kind [Sec. 11 (2)].The appropriate Government may also by notification in the OfficialGazette authorize the provision of the supply of essential commodities atconcessional rates [Sec. 11 (3)].The cash value of wages in kind 9 under Sec. 11 (2) and of concession inrespect of supplies of essential commodities at concessional ratesauthorized under Sec. 11 (2) and (3) shall be estimated in the prescribedmanner [Sec. 11 (4)].Payment of minimum rate of wages (Sec. 12).Where in respect of any scheduled employment minimum wages havebeen fixed, the employer shall pay to every employee wages at a rate notless than the minimum rate of wages fixed or that class of employees inthe employment. Such wages shall be paid without any deductions exceptas may be authorized. Where the contract rate of wages is higher, thestatutory obligation does not come into play [Sec. 12 (1)].Sec. 12 does not affect the provisions of the Payment of Wages Act,1936 [Sec.2 (2)].



Fixing hours for a normal working day, etc. (Sec. 13)In regard to any scheduled employment where minimum rates of wageshave been fixed, the appropriate Government may:a) fix the number of hours of work which constitute a normal working day,

inclusive of one or more specified intervals;b) provide for a day of rest in every period of 7 days and for payment of

remuneration in respect of such day of rest;c) provide for payment for work on a day of rest at a rate not less than the

overtime rate [Sec. 13 (1)].Provisions of Sec. 13 (1) to apply subject to conditions. In relation to thefollowing classes of employees, the provisions of Sec. 13 (1) shall applyonly to such extent and subject to such conditions as may be prescribed:a) employees engaged on urgent work, or in any emergency which could

not have been foreseen or prevented;b) employees engaged in work in the nature of preparatory or

complementary work which must necessarily be carried on outside thelimits laid down for the general working in the employment concerned;

c) employees whose employment is essentially intermittent;d) employees engaged in any work which for technical reasons has to be

completed before the duty is over;e) employees engaged in work which could not be carried on except ast

times dependent on the irregular action of natural forces [Sec. 13 (2)].

Intermittent employment The employment of an employee is essen-tially intermittent when it is declared to be so by the appropriate Govern-ment. The appropriate Government declares an employment as inter-mittent on the ground that the daily hours of duty of the employee nor-mally include periods of inaction during which the employee may be onduty but is not called upon to display either physical activity or sustainedattention [Sec. 13 (3)].

Rates of overtime (Sec. 14)Where an employee, whose minimum rate of wags is fixed under thisAct, by the hour, by the day or by such Extendeder wage-period as maybe prescribed, works overtime, the employer shall pay him for everyhour or for part of an hour so worked in excess, wages at the rates fixedfor overtime work under the Act or under any law of the appropriateGovernment, whichever is higher [Sec. 14 (1)].The provisions of the Minimum Wages Act, 1948 do not prejudice theoperation of the provisions of Sec. 59 of the factories Act, 1948 in anycase where those provisions are applicable [Sec. 14(2)].Wages of worker who works for less than normal working day [Sec. 15]Some times an employee whose minimum rate of wages has been fixed



by the day may work on any day on which he was employed for a periodless than the requisite number of hours constituting a normal workingday. In that case he is entitled to receive wages in respect of work doneby him on that day as if he had worked for a full normal working dayexcept –1) where his failure to work is caused by his unwillingness to work and not

by omission of the employer to provide him with work and2) in such other cases and circumstances as may be prescribed.Wages for two or more classes of work [Sec. 16]Where an employee does two or more classes of work to each of whicha different minimum rate of wages is applicable, the employer shall payto such employee in respect of the time respectively occupied in eachsuch class of work, wages at not less than the minimum rate in force inrespect of each such class.Minimum time rate wages for piece work [Sec.17]Where an employee is employed on piece work for which minimum timerate and not a minimum piece rate has been fixed under the Act, theemployer shall pay to such employee wages at not less than the minimumtime rate.

3.4.8 Maintenance of registers and records [Sec.18]

Every employer shall maintain registers and records giving particulars ofemployees employed by him, the work performed by them, the wagespaid to them, the receipts given by them and such other particulars asmay be prescribed [Sec. 18(1)]. He shall also keep exhibited notices inthe prescribed form containing prescribed particulars in the prescribedmanner in the factory, workshop or place where the employees in thescheduled Employment may be employed. In the case of out-workers,he shall keep these notices exhibited in such factory, workshop or placeas may be used for giving out-work to them [Sec.18 (2)].The appropriate Government may, by rules made under the Act, providefor the issue of wage books or wage slips to employees employed in anyscheduled Employment in respect of which minimum rates of wages havebeen fixed. It may also prescribe the manner in which entries shall bemade and authenticated in such wage books or wage slips by the employeror his agent [Sec. 18(3)].

3.4.9 Enforcement of the Act [Secs.19 to 21]Inspectors [Sec. 19]The appropriate Government may, by notification in the official Gazetteappoint Inspectors for the purposes of the Act, and define the local limitswithin which they shall exercise their functions [Sec. 19(1)]. The powersand functions of the Inspectors so appointed are almost similar to thoseof the Inspectors appointed under the Payment of Wages Act, 1936.The Inspectors have to see that the provisions of the Minimum Wages



Act are complied with.The words ‘local limits’ in Sec. 19(1) do not exclude appointment ofInspector for the whole of the State [P.N.Dubey v. state of U.P.(1978)F.L.R.334, a case decided under Sec. 8(1) of the Factories Act, 1948].Powers of Inspectors : An Inspector may -a) enter at all reasonable hours, with such assistants as he things fit, any

premises or place where employees are employed or work is given outto out-workers in any scheduled Employment in respect of whichminimum rates of wages have been fixed, for the purpose of examiningany register, record of wages or notices required to be kept or exhibitedby or under the Act or rules made there under, and require the productionthereof for inspection;

b) examine any person whom he finds in any such premises or place andwho, he has reasonable cause to believe, is an employee employed thereinor an employee to whom out-work is given;

c) require any person giving out-work and any out-workers, to give anyinformation, which is in his power to give, with respect to the names andaddresses of the persons to, for and from whom the work is given out orreceived, and with respect to the payments to be made for the work;

d) seize or take copies of such register, record of wages or notices as hemay consider relevant in respect of an offence under the Act which hehas reason to believe has been committed by an employer; and

e) exercise such other powers as may be prescribed [Sec. 19(2)]. Any person required to produce any document or thing or to give any

information by an Inspector under Sec. 19(2) shall be deemed to belegally bound to do so within the meaning of Secs. 175 and 176 of theIndian Penal Code, 1860 [Sec. 19(4)].

Every Inspector shall be deemed to be a public servant within themeaning of the Indian Code, 1860 [Sec. 19(3)].

3.4.10 ClaimsThe appropriate Government may, by notification in the official Gazette,appoint an Authority to hear and decide for any specified area all claimsa) arising out of payment of less than the minimum rates of wages, orb) in respect of payment of remuneration for the days of the rest [under

Sec. 13(1)(b)] or for work done of rest [under Sec. 13(1)(c)]; orc) in respect of wages at the overtime rate [under Sec. 14] to employees

Employment or paid in that area [Sec. 20(1)] Who may be an Authority under the Act? The Authority under theAct may be – i ) any Commissioner for Workmen’s Compensation

or ii) any officer of the Central Government exercising functions as a Labour

Commissioner for any region



oriii) any officer of the State Government not below the rank of a Labour

Commissioneror

iv) any other officer with experience as a Judge of the Civil Court or as aStipendiary Magistrate [Sec. 20(1)]

Who may apply? Where an employee has any claim, any of the followingpersons may apply to the Authority for hearing and deciding the case:i) the employee himself

orii) any legal practitioner

oriii) any official of a registered Trade Union authorized in writing to act on his

behalfor

iv) any Inspectoror

v) any person acting with the permission of the Authority [Sec. 20(2)].When an application under Sec. 20(2) is filed by a person other than theemployee, the Authority must inquire into the competence of such a personto file the same [A.P.State Handloom Weavers’ Co-op. Society v.Authority under the Minimum Wages Act, (1966), 1 L.L.N. 934 (A.P.)].The plea that an Inspector filing an application under Sec. 20(2) is notvalidly appointed is not maintainable when it is not shown that anysubstantial injury or failure of justice has resulted thereby [Ajanta Talkies, Allahabad v. Dy. Labour Commr., (1979) Lab. I.C. 659].Every application under Sec. 20(2) shall be presented within 6 monthsfrom the date on which the minimum wages or other amount becamepayable [Proviso 1 to Sec. 20(2)]. it may be admitted after 6 monthswhen the applicant satisfies the Authority that he had sufficient cause fornot making the application within such period [Proviso 2 to Sec. 20(2)].Amount of compensation, When any application is entertained, theAuthority shall hear the applicant and the employer or give them anopportunity of being heard. After such further inquiry, if any, as it mayconsider necessary, the Authority may direct – i) in the case of a claim arising out of payment of less than the minimum

rates of wages, the payment to the employee of the amount by which theminimum wages payable to him exceed the amount actually paid, togetherwith the payment of such compensation as the Authority may think fit,not exceeding 10 times the amount of such excess;

ii) in any other case, the payment of the amount due to the employee,together with the payment of such compensation as the Authority maythink fit, not exceeding Rs.10.



The Authority may direct payment of such compensation in cases wherethe excess or the amount due is paid by the employer to the employeebefore the disposal of the application. The discretion of the Authorityunder Sec. 20(3) to award compensation is without prejudice to anyother penalty to which the employer may be liable under the Act,[Sec. 20(3)].Any amount directed to be paid under Sec. 20 may be recovered by theAuthority as if it were a fine imposed by the Authority as a magistrate[Sec.20 (5)],Every direction of the Authority under Sec. 20 shall be final [Sec. 20(6).Malicious or vexatious application. If the authority hearing anyapplication is a satisfied that it was either malicious or vexatious, it maydirect that a penalty not exceeding Rs. 50 be paid to the employer by theperson presenting the application [Sec. 20(4)].Powers of the Authority. The Authority shall have all the powers of aCivil Court under the Code of Civil Procedure, 1908, for the purpose of i) taking evidence,ii) enforcing the attendance of witnesses andiii) compelling the production of documents.

Every such Authority shall be deemed to be a Civil court for all thepurpose of Sec. 195 and Chapter XXXV of the Code of CriminalProcedure, 1898 (now 1973) [Sec.20(7)]Single application in respect of a number of employees. (Sec. 21).Subject to such rules as may be prescribed, a single application may bepresented under Sec. 20 on behalf or in respect of any number ofemployees employment in respect of which minimum rates of wageshave been fixed. In such cases, the maximum compensation which maybe awarded under Sec. 20(3) shall not exceed 10 times the aggregateamount of such excess or Rs.10 per head, as the case may be[Sec.21(1)].

The Authority may deal with any number of separate pending applicationspresented under Sec. 20 in respect of employees in the scheduledemployment (in respect of which minimum rates of wages have beenfixed), as a single application presented under Sec. 21(1) and theprovisions of sec. 21(1) shall apply accordingly [Sec.21 (1) and theprovisions of Sec. 21 (1) shall apply accordingly [Sec. 21(2)].

3.4.11 Offences and Penalties

Penalties for certain offences [Sec. 22]Any employer who -a) pays to any employee less than the minimum rates of wages fixed for that

employee’s class of work, or less than the amount due to him under theprovisions of the Act



orb) contravenes any rule or order made under Sec. 13 shall be punishable

with imprisonment for a term which may extend to 6 months, or with finewhich may extend to Rs500 or with both [Sec.22]

In imposing any fine for an offence under Sec. 22, the Court shall takeinto consideration the amount of any compensation already awardedagainst the accused in any proceedings taken under Sec. 20 (Proviso toSec. 22)General provision for the punishment of other offences [Sec.22A]Any employer who contravenes any provision of the Act or of any rule ororder made there under shall, if no other penalty is provided for, suchcontravention by the act, be punishable with fine which may extend toRs.500.Cognizance of offences [Sec.22B]No court shall take cognizance of a complaint against any person for anoffence- a) involving payment of less than the minimum wages unless an application

in respect of the facts constituting such offence has been duly presentedunder Sec. 20 and granted and the appropriate Government or an officerauthorized by it in this behalf has sanctioned the making of the complaint;

b) involving contravention of any rule or order made under Sec.13 orsec.22A except on a complaint made by, or with the sanction of, anInspector [Sec.22B(1)]Further, no court shall take cognizance of an offence –

a) under Sec. 22 unless complaint thereof is made within 1 month of thegrant of sanction under Sec. 22B

b) under Sec.22A unless complaint thereof is made within 6 months of thedate on which the offence is alleged to have been committed [Sec.22B(2)]

Offences by companies [Sec.22C] If the person committing any offence under the Act is a company, everyperson who, at the time the offence was committed, was in charge of,and was responsible to, the company for the conduct of the business ofthe company as well as the company shall be deemed to be guilty of theoffence and shall be liable to be proceeded against and punishedaccordingly [Sec.22C (1)]. Such person shall not be liable to anypunishment provided in the Act if he proves that the offence was committedwithout his knowledge or that he exercised all due diligence to preventthe commission of such offence [Proviso to Sec. 22-C(1)].Further where in offence under the Act has been committed by a companyand it is proved that the offence has been committed with the consent orconnivance of, or is attributable to any neglect on the part of any director,manager, secretary or other officer of the company, such director, manager,secretary or other officer of the company shall also be deemed to be



guilty of that offence and shall be liable to be proceeded against andpunished accordingly [Sec. 22C (2)].For the purposes of Sec. 22Ca) ‘company’ means any body corporate and includes a firm or other

association of individuals andb) ‘director’ in relation to a firm means a partner in the firm [Explanation to

Sec. 22C).3.4.12 MiscellaneousPayment of un-disbursed amounts due to employees [Sec. 22D]All amounts payable by an employer to an employee as the amount ofminimum wages or otherwise due to the employee under the Act shall dedeposited with the prescribed authority if such amounts could not or cannotbe paid to the employee:i) on account of his death before payment orii) on account of his whereabouts not being known The prescribed authority shall deal with the money so deposited in such

manner as may be prescribed.Protection against the attachment of assets of an employer withthe Government [Sec.22E]Any amount deposited with the appropriate Government by an employerto secure the due performance of a contract with that Government andother amount due to such employer from that Government in respect ofsuch contract shall not be liable to attachment under any decree or orderof any court in respect of any debt or liability incurred by the employerother than any debt or liability incurred by the employer towards anyemployee employed in connection with the contract aforesaid.Application of Payment of Wages Act, 1938 to scheduled employments[Sec. 22F] Not withstanding anything contained in the Payment of Wages Act, 1936the appropriate Government may, be notification in the official Gazette,direct that all or any of the provisions of the said Act shall apply to wagespayable to employees in such scheduled employments as may be specifiedin the notification [Sec. 22-F(1)].Where all or any of the provision of the payment of Wages Act, 1938 areapplied to wages payable to employees in any scheduled employmentunder Sec. 22F (1).the Inspector appointed under the Minimum WagesAct shall be deemed to be Inspector for the purpose of enforcement ofthe provisions so applied within the local limits of his jurisdiction [Sec.22-F(2)].Exemption of the employer from liability in certain cases [Sec.23]Where an employer is charged with an offence against this act, he shallbe excused from liability if he can show that some other person wasresponsible for the offence and that –



a) he has used due diligence to enforce the execution of the Act; andb) the said other person committed the offence in question without his

knowledge consent or connivance.In such a case, the other person shall be convicted of the offence andshall be liable to the punishment as if he was the employer and the employershall be discharged [Sec.23].In seeking to prove as aforesaid, the employer may be examined on oath,and the evidence of the employer or his witness, if any, shall be subjectto cross-examination by or on behalf of the person whom the employercharges as the actual o ffender and by the prosecut ion[proviso to Sec. 23]Bar of suits [Sec.24]No court shall entertain any suit for the recovery of wages in so far as thesum so claimed –a) forms the subject of an application under Sec. 20 which has been

presented by or on behalf of the plaintiff onb) has formed the subject of a direction under Sec. 20 in favour of the

plaintiffor

c) has been adjudged in any proceeding under Sec. 20 not to be due to theplaintiffor

d) could have been recovered by an application under Sec. 20.Contracting out (Sec.25)Any contract or agreement, whether made before or after thecommencement of the Act, whereby an employee either relinquishes orreduces his right to a minimum rate of wages or any privilege or concessionaccruing to him under the Act shall be null and void in so far as it purportsto reduce the minimum rate of wages fixed under the Act.Exemptions and exceptions (Sec. 26)The appropriate Government may-1) direct that the provisions of this Act shall not apply in relation to the

wages payable to disabled employees [Sec. 26(1)]2) exempt by notification in the Official Gazette some specified scheduled

employments from the application of some or all of the provisions of theAct. [Sec.26 (2)].

3) direct that the provisions of the Act shall not apply to the wages payableby an employer to a member of his family who is living with him and isdependent on his [Sec.26(3)]. A member of the employer’s family inthis regard is deemed to include his or her spouse or child or parent orbrother or sister [Explanation to Sec. 26(3)].



The appropriate Government may, having regard to the terms andconditions of service applicable to any class of employees in a scheduledemployment generally or in a scheduled employment in a local area,direct, by notification in the Official Gazette, that the provisions of thisAct or any of them shall not apply in relation to such employees, if theyare in receipt of wages exceeding the prescribed limit [Sec.26 (2-A)].

Power of the appropriate Government to add to schedule (Sec. 27)If the appropriate Government intends to add to the Schedule anyemployment in respect of which it is of opinion that minimum rates ofwages should be fixed, it must give by notification in the Official Gazettenot less than 3 months’ notice of its intention so to do. After that theappropriate Government may, by like notification in the Official Gazette,add to the Schedule the employments in respect of which it is of opinionthat minimum rates of wages should be fixed.Power of the Central Government to make rules [Secs. 29 and 30A]The Central Government may, subject to the condition of previouspublication, by notification in the Official Gazette, make rules prescribingthe term of office of the members, the procedure to be followed in theconduct of business, the method of voting, the manner of filling up casualvacancies in membership and the quorum necessary for the transactionof business of the Central Advisory Board [Sec. 29]Rules to be laid before Parliament [Sec. 30A]. Every rule made by theCentral Government under this act shall be laid as soon as may be afterit is made before each House of Parliament while it is in session for atotal period of30 days. This period of 30 days may be comprised in onesession or in 2 or more successive sessions. If both Houses agree inmaking any modification in the rule, the rule shall thereafter have effectonly in the modified form. If both Houses agree that the rule should notbe made, the rule shall thereafter have no effect. But any such modificationor annulment shall be without prejudice to the validity of anythingpreviously done under that rule.Power of the appropriate Government to make rules [Sec. 30]The appropriate Government may, subject to the condition of previouspublication, by notification in the Official Gazette, make rules for carryingout the purpose of the act.Objective Questions :1. _______________ means a person who has completed his 14th year

of age but not completed his 18th year.a. child b. adolescent c. person d. adult

2. ‘Child’ means a person who has not completed his 14th year of age.a. True b. False



Short Questions :3. Define the Minimum Wages.4. What are the roles played by the advisory boards in wage fixation?5. How are claims processed in the Minimum Wages Act?Extended Questions :6. Discuss about the procedures in fixation and revision of minimum wages.7. Explain how the Payment of Minimum Wages can be safe guarded in

the Minimum Wages Act.8. Discuss about the enforcement procedures in the Minimum Wages Act.SummaryPayment of the Minimum Wages Act is exclusively enacted to protect theinterest and rights of the workers who work in the very lowest class. ThisAct will encompass the workers to lead their life with guaranteedassurance, given by the employer by the enactment of the government.The records and its maintenance will be the safest documents for thebasic claims for the workers. The monitoring is possible by theenforcement wing consisting of Inspectors appointed for enforcing theMinimum Wages.The Claims for wrong deductions can be reclaimed the provisions of theMinimum Wages Act.

3.5 The Industrial Disputs Act, 1947

3.5.1 Introduction of the Industrial Disputes Act, 1947

The first enactment dealing with the settlement of industrial disputes wasthe Employers’ and Workmen’s (Disputes) Act, 1860. This Act weighedmuch against the workers and was therefore replaced by the TradeDisputes Act, 1929. The Act of 1929 contained special provisionsregarding strikes in public utility services and general strikes affecting thecommunity as a whole. The main purpose of the Act, however, was toprovide a conciliation machinery to bring about peaceful settlement ofindustrial disputes. The Whitely Commission made in this regard theperceptive observation that the attempt to deal with unrest must beginrather with the creation of an atmosphere unfavorable to disputes thanwith machinery for their settlement. The Act came into force on the first day of April, 1947 (Sec. 1 (3)].


After studying this unit you should be able to:• Understand the definitions in Industrial Disputes Act.• Determine the objectives of the Act.• Know the definitions of Industry before amendments and after

amendments.



• Study the different causes for Industrial Disputes.• Know the meaning of unfair labour practices.• Reference of certain Individual Disputes to Grievance Settlement

Authorities.• Procedure for Settlement of Industrial Disputes and Authorities under

the Act.• Know the Conciliation Machinery.

3.5.3 Object of the Act:

The main objects of the Act are:-1) to secure industrial peace:a) by preventing and settling industrial disputes between the employers and

workmen.b) by securing and preserving amity and good relations between the

employers and workmen through an Internal Works Committee, andc) by promoting good relations through an external machinery of

conciliation, Courts of Inquiry, Labour Courts, Industrial Tribunals andNational Tribunals.

2) to ameliorate the condition of workmen in industry:a) by redressal of grievances of workmen through a statutory machinery,

andb) by providing job security [S.N. Ravi v. Vishwanath Lal, A.I.R. (1960)

Pat. 10].Extent of the ActThe Act extends to the whole of the India [Sec. 1 (2)]. It applies to allindustries whether they be carried on by private owners or by theGovernment [Western India Automobile Assn. v. Industrial Tribunal,Bombay, A.I.R. (1949) F.C. 111].The Act has been amended from time to time. The latest amendment tothe Act was made in August, 1984.

3.5.4 Definition of Industry

In Bangalore Water Supply & Sewerage Board v. A. Rajappa, A.I.R.,(1978) S.C. 548, a judgment of far-reaching importance, a seven-judgeBench of the Supreme Court gave a wide amplitude to the meaning of theterm ‘industry’ so as to bring within its scope clubs, educational andresearch institutions and charitable projects. The issue before the Courtwas whether the activities of institutions ranging from the Bangalore WaterSupply and Sewerage Board to the Gandhi Ashram were such as tocome within the scope of the term ‘industry’ as defined in Sec. 2 (j) ofthe Industrial Disputes Act, 1947.While defining the scope of the term ‘industry’ (in Sec. 2 (i), the SupremeCourt overruled the decisions given earlier in the cases relating to the



Safdarjung Hospital, Gymkhana Club, Delhi University and DhanrajgiriHospital, and observed:“Any systematic activity organized or arranged in a manner inwhich trade or business was generally organized or arranged wouldbe an industry even if it proceeded from charitable motives. Itwas the nature of the activity that had to be considered and it wasupon the application of that test that even the State’s inalienablefunctions fell within the definition of ‘industry”.The Amendment Act of 1982 has re-defined the term ‘industry’ in thelight of the observations of the Supreme Court in the case of BangaloreWater Supply & Sewerage Board, etc. v. A. Rajappa, (1978) Lab. I.C.467. The definition has now been made wider and more specific.According to new Sec. 2 (i) as substituted by the Amendment Act of1982, ‘industry’ means any systematic activity carried on by co-operationbetween an employer and his workmen. The workmen may be employedby the employer directly or by or through any agency, including acontractor. The employment should, however, be for the production,supply or distribution of goods or services with a view to satisfy humanwants or wishes (not being wants or wishes which are merely spiritual orreligious in nature). It makes no difference whether or not:i) any capital has been invested for the purpose of carrying on the activity

referred to aboveor

ii) such activity is carried on with a motive to make any gain or profit.What is included in the term ‘industry’? ‘Industry includes:

a) any activity of the Dock Labour Board established under Sec. 5-A ofthe Dock Workers (Regulation of Employment) Act, 1948;

b) any activity relating to the promotion of sales or business or both carriedon by an establishment.What is not included in the term ‘industry’?‘Industry does not include:

1) any agricultural operation except where such agricultural operation iscarried on in an integrated manner with any other systematic activity andsuch other activity is the predominant oneor‘Agricultural operation’ does not include any activity carried on in aplantation as defined in Sec. 2 (f) of the Plantation Labour Act, 1951.

2) Hospitals or dispensariesor

3) Educational, scientific, research or training institutions;4) Institutions owned or managed by organizations wholly or substantially

engaged in any charitable, social or philanthropic service; or



5) Khadi or village industries; orAccording to new clause as introduced in Sec. 2 by the Amendment Actof 1982, ‘khadi’ has the meaning assigned to it in Sec. 2 (d) of the Khadiand Village Industries Commission Act, 1956.

6) any activity of the Government relatable to the sovereign functions of theGovernment including all the activities carried on by the departments ofthe Central Government dealing with defense research, atomic energyand spaceor

7) any domestic serviceor

8) any activity, being a profession practiced by an individual or body ofindividuals, if the number of persons employed in relation to suchprofession is less than 10or

9) any activity, being an activity carried on by a co-operative society or aclub or any other like body of individuals, if the number of personsemployed in relation to such activity is less than 10.

3.5.5 Definition of industry before the amendment in 1982.

The definition of the term ‘industry’ has been amended by theAmendment Act of 1982 but the Amendment has not yet been broughtinto force. Prior to amendment in 1982, the definition of the term ‘industry’(which still continues to be effective) was as follows:“Industry” means any business, trade, undertaking, manufacture or callingof employees and includes any calling, service, employment, handicraft,or industrial occupation or avocation of workmen.’

3.5.6 What is an Industrial Dispute?

‘An Industrial dispute’ means any dispute or difference between:i) employers and employees,ii) employers and workmen

oriii) workmen and workmen, which is connected with

(a) the employment or non-employment(b) the terms of employment or(c) the conditions of labour of any person.

Real and substantial difference. The term industrial dispute connotesa real and substantial difference having some element of persistency andcontinuity till resolved and is likely, if not resolved, to endanger theindustrial peace of the undertaking or the community. When parties are



at variance and the dispute or difference is connected with employmentor non-employment or the terms of employment or with the conditions oflabour, there comes into existence an industrial dispute [Shambhu NathGoyal v. Bank of Baroda, (1978) 2 S.C.C. 353]. The expression ‘termsof employment’ would ordinarily include only the contractual terms andconditions but those terms which are understood and applied by theparties in practice or habitually or by common consent without ever beingincorporated in the contract are also included [Workmen v. HindustanLever Ltd., (1984) 1 S.C.C. 392].Three ingredients of industrial dispute. In the ordinary language anindustrial dispute is implied to mean a dispute between the workmen andthe management. In Standard Vacuum refining Co. of India Ltd. v. TheirWorkmen, A.I.R. (1960) S.C.948, it was held that a dispute as to whetherthe system of engaging contract labour prevailing in certain sections of anindustrial concern should be discontinued and the contractors labourersshould be made ‘workmen’ of the company is an ‘industrial dispute’, if itis taken up and sponsored by the regular workmen of the concern, it wasobserved in this case. :“The definition of the ‘Industrial dispute’ in Sec. 2(k) of the IndustrialDispute Act, 1947 has three ingredients, and if all three ingredients aresatisfied, the dispute raised is an ‘Industrial dispute’ which could validlybe referred under Sec. 10 to a Tribunal for adjudication. These threeingredients are –a) there should be real and substantial dispute or difference;b) the dispute or difference should be between employer and his workmen;

andc) the dispute or difference must be connected with the employment or

non-employment or terms of employment, or with the conditions of labourof any persons’.

Limitations of definition: The definition of ‘industrial dispute’contains two limitations:First, the adjective ‘industrial’ relates the dispute to an industry asdefined in the Act, andSecondly the definition expressly states that not disputes anddifferences of all sorts but only those which bear upon the relationship ofemployers and workmen and the terms of employment or non-employmentand the conditions of labour are contemplated.Test of industrial dispute: A dispute is an ‘industrial dispute’ onlywhen it arises in any activity which is an ‘industry’ as defined in Sec. 2(1)of the Act. [D.N.Banerji v. P.R.Mukherjee, A.I.,R.(1963) SC 58]. Thereal test whether a dispute is an industrial dispute or not is whether themajority or a large number of workmen are involved in the dispute. Anindividual dispute between a employer and one of his workmen is byitself not an industrial dispute which can be referred to under Sec. 10.But such dispute may become an industrial dispute, provided that thecause of the particular workman concerned is taken up by a majority of



workmen in the particular industrial establishment, or by any union ofsuch workmen [Express Newspapers (pvt) Ltd. v. First Labour Court,A.I.R. (1959) Cal. 265). It makes no difference even if the union whichtakes up the cause of the dismissed workman itself comes into existenceafter the date of dismissal and the dismissed workman joins the uniontherafter; the dispute in such a case would be a valid industrial dispute[Workmen of Jamadoba Collery of Tata Iron & Steel Co. v. JamadobaColliery of Tata Iron & Steel Co. (1967) 2 L.L.J. 622]. But where thecause of a workman is espoused by a union which has absolutely nothingto do with the establishment from which the workman comes, it is not anindustrial dispute [Motor & Machinery Mfrs. v. Industrial Tribunal, (1963)I.L.L.J. 222].Individual and collective disputesThe industrial disputes may be (1) individual disputes, or (2) collectivedisputes.Sec.2A provides that where any employer discharges, dismisses,retrenches or otherwise terminates the services of an individual workmanany dispute or difference between that workman and his employerconnected with or arising out of, such discharge, dismissal retrenchmentor termination shall be deemed to be an industrial dispute even if no otherworkman nor any union of workmen is a party to the dispute.A collective dispute may relate to any of the following matters:a) Wages, bonus, profit-sharing, gratuity compensatory and other

allowances.b) Hours of work leave with wages, holidaysc) Rules of discipline, retrenchment of workmen, closure of establishment,

rationalization.All collective disputes are industrial disputes.

3.5.7 Definitions

Appropriate Government [Sec. 2 (a)] ‘Appropriate Government’means the Central Government in relation to any industrial disputeconcerning –

1) any industry carried on (i) by or under the authority of the CentralGovernment or (ii) by a railway company or (iii) concerning any suchcontrolled industry as may be specified in this behalf by the CentralGovernment.

2)(a) a Dock Labour Board established under Sec. 5A of the Dock Workers

(Regulation of Employment]Act, 1948or

b) the Industrial Finance Corporation of India established under Sec. 3 ofthe Industrial Finance Corporation Act, 1948



orc) the Employees’ state Insurance Corporation established under Sec. 3

of the Employees‘ State Insurance Act, 1948or

d) the Board of Trustees constituted under Sec. 3A of the Coal MinesProvident Fund and Miscellaneous Provisions Act, 1948or

e) the Central Board of Trustees and state Boards of Trustees constitutedunder Sec. 5A and sec. 5B respectively, of the Employees’ ProvidentFunds and Miscellaneous Provisions act, 1952or

f) the ‘Indian Airlines’ and ‘Air India’ Corporations established under Sec.3 of the Air Corporations Act, 1952or

g) the Life Insurance Corporation of India established under Sec. 3 of theLife Insurance Corporation Act, 1956or

h) the Oil and Natural Gas Commission established under Sec. 3 of the Oiland Natural Gas Commission Act, 1959or

i) the deposit Insurance and Credit Guarantee Corporation establishedunder Sec. 3 of the Deposit Insurance and credit Guarantee Corporationact, 1961or

j) the Central Warehousing Corporation established under Sec. 3 of theWarehousing Corporations act, 1962or

k) the Unit Trust of India established under Sec. 3 of the Unit Trust of IndiaAct, 1963,

l) the Food Corporation of India established under Sec. 3 or a Board ofManagement established for 2 or more contiguous States under Sec. 16of the Food Corporation Act, 1964or

m) the International Airports Authority of India constituted under Sec. 3 ofthe International Airports Authority of India Act, 1971or

n) a Regional Rural Bank established under Sec. 3 of the Regional RuralBanks act, 1976or

o) the Export Credit and Guarantee Corporation Limitedor

p) the Industrial Reconstruction Bank of India



orq) the Banking Service Commission established under Sec. 3 of the Banking

service Commission Act, 1975or

r) a banking or an Insurance Companyor

s) a mine, an oilfield, a Cantonment Board or a major port.In relation to any other industrial dispute, the ‘appropriate Government’means the State Government. In case of a Union Territory, there is nodifference between the State Government and the Central Government(National Bldgs. Construction Corpn. Ltd. New Delhi, v. M.K.Jain (1981)Lab. I.C. 62]. 2. Average pay [Sec. 2 (aaa)]. It means the average of the wages payable

to a workman:i) in the case of a monthly paid workman, in the 3 complete calendar months.ii) in the case of a weekly paid workman, in the 4 complete weeks andiii) in the case of a daily paid workman, in the 12 full working days. This period of 3 months, 4 weeks and 12 working days must precedethe date on which the average pay becomes payable to the workman,provided he had worked during this period as the case may be. Wheresuch calculation cannot be made, the average pay shall be calculated asthe average of the wages payable to the workman during the period heactually worked.3. Award [Sec. 2 (b)]. It means an interim or a final determination of any

industrial dispute or of any question relating thereto by any Labour Court,Industrial Court, Industrial Tribunal or National Tribunal. It also includesan arbitration award made under Sec. 10A.

4. Board [Sec. 2 (c)]. ‘Board’ means a Board of Conciliation constitutedunder the act.

5. Closure [Sec. 2 (cc)]. It means the permanent closing down of a placeof employment or part thereof.

6. Conciliation officer [Sec. 2(d)]. ‘Conciliation officer’ means aconciliation officer appointed under the Act.

7. Conciliation proceeding [Sec. 2(e)]. It means any proceeding held bya conciliation officer or Board of Conciliation under the Act.

8. Controlled industry [Sec. 2(ee)]. It means any industry the control ofwhich by the Union has been declared by any Central Act to be expedientin the public interest.

9. Court [Sec. 2 (f). It means a Court if Inquiry constituted under the Act.10. Employer [Sec. 2 (g)]. ‘Employer’ in relation to an industry carried on

by or under the authority of any department of the Central Governmentor a State Government means the authority prescribed in this behalf.



Where no authority is prescribed, the ‘employer’ means the head of thedepartment carrying on the industry. But in relation to an industry carriedon by or on behalf of a local authority. ‘Employer’ means the chiefexecutive officer of the authority.This definition of ‘employer’ is neither exhaustive nor conclusive. itextends to all industrial undertakings and not merely to those run byGovernments or local authorities [Bombay province v. Western IndiaAutomobile Assn., A.I.R. (1949) Bom. 141]In Sholapur Spg. & Wvg. Co. v. Maruf, (1958) 2 L.L.J. 123, it washeld that the term ‘employer’ includes among others, an agent of anemployer, general manager, director and occupier of a mill.

11. Executive and office bearer in relation to a trade union [Sec. 2(gg) and Sec. 2 (iii). ‘Executive’ in relation to a trade union means thebody, by whatever name called, to which the management of the affairsof the trade union is entrusted [Sec. 2 (gg) ‘Office bearer’ in relation toa trade union, includes any member of the executive thereof, but doesnot include an auditor [Sec.2(iii)]

12. Independent person [Sec. 2 (i)]. A person shall be deemed to be‘independent’ for the purpose of his appointment as the Chairman orother member of Board of Conciliation, court of Inquiry or IndustrialTribunal if he is unconnected with the Industrial dispute referred to suchBoard of Conciliation, Court of Inquiry or Industrial Tribunal or withany industry directly affected by such dispute. No person shall cease tobe independent by reason only of the fact that he is a shareholder of anincorporated company which is connected with, or likely to be affectedby, such industrial dispute; but in such a case, he shall disclose to theappropriate Government the nature and extent of the shares held by himin such company.

13. Industrial establishment or undertaking [Sec. 2(ka)]. It means anestablishment or undertaking in which industry is carried on. Some timesseveral activities maybe carried on in an establishment or undertakingand only one or some of such activities is or is an industry or industries.

a) In such a case if any unit of such establishment or undertaking carryingon any activity, being an industry, is severable from the other unit or unitsof such establishment or undertaking, such unit shall be deemed to be aseparate industrial establishment or undertaking.

b) If the predominant activity or each of the predominant activities carriedon in such establishment or undertaking or any unit thereof is an industryand the other activity or each of the other activities carried on in suchestablishment or undertaking or unit thereof is not severable from and is,for the purpose of carrying on, or aiding the carrying on of, suchpredominant activity or activities, the entire establishment or undertakingor, as the case may be, unit thereof shall be deemed to be an industrialestablishment or undertaking.

14. Labour Court [Sec. 2 (kkb)]. It means a Labour Court constitutedunder Sec.7



15. Lay off [Sec.2 (kkk). ‘Lay off’ means the failure, refusal or inability ofan employer to give employment to a workman(a) whose name is borneon the muster-rolls of his industrial establishment, and (b) who has notbeen retrenched. The failure, refusal, or inability to give employmentmay be due to:

1) shortage of coal, power or raw materialsor

2) the accumulation of stocksor

3) the breakdown of machineryor

4) natural calamity or for any other connected reasons Essentials of lay off. The essentials of a ‘lay-off ‘are as follows:a) There must be failure or refusal or inability of the employer to continue

employees in his employment.b) The employees laid off must be on the muster-rolls of the establishment

on the day of lay-off.c) The failure, refusal or inability to give employment may be due to

shortage of raw materials or accumulation of stocks or breakdown ofmachinery or natural calamity or some other reason.

d) The employees must not have been retrenched16. Lock-out [Sec. 2(i). It means the temporary closing of a place of

employment, or the suspension of work, or the refusal by an employerto continue to employ any number of persons employed by him. Theword ‘temporary’ was added to the definition by the Amendment Act of1982.

Essentials of a lock-out. The essentials of a lack-out are as follows:a) There is a temporary closing of the place of employment, or suspension

or withholding of the work by the employer in some form,b) There is an element of demands for which the place of employment is

locked-out or closed.c) There is an intention to re-employ the workers if they accept the demands.Lock out is employer’s weapon. In Karibetta Estate v. Rajamanickam,A.I.R. (1960) S.C.893, the Supreme Court observed:“Lock out can be described as the antithesis of a strike. Just as a strikeis a weapon available to the employees for enforcing their industrialdemands, a lock out is a weapon available to the employer to persuadeby a coercive process the employees to see his point of view to accepthis demands.In a tussle between employees and an employer, whereas, ‘strike’ is theweapon of the employees. ‘lock out’ is the corresponding weapon in the



armory of the employer. If the employer shuts down his place of businessas a means of reprisal or as an instrument of coercion or as a mode ofexerting pressure on the employees, or generally speaking, when his act iswhat may be called an act of belligerency, there would be a lock-out [SriRamachandran Spg. Mills v. State of Madras, A.I.R. (1956) Mad. 241].Difference between lock-out and lay-off. 1) Under lock-out theemployer refuses to give employment because of closing of a place ofemployment or suspension of work. Under lay-off the employer refusesto give employment because of shortage of coal, power or raw materialsor the accumulation of stocks or the breakdown of machinery or naturalcalamity or for any other reason to give employment.2) Lock-out is resorted to by the employer to coerce or pressurize the

workmen to accept his demands; lay-off is for trade reasons beyond thecontrol of the employer.

3) Lock-out is due to an industrial dispute and continues during the periodof dispute; lay-off is not concerned with a dispute with the workmen.

Difference between lock-out and closure. Lock-out and closure ofa business are often confused. This is because cessation of work iscommon to both.Closure is a fundamental right and if it is not a lock-out, the workerscannot grudge [J.K. Hostery Factory v. Labour Appellate Tribunal, A.I.R.(1956) All. 498]. The State cannot compel an employer to carry on hisbusiness because several employees may be thrown out of employmentif it is closed. The grounds for closure of a business may be actual lossor apprehended loss. It may also be disinclination to run the risk ofrunning the business [Indian Metal & Metallurgical Corpn. v. IndustrialTribunal, Madras, 3 F. J.R. 420, High Court, Madras]. The points ofdifference between a lock-out and closure are as follows:1) In the case of lock-out it is only the place of business which is closed

(and not the business itself), while in the case of closure of a business notonly the place of business but the business itself is closed [ExpressNewspapers (Pvt.) Ltd. v. Their Workmen, A.I.R. (1963) S.C. 569].The closure of a business indicates the final and irrevocable terminationof the business itself. Lock-out, on the other hand, indicates the closureof the place of business or the place of employment and not the closureof the business itself.

2) Lock-out is a weapon of coercion in the hands of employer; closure isgenerally for trade reasons.

3) In closure there is severance of employment relationship whereas in lock-out there is no severance but only suspension of such relationship.

4) A lock-out is caused by the existence or apprehension of an industrialdispute whereas a closure need not be in consequence of an industrialdispute.



17. National Tribunal [Sec. 2 (ii)]. It means a National Industrial Tribunalconstituted under Sec. 7-B.

18. Public utility service [Sec. 2 (n)]. It means:i) any railway service or any transport service for the carriage of passengers

or goods by air;ia) any service in, or in connection with the working of, any major port or

dock;ii) any section of an industrial establishment, on the working of which the

safety of the establishment or the workmen employed therein depends;iii) any postal, telegraph, or telephone service;iv) any industry which supplies power, light or water to the public;v) any system of public conservancy or sanitation;vi) any industry specified in the First Schedule.The appropriate Government may, if satisfied that public emergency orinterest so requires, by notification in the Official Gazette, declare anyindustry specified in the First Schedule to be a public utility service forthe purposes of the Industrial Disputes Act for such period as may bespecified in the notification. The period so specified shall not, in the firstinstance, exceed 6 months. But it may, by a like notification, be extendedfrom time to time by any period not exceeding 6 months at any time if inthe opinion of the appropriate Government, public emergency or publicinterest requires such extension. The First Schedule is reproduced below.The First Schedule [Sec. 2 (n) (vi)]Industries which may be declared as the public utility services underSec.2 (n) (vi).1. Transport (other than railways) for the carriage of passengers or goods

by land or water2. Banking3. Cement4. Coal5. Cotton Textiles6. Foodstuffs7. Iron and Steel8. Defense establishments9. Service in hospitals and dispensaries10. Fire Brigade Service11. India Government Mints12. India Security Press13. Copper mining14. Lead mining



15. Zink mining16. Iron ore mining17. Service in any oilfiel18. Service in uranium industry19. Pyrities mining industry20. Security Paper Mill, Hoshangabad21. Service in Bank Note Press, Dewas22. Phosporite mining23. Magnesite mining24. Currency Note Press25. Manufacture of production of mineral oil (crude oil), motor and aviation

spirit, diesel oil, kerosene oil, fuel oil, diverse hydrocarbon oils and theirblends including synthetic fuels, lubricating oils and the like

26. Service in the International Airports Authority of India19. Retrenchment [Sec. 2(oo)]. It means ‘to end, conclude, or cease’.

The term as used in the Industrial Disputes Act means the termination bythe employer of the service of a workman for any reason whatsoever,otherwise than as punishment inflicted by way of disciplinary action[Ramachandra Vittuji Kothare v. Industrial Court, Nagpur, (1985) Lab.I.C. 1787 (Bom)]‘Retrenchment however does not include:

a) Voluntary retirement of the workman; orb) Retirement of the workman on reaching the age of superannuation if the

contract of employment between the employer and the workmanconcerned contains a stipulation in that behalf; or

c) termination of the service of the workman as a result of the non-renewalof the contract of employment between the employer and the workmanconcerned on its expiry or of such contract being terminated under astipulation in that behalf contained therein; or

d) Termination of the service of a workman on the ground of continuedill-health.

Difference between the ‘retrenchment’ and the closure’. The importantpoints of difference between ‘retrenchment’ and ‘closure’ may beenumerated as follows:1) Retrenchment is the termination by the employer of the service of a

workman for any reason whatsoever, otherwise than as punishmentinflicted by way of disciplinary action. It affects only some of theworkmen. Closure, on the other hand, means closing down of thebusiness for trade reasons and it affects all the workmen.

2) In case of retrenchment the services of workmen are terminated onaccount of surplus labour while in the case of closure it is on account oftotal closure of work by an employer.



3) In retrenchment the trade or business remains uninterrupted as itcontinues; while in closure the business itself is discontinued.

4) The compensation payable to a workman on retrenchment either onaccount of surplus labour or closure shall be equivalent to 15 daysaverage pay for every completed year of continuous service or any partthereof in excess of 6 months. Retrenchment as a result of bonafideclosure of business does not entail any compensation beyond averagepay for 3 months.

Difference between lock-out and retrenchment.1) Lock-out is temporary; retrenchment is permanent. Retrenchment results

in complete severance of industrial relationship between an employerand an employee while lock-out keeps this relationship alive even duringthe cessation of work. The former results in severance of relationshipbetween the employer and the employee while the latter amounts to onlysuspension of this relationship.

2) Lock-out is with a motive to coerce the workmen to accept the demandsof the employer; retrenchment is resorted to dispense with surplus labour.

3) Lock-out is due to and during an industrial dispute; there is no suchdispute in case of retrenchment.

20. Settlement [Sec. 2 (p)].

It means:1) a settlement arrived at in the course of conciliation proceedings (which

may be held by a Conciliation Officer or Board of Conciliation) andincludes

2) a written agreement between the employer and workmen arrived atotherwise than in the course of conciliation proceeding where suchagreement has been signed by the parties thereto in such manner as maybe prescribed and a copy thereof has been sent to an officer authorizedin this behalf by the appropriate Government and the Conciliation Officer.

29) Strike [Sec. 2 (q)]. It means:i) a cessation of work by body of persons employed in any industry acting

in combination; orii) a concerted refusal of any number of persons who are or have been so

employed to continue to work or to accept employment; oriii) refusal under a common understanding of any number of such persons

to continue to work or to accept employment.21. Trade Union [Sec. 2 (qq)]. It means a trade union registered under the

Trade Union Act, 1926.22. Tribunal [Sec. 2 (r)]. It means an Industrial Tribunal constituted under

Sec. 7-A and includes an Industrial Tribunal constituted before the 10thday of March, 1957 under this Act.

23. Unfair labour practice [Sec. 2 (ra)]. It means any of the practicesspecified in the Fifth Schedule (introduced by the Amendment Act of



1982) which declares certain labour practices as unfair on the part ofemployers and their trade unions and on the part of workmen and theirtrade unions. The Amendment Act of 1982 prohibits commission of anyunfair labour practice by employers and workmen [Sec. 25-T asintroduced by the Amendment Act of 1982]. The person committingany unfair labour practice is punishable with imprisonment up to 6 monthsand fine up to Rs.1,000 or with both [Sec. 25-U as introduced by theAmendment Act of 1982]. The Fifth Schedule to the Act is reproducedbelow:

The Fifth Schedule [See Sec. 2 (ra)]

3.5.8 Unfair Labour Practices

I. On the part of employers and trade unions of employers1. To interfere with, restrain from, or coerce, workmen in the exercise of

their right to organize, form, join or assist a trade union or to engage inconcerted activities for the purposes of collective bargaining or othermutual aid or protection, that is to say:

a) threatening workmen with discharge or dismissal, if they join a tradeunion;

b) threatening a lock-out or closure, if a trade union is organized;c) granting wage increase to workmen at crucial periods of trade union

organization, with a view to undermining the efforts of the trade union atorganization.

2. To dominate, interfere with or co tribute support, financial or otherwise,to any trade union, that is to say:

a) an employer taking an active interest in organizing a trade union of hisworkmen; and

b) an employer showing partiality or granting favour to one of several tradeunions attempting to organize his workmen or to its members, wheresuch a trade union is not a recognized trade union.

3. to establish employer-sponsored trade unions of workmen.4. to encourage or discourage membership in any trade union by

discriminating against any workman, that is to say:a) discharging or punishing a workman, because he urged other workmen

to join or organize a trade union;b) discharging or dismissing a workman for taking part in any strike (not

being a strike which is deemed to be an illegal strike under this Act);c) changing seniority rating of workmen because of trade union activities;d) refusing to promote workmen to higher posts on account of their trade

union activities;e) giving unmerited promotions to certain workmen with a view to creating

discord amongst other workmen, or to undermine the strength of theirtrade union;



f) discharging office-bearers or active members of the trade union onaccount of their trade union activities;

5. To discharge or dismiss workmen:a) by way of victimization;b) not in good faith, but in the colourable exercise of the employer’s rights;c) by falsely implicating a workman in a criminal case on false evidence or

on concocted evidence;d) for patently false reasons;e) on untrue or trumped up allegations of absence without leave;f) in utter disregard of the principles of natural justice in the conduct of

domestic inquiry or with undue haste;g) for misconduct of a minor or technical character, without having any

regard to the nature of the particular misconduct or the past record orservice of the workman, thereby leading to a disproportionate punishment.

6. To abolish the work of a regular nature being done by workmen, and togive such work to contractors as a measure of breaking a strike.

7. To transfer a workman mala-fide from one place to another, under theguise of following management policy.

8. To insist upon individual workmen, who are on a legal strike to sign agood conduct bond, as a pre-condition to allowing them to resume work?

9. To show favoritism or partiality to one set of workers regardless of merit.10. To employ workmen as ‘badlis’, casuals or temporaries and to continue

them as such for years with the object of depriving them of the statusand privileges of permanent workmen.

11. To discharge or discriminate against any workman for filing charges ortestifying against an employer in any inquiry or proceeding relating to anyindustrial dispute.

12. To recruit workmen during a strike which is not an illegal strike?13. Failure to implement award, settlement or agreement.14. To indulge in acts of force of violence.15. To refuse to bargain collectively, in good faith with the recognized trade

unions.16. Proposing or continuing a lock-out deemed to be illegal under this Act.II. On the part of workmen and trade unions of workmen1. To advise or actively support or instigate any strike deemed to be illegal

under this Act.2. To coerce workmen in the exercise of their right to self-organisation or

to join a trade union or refrain from joining any trade union, that is to saya) for a trade union or its members to picketing in such a manner that non-

striking workmen are physically debarred from entering the work places;



b) to indulge in acts of force or violence or to hold out threats of intimidationin connection with a strike against non-striking workmen or againstmanagerial staff.

3. For a recognized union to refuse to bargain collectively in good faithwith the employer.

4. To indulge in coercive activities against certification of a bargainingrepresentative.

5. To stage, encourage or instigate such forms of coercive actions as willful‘go show’, squatting on work premises after working hours or ‘gherao’of any of the members of the managerial or other staff.

6. To stage demonstrations at the residences of the employers or themanagerial staff members.

7. To incite or indulge in willful damage to employer’s property connectedwith the industry.

8. To indulge in acts of force or violence or to hold out threats of intimidationagainst any workman with a view to prevent him from attending work.

The following have been held to be unfair labour practices:a) The termination of the service of a daily wage labourer on his passing

matriculation examination, where the terms and conditions ofappointment contained no such stipulation. This is an unfair trade practiceby way pf victimization [H.D. Singh v. Reserve Bank of India, (1985)4 S.C.C. 201].

b) Offering work on rotation basis to workmen treating them as badliworkers and continuing them as such for years together (H.D. Singh v.Reserve Bank of India, supra).

c) Issuance of repeated orders of appointment and termination with a viewto bypass the provisions of Sec. 25-B (which defines continuousservice) [Ferozpur Central Co-op. Bank v. Labour Court, (1986)1 L.L.N. 20 (P & H)].

24. Wages [Sec. 2 (rr)].

‘Wages’ means all remuneration capable of being expressed in terms ofmoney, which would, if the terms of employment, express or implied,were fulfilled, be payable to a workman in respect of his employment orof work done in such employment.

What is included in ‘wages’?‘Wages’ includes:i) such allowances (including dearness allowance) as the workman is for

the time-being entitled to;ii) the value of any house accommodation, or of supply of light, water,

medical attendance or other amenity or of any service or of anyconcessional supply of foodgrains or other articles;



iii) any travelling concession;iv) any commission payable on the promotion of sales or business or both.

This clause has been added by the Amendment Act of 1982.What is not included in ‘wages’? ‘Wages’ does not, however, include:a) any bonus;b) any contribution paid or payable by the employer to any pension fund or

provident fund or for the benefit of the workmen under any law for thetime being in force;

c) any gratuity payable on the termination of his service.

25. Workman [Sec. 2 (s)].

‘Workman’ means any person (including an apprentice) employed inany industry to do any manual, unskilled, skilled, technical, operational,clerical or supervisory work for hire or reward. His terms of employmentmay be express or implied. For the purposes of any proceeding underthis Act in relation to an industrial dispute, ‘workman’ includes any personwho has been dismissed, discharged or retrenched in connection with,or as a consequence of, that dispute, or whose dismissal, discharge orretrenchment has led to that dispute.Persons who are not workmen. ‘Workman’ does not include anysuch person.

i) who is subject to the Air Force Act, 1950, or the Army Act, 1950, orthe Navy Act, 1957; or

ii) who is employed in the police service or as an officer or other employeeof a prison; or

iii) who is employed mainly in a managerial or administrative capacity; oriv) who being employed in a supervisory capacity, draws wages exceeding

Rs.1,600 per mensem (the limit has been raised from Rs.500 to Rs.1,600by the Amendment Act of 1982) or exercises, either by the nature of theduties attached to the office or by reason of the powers vested in him,functions mainly of a managerial nature.

3.5.9 Reference of certain Individual Disputes to GrievanceSettlement Authorities: (Chapter II-B, Sec. 9-C as introduced bythe Amendment Act of 1982)

The employer in relation to every industrial establishment in which 50 ormore workmen are employed or have been employed on any day in thepreceding 12 months shall provide for a Grievance Settlement Authorityfor the settlement of industrial disputes connected with an such a GrievanceSettlement Authority shall be in accordance with the rules made in thatbehalf under the Act [Sec. 9-C (1)].Where an industrial dispute connected with an individual workman arises inan establishment referred to above, a workman or any trade union ofworkmen of which such workman is a member may refer such dispute to the



Grievance Settlement Authority for settlement [Sec. 9-C (2)]. TheGrievance Settlement Authority shall follow such procedure and completeits proceedings within such period as may be prescribed [Sec. 9-C (3)].Sec. 9-C specifically provides that no reference shall be made underChapter III (which deals with reference of disputes to Boards ofConciliation, Courts of Inquiry or Industrial Tribunals) with respect toany dispute referred to above unless—a) such dispute has been referred to the Grievance Settlement Authority

concerned; andb) the decision of the Grievance Settlement Authority is not acceptable to

any of the parties to the dispute [Sec. 9-C (4)].

3.5.10 Procedure for the Settlement of Industrial Disputes andAuthorities under the Act: (Chapter II, Secs. 3 to 9)

The industrial disputes Act intends, by making various provisions, theprevention and settlement of industrial disputes. The Act, in itsPreamble, has also emphasized this point by saying that the Act is ‘forthe investigation and settlement of industrial disputes’.The Act provides elaborate and effective machinery for bringing aboutindustrial peace by setting up various authorities for the investigation andsettlement of industrial disputes. These authorities are:1. Works Committees (Sec. 3).2. Conciliation Officers (Sec. 4).3. Boards of Conciliation (Sec. 5).4. Courts of Inquiry (Sec. 6).5. Labour Courts (Sec. 7).6. Industrial Tribunals (Sec. 7-A).7. National Tribunal (Sec. 7-B).The Act provides for the following modes of settlement of disputes underthe Act:1. Voluntary settlement and conciliation.2. Adjudication and3. Arbitration.Conciliation. The authorities that make use of conciliation as a methodof settlement of industrial disputes are:1. Works Committees.The Act encourages voluntary settlement of disputes through the WorksCommittees whose object is to remove causes of friction between theemployers and workmen in the day-to-day working of establishmentsand to promote measures for securing amity and good relations betweenthem.Industrial peace will be most enduring where it is founded on voluntarysettlement.



2. Conciliation Officers3. Boards of Conciliation4. Court of Inquiry: which may be constituted for inquiring into any matter

appearing to be connected with or relevant to an industrial dispute?Adjudication. The aforesaid authorities endeavour to compose anyindustrial difference of opinion or settle the industrial dispute before itmay be adjudicated upon by-

1. Labour Courts,2. Industrial Tribunals3. National Tribunal.Voluntary reference. Sec. 10-A makes provision for voluntary referenceof disputes to arbitration.The various authorities which constitute the machinery for the preventionand settlement of industrial disputes are discussed below:

3.5.11 Conciliation Machinery

Works Committees, Conciliation Officers, Board of Conciliation, andCourts of Inquiry constitute the conciliation machinery for settlement ofindustrial disputes. They can only promote settlement of industrial disputesor inquire into them but cannot make any awards which are binding onthe parties.1. Works Committees (Sec. 3)In the case of any industrial establishment in which 100 or more workmenare employed or have been employed on any day in the preceding 12months, the appropriate Government may, by general or special order,require the employer to constitute a Works Committee. The Committeeshall consist of representatives of employers and workmen engaged inthe establishment. The number of representatives of workmen on theCommittee shall not be less than the number of representatives of theemployer. The representatives of the workmen shall be chosen in theprescribed manner from among the workmen engaged in the establishmentand in consultation with their trade union, if any, registered under theTrade Unions Act, 1926 [Sec. 3 (1)].Powers and duties. It shall be the duty of the Works Committee to:1) promote measures for securing and preserving amity and good relations

between the employers and workmen and, to that end.2) comment upon matters of their common interest or concern, and respect

of such matters [Sec. 3 (2)]. These matters are so wide-ranging as toinclude welfare of workers, supervision of recreational facilities andcrèches and hospitals, their training, wages, hours of work, bonus, gratuity,holidays with pay, and working conditions including discipline, promotions,and transfers, etc.



2. Conciliation Officers (Sec. 4).The appropriate Government may, by notification in the Official Gazette,appoint such number of persons as it thinks fit to be Conciliation Officers.The duty of the Conciliation Officers shall be to mediate in and promotethe settlement of industrial disputes [Sec. 4 (1)].

Appointment. A conciliation Officer may be appointed for a specified areaor for specified industries in a specified area or for one or more specifiedindustry. He may be appointed either permanently or for a limited period[Sec. 4 (2)]. He shall be deemed to be a public servant within the meaningof Sec. 21 of the Indian Penal Code, 1860 [Sec. 11 (6)].Duties (Sec.12).1) To hold conciliation proceedings. Where any industrial dispute exists

or is apprehended, the Conciliation Officer may hold conciliationproceedings. Where the dispute relates to a public utility service and anotice under Sec.22 has been given, he shall hold conciliation proceedingsin the prescribed manner [Sec. 12 (1)].

2) To investigate the dispute. The conciliation Officer shall, for the purposeof bringing about a settlement of the dispute, without delay, investigatethe dispute and all matters affecting the merits and the right settlementthereof. He may do all such things as he thinks fit for purpose of inducingthe parties to come to a fair and amicable settlement of the dispute [Sec.12 (2)]. But he has no authority to make a final decision.

3) To send a report and memorandum of settlement to appropriateGovernment. If a settlement of the dispute is arrived at in the course ofthe conciliation proceedings, the Conciliation Officer shall send a reportthereof to the appropriate Government or an officer authorized in thisbehalf by the appropriate Government. He shall also send amemorandum of the settlement signed by the parties to the dispute tothe appropriate Government [Sec. 12 (3)].

4) To send full report to appropriate Government setting forth thesteps taken by him in case no settlement is arrived at. If no suchsettlement is arrived at, the Conciliation Officer shall as soon as after theclose of the investigation, send to the appropriate Government a fullreport setting forth the steps taken by him for ascertaining the facts andcircumstances relating to the dispute and for bringing about a settlementthereof. The report shall be accompanied with a full statement of suchfacts and circumstances, and the reasons on account of which, in hisopinion, a settlement could not be arrived at [Sec.12 (4)].Time for the submission of the report. The report by the ConciliationOfficer shall be submitted within 14 days of the commencement of theconciliation proceedings or within such shorter period as may be fixedby the appropriate Government [Sec. 12 (6)].Further reference by the appropriate Government. If no reference ismade, reasons to be communicated to the parties. If , on a considerationof the report referred to in Sec. 12 (4), the appropriate Government issatisfied that there is a case for reference to a Board of Conciliation,



Labour Court, Industrial Tribunal or National Tribunal, it may makesuch reference, it shall record and communicate to the parties concernedits reasons therefore [Sec. 12 (5)].

Powers1) Power to enter premises. A Conciliation Officer may for the purpose

of inquiry into any existing or apprehended industrial dispute, after givingreasonable notice, enter the premises occupied by the establishment towhich the dispute relates [Sec. 11 (2)].

2) Power to call for and inspect documents. He may call for and inspectany document which he has ground for considering to be relevant to theindustrial dispute or to be necessary for the purpose of verifying theimplementation of any award or carrying out any other duty imposed onhim under the Act. For these purposes, he shall have the same powersas are vested in a Civil Court under the Code of Civil Procedure, 1908in respect of compelling the production of documents [Sec.11 (4)].

3. Boards of Conciliation (Sec. 5)Appointment and the constitution. The appropriate Government mayas occasion arises, by notification in the Official Gazette constitute, aBoard of Conciliation (hereinafter called the Board) for promoting thesettlement of an industrial dispute [Sec. 5 (1)].The Board shall consist of a Chairman and 2 or 4 other members, as theappropriate Government thinks fit [Sec. 5 (2)]. The chairman shall bean independent person [For the definition of ‘independent person’, referto Sec. 2 (i)]. The members shall be persons appointed in equal numberto represent the parties to the dispute. A person appointed to representa party shall be appointed on the recommendation of that party[Sec. 5 (3)]. But if any party fails to make a recommendation within theprescribed period, the appropriate Government shall appoint suchpersons as it thinks fit to represent that party [Proviso to Sec. 5 (3)].A Board, having the prescribed quorum, may act, notwithstanding theabsence of the chairman or any of its members or any vacancy in itsnumber [Sec. 5 (4)]. But if the appropriate Government notifies theBoard that the services of the chairman or any other member have ceasedto be available, the Board shall not act until a new chairman or member,as the case may be, has been appointed [Proviso to Sec. 5 (4)].Reference of dispute. Where the appropriate Government is of opinionthat any industrial dispute exists or is apprehended, it may at any time,by order in writing, refer the dispute to a Board of Conciliation forpromoting a settlement thereof [Sec. 10 (1) (a)].Where the parties to an industrial dispute apply in the prescribed manner,whether jointly or separately, for a reference of the dispute to a Board,the appropriate Government, if satisfied that the persons applyingrepresent the majority of each party, shall make the reference accordingly[Sec. 10 (2)].Prohibition of strike or lock-out. Where an industrial dispute has beenreferred to a Board under Sec.10, the appropriate Government may by



order prohibit the continuance of any strike or lock-out in connectionwith such dispute which may be in existence on the date of the reference[Sec. 10 (3)].Duties (Sec. 13).

1) To bring about a settlement of the dispute. Where a dispute hasbeen referred to a Board of Conciliation, it shall be the duty of the Boardto endeavour to bring about a settlement of the same. It shall, withoutdelay, investigate the dispute and all matters affecting the merits and theright settlement thereof. it may also do all such tings as it thinks fit for thepurpose of inducing the parties to come to a fair and amicable settlementof the dispute [Sec. 13 (1)].

2) To send a report and memorandum of settlement to the appropriateGovernment. If a settlement of the dispute is arrived at in the course ofconciliation proceedings, the Board shall send a report thereof to theappropriate Government together with a memorandum of the settlement,signed by the parties to the dispute [Sec.13 (2)].

3) To send a full report to the appropriate Government setting forththe steps taken by the Board in case no settlement is arrived at. Ifno such settlement is arrived at, the Board shall, as soon as practicableafter the close of the investigation, send to the appropriate Governmenta full report setting forth the proceedings and steps taken by the Boardfor ascertaining the facts and the circumstances relating to the disputeand for bringing about a settlement thereof. The report shall beaccompanied with a full statement of such facts and circumstances itsfindings thereon, the reasons on account of which, in its opinion asettlement could not be arrived at and its recommendations for thedetermination of the dispute [Sec. 13 (3)].

4) To communicate reasons to the parties if no further reference made.If on the receipt of a report in respect of a dispute relating to a publicutility service, the appropriate Government does not make a referenceto a Labour Court, Industrial Tribunal or National Tribunal under Sec.10, it shall record and communicate to the parities concerned its reasonstherefore (Sec. 13 (4)].

5) To submit report within 2 months. The board shall submit its reportwithin 2 months of the date on which the dispute was referred to it orwithin such shorter period as may be fixed by the appropriate Government[Sec. 13 (5)]. The appropriate Government may, from time to time,extend the time for the submission of the report by such further periodsnot exceeding 21 months in the aggregate. The time for the submissionof the report may also be extended by such period as may be agreed onin writing by all the parties to the dispute.Report of the Board to be in writing and to be signed and itspublication. The report of the Board shall be in writing and shall besigned by all the members of the Board. A member of the Board mayrecord any minute of dissent from a report or from any recommendationmade therein [Sec. 16 (1)]. Further the report together with the minuteof dissent recorded therewith shall be published by the appropriateGovernment within 30 days from the receipt thereof [Sec. 17 (1)].



Powers1) Power to enter premises. A member of a Board may for the purpose

of inquiry into an existing or apprehended industrial dispute, after givingreasonable notice, enter the premises occupied by any establishment towhich the dispute relates [Sec. 11 (2)].

2) Powers of Civil Court. A Board shall have the same powers as arevested in a Civil Court under the Code of Civil Procedure, 1908, whentrying a suit in respect of the following matters, namely:

a) enforcing the attendance of any person and examining him on oath;b) compelling the production of documents and material objects;c) issuing commissions for the examination of witnesses;d) in respect of such other matters as may be prescribed.Every inquiry or investigation by a Board shall be deemed to be a judicialproceeding within the meaning of Secs. 193 and 228 of the Indian PenalCode, 1860 [Sec. 11 (3)].All members of a Board shall be deemed to be public servants within themeaning of Sec. 21 of the Indian Penal Code, 1860 (Sec. 11 (6)].Subject to any rules that may be made in this behalf, a Board shall followsuch procedure as it may think fit [Sec. 11 (1)].4. Courts of Inquiry (Sec. 6).Appointment and constitution. The appropriate Government may, bynotification in the Official Gazette, constitute a Court of Inquiry (hereinaftercalled the Court) for inquiring into any matter appearing to be connectedwith or relevant to an industrial dispute [Sec. 6 (1)]. A Court may consist ofone independent person [For the definition of ‘independent person’, refer toSec. 2 (i) or of such number of independent persons as the appropriateGovernment may think fit. Where a Court consists of 2 or more members,one of them shall be appointed as the chairman [Sec. 6 (2)].A Court, having the prescribed quorum, may act notwithstanding theabsence of the chairman, or any of its members or any vacancy in itsnumber [Sec. 6 (3)]. But if the appropriate Government notifies the Courtthat the services of the chairman have ceased to be available, the Courtshall not act until a new chairman has been appointed [Proviso to Sec. 6(3)].All members of the Court shall be deemed to be public servants withinthe meaning of Sec. 21 of the Indian Penal Code, 1860 [Sec. 11 (6)].Reference of dispute. Where the appropriate Government is of opinionthat any industrial dispute exists or is apprehended, it may at any time, byorder in writing, refer any matter appearing to be connected with orrelevant to the dispute to a Court for inquiry [Sec. 10 (1) (b)].Where the parties to an industrial dispute apply in the prescribed manner,whether jointly or separately, for a reference of the dispute to a Court,the appropriate Government, if satisfied that the persons applyingrepresent the majority of each party, shall make the reference accordingly[Sec. 10 (2)].



Subject to any rules that may be made in this behalf, the Court shallfollow such procedure as it may think fit [Sec. 11 (1)].Duties. A Court shall inquire into the matters referred to it and reportthereon to the appropriate Government ordinarily within a period of 6months from the commencement of its inquiry (Sec. 14).The report of the Court shall be in writing and signed by all the membersof the Court. Any member of the Court may record any minute of dissentfrom a report or from any recommendation therein [Sec. 16 (1)]. Thereport together with any minute of dissent recorded therewith shall bepublished within a period of 30 days of its receipt by the appropriateGovernment [Sec. 17 (1)].The duty of a Court is to abide by the principle of fair play and justice[Hindustan Steel Ltd. v. State of Orissa, A.I.R. (1968) Ori. 345].Powers1) Power to enter premises. A member of a Court may for the purpose of

inquiry into an existing or apprehended industrial dispute, after givingreasonable notice, enter the premises occupied by any establishment towhich the dispute relates [Sec.11(2)].

2) Powers of Civil Court. A Court shall have the same powers as arevested in a Civil Court under the Code of Civil Procedure 1908, whentrying a suit in respect of the following matters, namely—

a) enforcing the attendance of any person and examining him or oath;b) compelling the production of documents and material objects;c) issuing commissions for the examination of witnesses;d) in respect of such other matters as may be prescribed.Every inquiry or investigation by a Court shall be deemed to be a judicialproceeding within the meaning of Secs- 193 and 228 of the Indian PenalCode, 1860 [Sec. 11 (3)].A Court may, if it so thinks fit, appoint one or more persons having specialknowledge of the matter under consideration as assessor or assessors toadvise it in the proceeding before it [Sec. 11 (5)].Objective questions :1. It means the permanent closing down of a place of employment or part

thereof. ________a. Lock out b. closure c. retrenchment d. lay-off

2. __________ means the failure, refusal or inability of an employer togive employment to a workmana. lay off b. lockout c. compulsory waiting d. closure

3. ___________ means the temporary closing of a place of employment,or the suspension of work, or the refusal by an employer to continue toemploy any number of persons employed by him.a. lockout b. layoff c. closure d. lay-off



Short Questions :4. What are the objectives of the Industrial Disputes Act?5. Define Industry.6. What is an Industrial Dispute?

Extended Questions :7. Discuss the Unfair Labour Practices in India.8. Discuss the referral of Industrial Disputes to Grievance Settlement

Authorities.9. Explain the procedure for settlement of Industrial Disputes and au-

thorities under the act.10. Critically examine the Conciliation Machinery process in India.SummaryThe Industrial Disputes Act, 1947 was passed with a view to removingcertain shortcomings found in the working of the Trade Disputes Act of1929. It also introduces 2 new institutions for the prevention andsettlement of industrial disputes, viz., Works Committees and IndustrialTribunals. It also seeks to reorient the administration of the conciliationmachinery. Conciliation under the Act has also been made compulsory inall disputes in public utility services and optional in all other industrialestablishments.



4 Income Tax Act and Sales Act

4.1 Introduction of Corporate Tax Planning and Sales Tax ActGovernments have several options at hand to finance their activities andpursue their fiscal policy. These options include the imposition of taxesand the generation of non-tax revenues through fees, levies, cost recoveryand user charges, property and investment income, domestic and foreignborrowing (including loans from multilateral institutions), seigniorage (rentsgenerated from the government’s monopoly power to print currency andcoins), the sale of government assets (including the sale of publicenterprises) and domestic and foreign grants. In most countries,conventionally defined legal taxes and levies constitute a significantproportion of GDP, and finance a major part of government expenditure.It is therefore essential that tax systems be designed to achieve theappropriate trade-offs among revenue generation, allocation efficiency,equity, and administration and compliance costs.Tax planning is not a device to reduce tax burden. In fact, it helps savingsby investments in government securities. Savings reduce extravagance,and correspondingly inflation. Tax savings are permitted only forinvestment made i:n government securities and bonds of priority sectorswhich ultimately help the nation. Therefore, the savings in tax help theCentral and state governments to mobilizes funds by way of investmentsand as such the government earns much by way of other benefits, bysacrificing small amount of tax. The Supreme Court in one case observedthat “Tax planning may be legitimate provided it is within the frameworkof Law”.

• Liquidity-when he requires the amount to meet the educational expensesof children, for marriage, house construction or for a secure future afterretirement.

INCOME TAX ACT AND SALES TAX ACT

UNIT-IV



• Security of the investment.

• The return and tax on income on such investments.The era of liberalization that was ushed in the early 90’s through theintroduction of economic reforms is perhaps the most significant event inthe economic history of India. In the last 15 years, we have taken giantstrides in intergrating our economy with the New International Economicorder. The unification of our markets with the international markets hascreated tremendous opportunities for Indian industry and paid richeconomic dividends to the nation. Today, there seems no dispute thatIndia will soon emerge as a major international econmic power and jointhe league of the world’s most developed nations. It does seem that theintroduction of VAT would have positive ramifications for our economicgrowth and national development. The success of VAT is well recognizedfrom the fact that more than 130 countries around the world follow thissystem. Until recently, it was only the United States and India amongstthe more populous countries that did not follow VAT. However, this hasnow changed and India has reformed its tax regime.Right at the outset, however, we must note that for the successfulimplementation of VAT, it is important that there be constant dialoguebetween all the stakeholders regarding issues related to VAT and itsimplementation. This includes legal and tax professionals, companies,traders, consumers and the State governments. It is confident, that forumssuch as this would go a long a way in generating that dialogue.

4.2 Learning Objectives

After studying this unit you should be able to:• Define Corporate Tax Planning.• Understand the essentials of Sales Tax Act.• Describe the functions of CST and TNGST .• Implementing the formalities in forming a contract.• Analyze the need and Importance of VAT.

4.3 Corporate Tax Planning

4.3.1The Important Highlight of Corporate Tax Planning

• Tax planning is an arrangement of one’s financial and economic affairsby taking complete legitimate benefit of all deductions,exemptions, and allowances and rebates so that tax liability reduces tominimum.

• Tax laws are fully complied within its framework.

• Not taking form of colorable devices.



• Having no intention to deceit the legal spirit.

• Planning of tax must be correct both in form and substance.

4.3.2 Computing of Profits and GainsEstimated income scheme for computing profits and gains of retailtraders

• The taxpayer is engaged in the business of retail trade in any goods ormerchandise.

• Total turnover from the above business does not exceed Rs.40lakh.• Income to be calculated on estimated basis @ 5%.• Rate of 5% is comprehensive.

4.3.3 DeductionsDeduction in respect of profits and gains from the business ofcollecting bio-degradable waste [Sec. 80JJA]Section 80JJA is applicable where the gross total income of the assesseeincludes any profits and gains derived from the business of collecting,processing or treating of biodegradable waste for generating power orproducing bio-fertilizers, bio-pesticides or other biological agents or forproducing bio-gas or making pellets or briquettes for fuel or organicmanureDeduction in respect of employment of new workmen [Sec. 80JJAA]• Income of the tax payer includes any profits or gains derived from any

industrial undertaking engaged in the manufacture or production of articleor thing.

• The amount of deduction is equal to 30% of “additional wages” paid tonew “regular workmen” employed by the assessee in the previous year.

Deduction in respect of certain income of offshore Banking units[Sec. 80LA]• The gross total income of the assessee includes• Any income from a branch in Special Economic Zone• From the business referred to in section 6(1) of the Banking Regulations

Act• Received in convertible foreign exchange

If the conditions are satisfied, then 100% of the aforesaid income isdeductible for three consecutive assessment years beginning with theassessment year.

4.3.4 Tax Planning with Reference to Financial ManagementDecisionsTax Planning is calculated based on the Management Decisions is as follows:

1. Capital Structure Decisions

• Distributed profit will subject to extra tax, While interest paid on borrowedcapital is allowed as deduction under Sec 36(1)



• Cost of raising finance through borrowing is deductible in the year inwhich it is incurred (pre-commencement period – capitalized).

• Cost of issue of share is allowed as deduction in five years, Sec35D.2. Dividend Policy

Meaning of dividend under Sec 2(22).• Tax treatment in the hands of shareholders.• Tax deduction at source under Sec 194.• Tax on dividend.

3. Meaning of Dividend: Sec2 (22)“Deemed Dividend”-chargeable to tax, under “Income from othersources”.The following payments or distributions by a company to its shareholdersare deemed as dividends• Release of company’s assets.• Debenture stock, debenture, deposit certificates and bonus to preference

shareholders• Liquidation of company• Reduction of capital.• Loan or advance, but not made in the ordinary course of the business.

Sec77A – Not treated as dividends• Purchase of its own shares.• Scheme of de-merger by the resulting company.

Other factors under dividend• Accumulated Profits• Distribution of accumulated profits entailing release of company’s

assets[Sec2(22) (a)]• Distribution of accumulated profits in the form of debentures, debenture

stock[Sec.2(2) (b)]• Distribution of accumulated profits at the time of liquidation[Sec2(22) (c)]• Distribution of accumulated profits on the reduction of its

capital[Sec2(22) (d)]• Distribution of accumulated profits by way of advance or loans[Sec.2(22) (e)]• Tax treatment in the hands of shareholders.

4. Bonus Shares:• Bonus Shares to equity shareholders• Bonus Shares to preference shareholders

4.3.5 Tax Planning with Reference to Managerial Decisions1. Purchase of asset out of own funds or out of borrowed capital

The factors which determine effective tax savings are:



• Rate of depreciation• Marginal tax rate2. Lease vs. PurchaseIf asset is purchased, the assessee can claim depreciation. In case ofobtaining on lease, deduction can be claimed in respect of lease rentalsand lease management fees.3. Purchase by installment vs. Hire If an asset is purchased by installments, then the taxpayer can claimdepreciation under Sec32.In the case of obtaining an asset on hire,deduction can be claimed in respect of hire charges.4. Sale of asset used for scientific researchAny asset is sold without having been used for other purposes and saleproceeds, together with the amount of deduction under Sec 35, exceedthe capital expenditure, such surplus or the amount of deduction allowed,whichever is less, is chargeable to tax.5. Make or buyMany costing or non-costing considerations guide the decisions relatingto “make or buy”.6. Repairs, replace, renewals or renovationIn this expenditure is deductible as revenue expenditure under Sections30, 31, or 37(1).If it deduction is made under these sections, and thencost of financing such expenditure is reduced to the extent of tax saved.7. Shut-down or continueBusiness/profession loss will be carried forward even if such business/profession is discontinued.Tax Planning in respect of Employees Remuneration1. Factors which require consideration2. Deduction of remuneration in the hands of employer3. Tax incidence in the hands of employees4. Remuneration planning

4.4 Overview of Sales TaxThe Following points are discussed as below:• What is a Sales Tax?• History of CST• Features of CST, 1956• Definitions• Principles for determining inter-state trade• Exceptions to CST



• Types of goods• CST rates• Penalties

4.4.1 What is a Sales Tax?• A tax levied at the point of sale and based on the retail price of a good or

service.• Different from value added tax (VAT).• Sales tax in India is covered under: a) Central Sales Tax b) State Sales Tax (TNGST)

4.4.2 Central sales taxHistory of Central sales tax• Levy of tax by states even when one ingredient of sale was present. (ingredient being contract, payment, delivery or passing of title)• Multi levy of tax because of Nexus theory• Led to amendment of Constitution in 1956 to include “entry no 92 A” to

empower Parliament to levy tax on inter-state trade.

Features of CST, 1956• Applicability: Whole of India on all goods• Place: Where the goods were sold in the IST• Registration: Dealers to register U/S 7. And are liable to pay CST when

they make an inter-state trade• Levy: By central govt., collection by state govt.• Basis: On the amount of turnover in IST• Assessment: Made by the assessing authority based on the returns

submitted by the registered Dealer.

4.4.3 Definitions

• Dealer: Any person carrying on the business of buying, selling ordistributing goods directly or indirectly for cash, deferred payment,commission or any remuneration.

• Business: Any trade, commerce or manufacture with or without a profitmotive

• Sale: Transfer of property from one person to another for a valuableconsideration.

• Goods: All materials, articles, commodities except newspapers, shares,money, claims

• Rate: As prescribed in the Act.



4.4.4 Principles for determining Inter-State Sales TaxThe sale or purchase:• Occasions the movement of goods from one state to another or• Is effected by a transfer of documents to the title of goods during the

movement of goods from one state to anotherExceptions to CST• Sale of electric energy• Sale to an exporter for the purpose of export (penultimate sale)• Subsequent sale: a) To registered Dealer or b) To Govt.Types of Goods• Declared goods or goods of special importance: These are goods

mentioned U/S 14 of CST (e.g.. Cereals, Coal, Cotton etc)• Undeclared goods

4.4.5 Central Sales Tax rates

Types of goods Sale to Govt. Sale to regd. dealer Sale to un regd. dealer

Declared goods 4% or State sales tax rate,

whichever is lower.

Form: D

4% or State sales tax rate,

whichever is lower.

Form: C

TWICE the general sales tax

rate. (8%)

Undeclared

goods

Same as above Same as above. 10% or sales tax whichever

is less

Penalties• Penalties in the form of prosecution/ fine U/S 10• Penalties in lieu of prosecution U/S 10• Seller or buyer: Imprisonment of 6 months or fine• Purchaser: Fine up to 1 ½ times the taxDefinitions1. Sale:Sale means transfer of property in goods by one person to another in thecourse of business for cash, deferred payment or other valuableconsideration and includes:



• Transfer of property in goods• Work contract• Hire purchase• Right to use• Supply of goods by unincorporated association• Supply of food as part of any serviceTerms like Deemed sale, Goods, Declared goods, Dealer, Registereddealer, Turnover etc have also been defined in the act.

4.4.6 Levy of Sales Tax under TNGSTLevy of surcharge:Surcharge is leviable throughout the state at the rate of 5% on taxes.Single-point tax:• Section 3 of TNGST act is the main charging section.• It provides levying tax at the specific rate and at point fixed under the - I

schedule.• It has 190 items being divided into 8 parts.• Each part carries a different rate of tax meant for levy at the point of sale.• Levy can be at the point of first purchase or at the last.Multi-Point Tax:• Goods mentioned in the sixth schedule.• Example: Alcoholic liquors, will be subject to tax rates varying between

25% and 55% at the I and II point of sale in the state.• Cement (V Schedule) will be at 16% or 24% at the first sale and 1% or

5% at every subsequent sale in the state.4.4.7 Types of levy of TNGST

A. Levy based on classification of goods:This levy based on classification according to schedules as follows:

I schedule: spares components and accessories (s). II schedule: Rice, Paddy, wheat, cotton etc.,(s) Maximum rate is 4%. III schedule: Goods of Special importance. IV schedule: Transfer of goods involved in works contract. V schedule: Cement (M). VI schedule: Alcoholic liquor except foreign liquor VII schedule: Goods coming from outside the state and pass through the

state to obtain a transit pass like edible oils, marbles, diesel engines, aircoolers etc.,

VIII schedule: Sale of goods for installation in the factory site in the statefor manufacture of any goods.

IX schedule: Levy of tax on hotels, restaurants and sweet stalls, dealersin jewellery.



X schedule: Dealers in lottery tickets. XII schedule: Bitumen, aviation gasoline, Kerosene, diesel oil, lubricating

oils, white kerosene, alcoholic liquors purchased or procured fromoutside and foreign liquors imported from abroad.

VIII schedule: Sale of goods for installation in the factory site in the statefor manufacture of any goods.

IX schedule: Levy of tax on hotels, restaurants and sweet stalls, dealersin jewellery.

X schedule: Dealers in lottery tickets. XII schedule: Bitumen, aviation gasoline, Kerosene, diesel oil, lubricating

oils, white kerosene, alcoholic liquors purchased or procured fromoutside and foreign liquors imported from abroad.

A. Compounded levy:It is an option given to every dealer whose total turnover is not less than1 lakh but not more than 2 lakhs rupees. Section 7(1) applies.Conditions:• Dealers other than a casual dealer and a non-resident dealer.• The dealer opting should intimate the dept. within 30 days from

commencement of business or before April 30.• The dealer is not allowed to collect tax.• Not required to maintain product-wise books of accounts.• Change in the system for the next year should be intimated to sales tax

authorities.

4.4.8 Payment of Tax at Compound Rates is at the following rates

Rates as per section 7(1)Slab of turnover

Rate of tax/Amount of tax

When the total turnover is not less than Rs.100000 but less

than 110000.

When it is not less than 110000 but less than 120000








a)

b)

a)

b)

c)

d)

e)

f)

g)

h) When it is not less than 190000 but not more than 200000

Rs.2580 p.a.

Rs.2880 p.a.

Rs.3180 p.a.

Rs.3480 p.a.

Rs.3780 p.a.

Rs.4080 p.a.

Rs.4380 p.a.

Rs.4680 p.a.

Rs.4980 p.a.

Rs.5280 p.a.



Payment of tax by work contractorThe works contractor may, at his option, instead of paying tax inaccordance with section 3-B on the basis of turnover pay, either on thetotal value of each works contract or on the total value of all workscontracts executed by him in a year at the rates mentioned below:i. Civil works contract: 2% of the total contract value of the civil works

executed.i. All other contracts: 4 % of the total contract value of the works executedTax payable by hotels, restaurants, clubs, caterers and any othereating houses When there turnover is not less than 10 lakhs of rupees for the year the

tax payable is 2%. In case of Star hotels, the tax is 10% on sale turnover of food and drinks. Dealers with turnover not less than 10 lakh rupees but not more than 15

lakh may, at their option pay tax at compound rates. Dealers in jewellery may also opt for payment of tax at compound rate if

not more than 15 lakh.4. Purchase tax When taxable goods are transferred from an unregistered dealer to a

registered dealer the reg. dealer has to pay tax on the goods. An unreg. Dealer cannot collect sales tax. Hence the buyer has to pay and it is purchase tax. If an unreg. Dealer collects buy mistake then reg. buyer can make

adjustments of this with future tax liability. If a customer buys from a unreg. Dealer for personal consumption he is

not liable to pay any tax. When an unreg. Dealer sells to other unreg. Dealer the burden shifts to

the immediate reg. buyer.

4.4.9 Hierarchical order of commercial tax authorities in Tamilnadu

Ministry of finance, Government of TN

Commissioner of commercial taxes

Joint commissioners of commercial taxes

Appellate deputy commissioners of commercial taxes

Deputy Commissioner of commercial taxes



Appellate assistant commissioner of commercial taxes

Territorial assistant commissioners of commercial taxes

Administrative assistant commissioners of commercial taxes

Assistant commissioner of commercial taxes (Assessment)

Assistant commissioner of commercial taxes (check-post)

Assistant commissioner of commercial taxes (Enforcement)

Commercial tax officer

Deputy commercial tax officer

Assistant commercial tax officer4.4.10 Procedure for registration of dealers1. Dealers who can apply:

• Turnover not less than 300000 in any year• Any dealer intending to start a business• Casual dealer• Every dealer registered under the CST act• Dealer residing outside the state but carrying business inside the state• Every agent of a non-resident dealer• Every factor, broker, commission and delcredere agent, auctioneer or

any other mercantile agent2. Application for registration:

• An application in Form D should be filled• It should be submitted to Registering authority• A demand draft should be enclosed for the amount specified by the

authority3. Documents to be enclosed with Form D:

• 2 recent passport size photographs• Identity to prove his existence like passport/family card/bank pass book/

driving license/VAO certificate



• Copy of MOA and AOA in case of company• Copy of Partnership deep in case of partnership• Form XI of TNGST act signed by applicant and manager• Form A showing the estimated turnover for the year

4. Security money:

• The Registering authority may demand security equal to 50% of the taxdue as estimated

• In all cases Rs.2500/- has to be collected by way of security at the timeof new registration

5. Issue of registration certificate:

• The commissioner issues certificate within 7days• If no notice been made with ref to the application within 20 days the

dealer is deemed to be registered• Registration certificate should be renewed every yr. by paying 500 before

31st march without penalty.Collection of tax by registered dealer• The registered dealer may collect the tax by issuing a bill in respect of

every sale, in duplicate• One copy of the bill should be retained by the dealer to be checked by

officialsAmendment to certificate of registration• Where the dealer has altered the name, place and nature of business• Where the dealer has changed the class or classes of goods in which he

carries on his business• Where there is change in ownership in businessCancellation of registration• Under section 21(4) when he proves that his turnover in each of the 2

consecutive years immediately preceding the application was less thanRs.75000

• Cancellation or amendment by the prescribing authority• Cancellation by the authority due to failure on the part of dealer to pay

tax or penalty, declaration of false information, failure to provide securityetc.,

Duties of a registered dealer• Shall keep at the place of business certificate of registration, books of

accounts.• Shall notify the registering authority about the change in place of business• Shall send bill of sale or delivery note or such documents along with the

goods• Shall furnish the returns before the due dates prescribed



4.5 Value Added Tax (VAT)

What is VAT and why is it so important?

4.5.1 General Introduction

A new tax system called Value Added Tax (VAT) is scheduled to intro-duce throughout India from April 2003. VAT is, perhaps, one of the mostimportant fiscal innovations of the 20th century. First introduced in Francein 1954 (Taxe sur la Valeur Adjoutee), it gradually began to be adoptedin other countries as well. At present, more than 160 countries, includingthose in Latin America, Asia, Africa and the Pacific have a VAT system inplace. Introduction of VAT in India is as per decisions taken by the Em-powered Committee of State Finance Ministers at the National levelunder the initiative of National Institute of Public Finance & Policy(NIPFP), New Delhi.

Implementation of VAT in our country is a right step in this direction andto do away with multiple tax system. Under the regime of VAT, thereshould be no other tax such as Additional Special Tax, Entry Tax, Octroiand Central Sales Tax (CST). Government of India decided to implementVAT throughout India w.e.f 1st April 2002 but it had to be deferred tillApril 2003 for all the states including north-eastern states

It is learnt that the Empowered Committee continued its deliberationsand joint discussions with the States to finalize draft rules. The elementof CST with respect to the inter state trade came in the way as the majorbarricade in implementing VAT due to delay in amendment of the CSTAct in the Parliament. The Central Government is reluctant to phase outCST and transfer of services for taxation to the states. Moreover, thereis a difference of opinion on the drafts of VAT between a few majorstates. At this stage, it was thought to be wise to defer implementation ofVAT to April 2003 otherwise the ill-designed, complicated and half bakedVAT system would have had incurred more damages to tradeandindustry.

If CST is allowed to continue after the introduction of VAT, it will be anadditional burden on industry with no mechanism of set-off betweenstates. In case CST is decreased over a period of time, the differencebetween VAT paid on inputs and CST paid on the outputs within thesame State would increase especially where ever inter-state exposure ishigh. So, until and unless CST is abolished and a uniform rate of taxamong the states is introduced, VAT system will miserably fail and wouldhave cascading effect on trade and industry.

4.5.2 What is VAT?

VAT is a tax, which is charged on the ‘increase in value’ of goods andservices at each stage of production and circulation. It is also chargeable



on the value of all imported goods. It is charged by registered VATbusinesses/persons/taxpayers. VAT has replaced a number of other taxesand its introduction should not result in either increased prices to finalconsumers or reduced profitability of business. VAT is levied on thedifference between the sale price of the goods produced or the servicesrendered, and the cost thereof __ that is, the difference between theoutput and the input.

In other words

It is nothing but Multi-Point Sales Tax.

• It is collected on value addition only at each stage.

• Tax paid by the dealer is deducted from the tax payable collected atevery point of sale and the tax already paid.

4.5.3 How is VAT different from the current Sales Tax?

`

How to calculate VAT?

VAT is calculated by deducting tax credit from tax collected during thepayment period.



Illustration No.1

Example: (Rate of tax assumed is 10%)

Purchase Price Rs.100

Tax paid during purchase Rs.10 (input tax)

Selling Price Rs.150

Tax collected during resale Rs.15 (output tax)

Input tax credit (Tax paid during purchase) Rs.10

VAT payable (outp ut tax – input tax) Rs.5

Total tax collected by govt. Rs.10

At the time of purchase by the dealer Rs.5

At the time of resale by the dealer

Total tax: Rs.(10+5) =Rs.15

The first thing we observe from the above table is that with equal taxrates of 10%, the final price to the consumer is 33% or Rs.174/-(Rs.702-Rs.528) higher in the cascading (traditional) sales-tax system. A part ofthis difference is owing to the Rs.77/-(Rs.125-Rs.48) higher tax receiptsof the government. The rest of the difference, Rs.97/-, is taken by higherprofits of the different intermediaries B, C & D.The second thing we can observe is that almost every time the VAT ischarged, it is not an expense to the person who pays it, but just an advanceto the government via the supplier. This is true for all except the finalcustomer who cannot claim the VAT deduction. Actually, he is the onlyone who pays the full amount. The above table assumes that the differentintermediaries want to keep a fixed percentage mark-up (perhaps becauseof capital invested in inventory). As a result, each time there are fewerprofits to the business intermediaries who don’t take a mark-up on theVAT. This also explains why the VAT is considered a better tax than thesales tax.We also observe from the last two lines of the above table that theconsumer is benefited by Rs.174/-(Rs.702-Rs.528) in the VAT systemwhereas the government loses by Rs.77/- (Rs.125-Rs.48).Note: In the above illustration, it is observed that in the VAT regime theeffect on price to B is only Rs.100/-. This is because the tax paid onpurchase by B is allowed to be setoff/credited against the tax (outputtax) payable by C on sale of the goods. Similarly, intermediaries C andD too will be allowed input tax credit until the goods reaches the finalconsumer (who cannot claim the VAT deduction).



4.5.5 Why VAT?

More equitable – tax burden is shared by all dealers.

More transparent – easy procedures and only two rates, broadly speaking.

Simpler- easy computation and easy compliance.

Credit for input taxation - cost efficiency.

Better Compliance - through self-policing.

Prevents cascading effect – through input rebate.

Avoids distortions in trade and economy – uniform tax rates.

Registration of -VATWho has to register as a Taxpayer?All legal and natural persons who provide goods, works or services andhave an annual sales turnover exceeding the threshold limit should registeras taxpayer. All importers are required to register irrespective of theirannual turnover. If the dealer supplies only exempt goods and serviceshe must still notify the local VAT office if his turnover exceeds the thresholdlimit. Totally exempt businesses will not however be registered astaxpayers but still be subjected to later visits by VAT officials to confirmtheir exempt status.It is the person, not the enterprise, who is registered for VAT. The personis only registered once for all enterprises/branches/divisions carried onunless permission is granted to register them separately.The person to be registered :

Sole proprietor (individual)

Incorporated/unincorporated body of persons

Corporation / company

Association not for gain

Welfare organization / trust

Local authority and certain public authorities

When must I register for VAT?You must register for VAT when the taxable supplies of your businessexceed the threshold limit. In most cases, taxable supplies refer to yourtotal sales. The limit changes each year, depending on inflation and



government decisions. At present, you should register your business forVAT in the following instances:

If your taxable turnover in the previous year exceeded the threshold limit.

If your taxable turnover in the next 30 days is expected to exceed threshold limit.

How do I register?You will need to complete the registration application form, which will besupplied by the VAT office, and take it or post it to your local VAT office.Your local VAT office will deal with your application and send you acertificate of VAT registration.What are my obligations as a VAT registered taxpayer?• Display your certificate of registration.• Charge VAT on all taxable transactions from the date of registration• Issue tax invoices.• Keep accurate and up to date books and records and make it available

for inspection by VAT auditors.• Submit a declaration to the local VAT office each month.• Pay the tax due each month.Can I be registered even if my turnover is below the thresholdlimit (Voluntary registration)?Yes. But if you register you must stay registered for a period (say 2years), which will be determined by the VAT office irrespective of yourannual turnover. You will have to charge VAT on all your taxable salesand keep all the records, which all taxpayers must keep. You will beallowed to reclaim input VAT on your purchases and expenses. You willneed to think carefully about the advantages and disadvantages of beingregistered.You may apply for voluntary registration even though the value of taxablesupplies in the course or furtherance of your enterprise is below the limitof threshold per annum. It may be in your interest to register if you makesupplies of goods or services mainly to other vendors. Before applyingfor voluntary registration you should, however, consider the obligations/implications of registration. You may, however, a) claim a credit for inputtax b) issue tax invoices to customers who are vendors. Registration isnot available to persons who make only exempt supplies.Can I be registered before I make taxable supplies?If you intend to carry on an enterprise, you may, prior to the date onwhich your activities will commence, apply to the VAT office forregistration.



Why do I need a registration certificate?This confirms to customers that you are authorized to charge VAT. Theregistration certificate or a certified copy must be prominently displayedat all premises where your business operates. A registered taxpayer whohas a valid Certificate of VAT Registration can only lawfully charge VAT.Declarations and Payment of VATHow do I declare and pay Tax?You must complete a VAT declaration form monthly as per directions ofthe VAT office for instance on the 16th day of each month. On the formyou will show the amount of VAT you have paid to your suppliers and theamount you have charged your customers. The difference between thetwo figures is either the amount of tax due to be paid to the VAT office orthe amount of credit to be carried forward to the next month’sdeclaration.Credit for purchases can only be claimed if you are in possession of anofficial tax invoice which shows the amount of VAT you have paid on thetransaction. If you calculate that you owe tax to the VAT office it shouldbe paid at the same time as you submit your declaration form. If you areowed tax it will be carried forward and you will deduct it from the tax youowe the following month. You will also need to show other information onyour declaration.How do I obtain my monthly declaration forms?You can obtain supplies of the monthly declaration form from your localVAT office. When the VAT office issues your certificate of registrationthey will give you an initial supply of the forms. However, it is yourresponsibility to ensure that you have a declaration form and submit it tothe VAT office monthly before the date mentioned by the VAT office.Who pays VAT?All dealers with an annual turnover of more than the threshold limit shallregister for VAT. All dealers registered under VAT should pay. Dealerswith turnover less than the threshold limit may register voluntarily.How to pay VAT?VAT will be paid along with monthly returns. Credit will be given withinthe same month for entire VAT paid within the state on purchase of inputsand goods. Credit thus accumulated over any month will be utilized todeduct from the tax collected by the dealer during that month. If the taxcredit exceeds the tax collected during a month on sale within the state,the excess credit will be carried forward to the next month.What must I charge VAT on?VAT is chargeable at the rate fixed by the government (say 10%) of thetotal tax exclusive selling price on all goods and services supplied in Indiaby registered taxpayers unless the goods or services are listed as exempt.If you are an exporter your sale abroad will be zero rated provided youhave exported the goods under customs supervision and have the customs



evidence of export. If you are in any doubt about the liability to the tax ofcertain goods or services you should contact your local VAT office foran official ruling.What types of input tax are eligible for VAT credit?Input tax credit is given for entire VAT paid within the State on purchasesof taxable goods meant for resale/manufacture of taxable goods. Inputcredit generally excludes purchases:• from unregistered dealers,• from other states/countries,• of goods used in manufacture of exempted goods,• goods used as fuel in power generation,• of goods to be dispatched as branch transfers outside the State,• of goods used in manufacture of goods to be dispatched outside the

State as branch transfer/consignments and in cases where the dealerdoes not have invoices showing amounts of tax charged separately bythe selling dealer. The above list is not exhaustive and is considered forillustration only. The government will decide further information regardingthe Input Tax Credit.

Tax Rates, Taxable Supplies and ExemptionsDifferent rates of VATThere are two rates of VAT:-• Standard rate (for example 10 %)• Zero-rate ( 0 % )What are Zero-rated supplies?Zero-rated supplies are supplies of goods or services on which VAT ischarged at 0%.Examples include:• Most of the food stuff (but not meals in restaurants or cafes and hot

take-away food and drinks),• books and newspapers,• exported goods • most prescriptions dispensed to a patient by a registered pharmacist

and • most public transport services.This list is not exhaustive and is considered for illustration only. TheGovernment will decide further information regarding zero-rated supplies.If all or most of the supplies are zero-rated, the dealer may not need tobe registered for VAT. This is called exemption from registration.What are “taxable supplies”? Taxable supplies are supplies of goods orservices made by a vendor in the course or furtherance of an enterprisewhich are chargeable with VAT including any supply charged with VAT



at the zero-rate. The following transactions by vendors are examples oftaxable supplies of goods or services:-• Sales of new and used goods.• Leasing and rental of movable and immovable property.• Private use of trading stock, assets and services.• Services provided, including professional services.• Services provided by local authorities and certain public authorities.What goods and services are exempted?The list of exempt goods and services will be provided by the VAT office/Department of Taxes, Govt. of Manipur. VAT is not chargeable on exemptsales. If all the sales are exempt the dealer will not be registered as ataxpayer but he must still notify the VAT office on a registration applicationform. The VAT office will confirm that the dealer does not need to beregistered, and from time to time they will contact the dealer to checkwhether he still sales only exempt goods.When am I exempt from registering for VAT? You are exempt from the normal registration requirements for VAT if youmake only zero-rated supplies. You must normally register for VAT whenthe value of your taxable supplies - generally speaking, the goods orservices you sell - which include zero-rated goods, exceeds the thresholdlimit. You can also get exemption from registration when you make taxablesupplies in addition to zero-rated supplies, but the level of the taxablesupplies must fall below the threshold limit. In both cases, not registeringfor VAT means that you cannot reclaim the VAT that you pay on yourpurchases. Certain goods and services are classed as exempt from VAT;if you supply only these, you do not have to register for VAT.Business ObligationsWhat if my circumstances change?You should notify your local VAT office of any changes in your business,which affect your registration or the information held by the VAT office.If you cease business and do not intend starting up another registerableenterprise you should complete an application to deregister. Tax will bedue on your sales up to the date of your deregistration which will benotified by the VAT office. VAT will be payable on the disposal of anytaxable assets of the business. Any unused stamped tax invoices must besurrendered to the VAT office.What if I am unsure about the procedures?Every VAT office has a Taxpayer Services section. The staff in thissection has been trained to deal with any inquiries from taxpayers andthey will be able to give answers to the questions. If you are in any doubtabout the tax or the procedures and requirements you should contactyour local VAT office immediately.



Must I issue Special Invoices?All sales to other VAT registered tax payers must be invoiced on approvedVAT invoices. Your customer will need this invoice to be able to claim hiscredit on the VAT he pay you. Supplies of the invoices you intend to usewhen you sell to other registered taxpayers must be approved and stampedby your local VAT office before issue. Exempt goods and services mustnot be invoiced on approved tax invoices. Invoices issued to non-registered customers must also contain information showing the seller’sname, tax number and amount of VAT charged. These invoices do nothave to be stamped by the VAT office but must be approved prior touse.What are the procedures for importing goods? VAT is charged on all imports unless they are listed as VAT exempt. Thetax is payable to Customs before the goods are released. VAT is calculatedon the import value of the goods plus any duties or other taxes payableat import. The Customs Declaration Form will include details of the taxcharged. Tax credits on imports can only be claimed if you have a custom’scertified copy of the import declaration form or evidence from Customsthat you have paid the VAT.Keeping Records & AccountsWhat records must I keep?VAT is a self-assessed tax. Registered businesses must keep at least thefollowing records and supporting documents -• A Purchase Book in which all purchases and expenses of the business

are separately recorded together with a note of the VAT paid to suppliers.• A Monthly Sales Book recording separately all invoiced sales and the

VAT charged to customers.• A book recording your daily gross sales if you are a retailer, a copy of all

purchase and sales invoices and a record of all imports and exports.Will the VAT office check my records?Yes, from time to time VAT Auditors will check your books and records.Trained officers from the VAT office will come to your business premisesto check your VAT records. They will normally arrange a visit bytelephoning or writing to you beforehand, but sometimes they will arrivewithout prior arrangement. On their visits the auditors will also answerany questions you have and will give you advice if you need it.What happens if I don’t comply with the requirements?VAT is a self assessed tax and it is your responsibility to make sure thatyou understand the requirements, pay the correct amount of taxes andkeep accurate books and records. Every VAT office has a taxpayerservices section to give you advice and answer your questions. Thereare severe penalties for not meeting all your obligations.



What happens if I make regular Tax credit claims?If you are a frequent exporter and exports make a large part of yourbusiness it is likely that you will regularly be in tax credit. Specialarrangements have been made for exporters to receive a refund ratherthan a credit of tax from the VAT office. In a few countries where VAT isalready implemented, all claims for zero rating of exports are supportedby evidence of export certified by Customs at the point of export. Theoriginal export certificates are attached to the VAT monthly declaration.Photocopies of export certificates are not accepted as evidence of export.The original certificates are returned after checking by the VAT office.Field Audit GuideIntroductionOne of the most important obligations of the VAT office is to provideinformation and education to taxpayers so that they, in turn, can dischargetheir VAT responsibilities. The VAT office will try to inform and educatethe taxpayers in a number of ways -• through publicity in the press, on TV and radio,• through public meetings,• by issuing a taxpayer guide,• by having a taxpayer services section in every office,• by visiting every registered taxpayer at least once in the first year of the

tax,This guide gives audit staff advice and instruction on the conduct ofeducation/audit visits in this first year.The purpose of education/audit visitsThe purpose of visits by field auditors in the first year of the tax will be toensure that each taxpayer -• understands his VAT obligations,• has set up the necessary systems and records to account for the tax,• has maintained up to date systems and records,• has made the necessary monthly declarations,• is accounting correctly for the tax.The visits can therefore be considered as mainly education rather thanaudit inspection.Planning the visit programThe head of each Field Audit section will need to plan a visiting program,which will achieve the objective of visiting every taxpayer within the firstyear. In offices with a small taxpayer population they should aim tocomplete the first cycle of educational visits as soon as possible. In officeswith taxpayer populations the head of the section will need to consider anumber of factors when planning the visit program i.e. it would be normalto visit the larger taxpayers first on the basis that they pose the biggest



potential risk to the system, but equally attention must be paid to thosetaxpayers who perhaps have poor compliance records for other taxes,or are in trade sectors where there are particular VAT technical difficulties.Each week or month, the head of the Field Audit section should allocatea number of visits to each auditor. A simple record should be kept in the“Audit Selection Register” (Appendix A) of the allocation and thecompletion of the visits.As a commitment is being given to visiting every taxpayer in the firstyear. it will be necessary for reports on progress to be sent monthly tothe VAT office, so that he can be satisfied that this commitment will befulfilled. On the 15th day of each month the head of the Field Audit sectionshould complete the “Audit Program Report” (Appendix B) and send itto the VAT office.Education visitsThe education/audit visits should not normally take more than a day tocomplete, including writing the visit report. Occasionally a visit to a largertaxpayer who has complicated systems or where there are othercomplications may take longer than a day, but on the first visit this shouldbe the exception.Preparing for the visitThe audit officer should plan a weekly program of visits. To prepareproperly for the visit the officer should -• telephone the taxpayer and arrange the date and time of the visit,• ensure that the owner, a director, a partner, or a responsible person will

be available on the visit,• explain the purpose of the visit to the taxpayer,• ask if there are any particular problems that the taxpayer will wish to

discuss (you can then make sure you are well prepared with the answers),• tell the taxpayer that you will want to examine this VAT books and

records,• examine the papers in the taxpayer’s file.Visiting the taxpayerAudit officers should take the taxpayer file, a copy of the law, Taxpayerguide, Retailer Guide and a notebook on the visit. The officer should -• examine the Taxpayer file before he goes on the visit,• decide which declaration you propose auditing in depth,• at the start of the visit interview the owner, partner, director or responsible

person with whom the appointment was arranged,• confirm that the details shown on the registration application are correct.

If there have been changed which affect the registration (e.g. addresshas changed, directors have changed etc.) make a note of the new details,

• check that the certificate of VAT registration is on display for the publicto see,



• ask the taxpayer if he has read his copy of the Taxpayer Guide (if hesays he has lost it another copy should be given to him),

• ask the taxpayer to explain how his accounting system work and whatbooks and records he keeps (make a note of what he tells),

• ask to see the books and records,• compare the totals for each month in the sales and purchase records

with the amounts declared on the various declaration in the taxpayersfile.

• If there are differences between the books and any of the VAT returnsthe taxpayer must be asked to explain why there is a difference andfurther investigation is required in this regard.

• If the totals in the books agree with the totals on the VAT declarations,the audit officer should select one declaration from the taxpayer’s file fora more detailed audit examination.

• If the taxpayer is a retailer the officer should check his calculations of taxdue.

• If the Taxpayer has exempt sales as well as taxable the officer shouldcheck his calculations of input tax claimed.

• If the Taxpayer is a retailer of exempt and taxable goods the officershould check that he is correctly assessing his taxable sales.

• Check that exempt sales are correctly classified as exempt under thelaw.

• Ask the taxpayer if he has any questions about VAT and his obligations.• Ask the Taxpayer if he has made any significant capital purchases since

VAT started.• If it is practical to do so the officer should physically inspect any capital

purchases.• Inspect the business premises including warehouses (except where there

are branches or premises at a distance).• Complete an “Audit Visit Report” (Appendix C) as soon as the officer

return to the office.• Pass the Taxpayer file together with the officer’s visit report to the head

of the Audit Section.• Advise Registration Section of any amendments to the registration details.Audit examinationVAT control does not depend on Audit officers carrying out a full audit ofall the declarations submitted to a Taxpayer. The audit should be in twoparts –• First, a simple comparison of the totals of VAT on each month’s purchases

and sales books with the VAT declared on each monthly declaration.• Secondly, a more detailed audit inspection of a selected month’s

declaration.



The selection of a particular declaration period for an in-depth audit willdepend on a number of factors. Ideally there should be a reason forauditing a particular period rather than merely selecting one at random.Your inspection of the declarations in the Taxpayer file before you startedthe visit should have helped you to decide which period you intendauditing. (Perhaps there were larger than normal purchases one month,or an apparent drop in sales).When you audit the declaration should:• Confirm with the taxpayer that he has given you all the records for the

particular period.• Check the purchase invoices against the purchase record ensuring that

there is a proper VAT invoice to support all items on which VAT is beingreclaimed.

• Check that the total of the VAT claimed in the purchase book has beencorrectly added up.

• Check that the total of the VAT claimed agrees with the total shown inthe purchase book.

• If it is practical to do so, you should inspect all capital items on whichVAT has been reclaimed and satisfy yourself that they are being used forbusiness purposes and not personal use.

• If you have suspicions about capital purchases which are alleged to bekept in remote premises, perhaps in another State, you should considerasking the local VAT staff to make a visit to inspect the items.

• Inspect the taxpayer’s stock (to satisfy yourself that the level of stock isconsistent with the purchasing pattern shown in the books).

• Check that all sales invoices are recorded in the sales book.• Check that the total of VAT shown in the VAT sales book has been

correctly added up.• Check that the total VAT shown in the sales book agrees with the total

VAT declared in the monthly declaration form.• Issue an assessment if tax has been incorrectly declared.• Extend you audit to other months if you consider that they are also likely

to be under-declared.• If the tax under-declared exceeds the threshold limit no assessment should

be issued until your report has been considered by the head of the AuditSection (who may consider offence action is appropriate).

• Remind him that there are penalties for under-declaring the tax.• Remind him that all books and records must be kept even if they have

been audited by VAT field auditors.Audit visit reportsThe audit visit report is an important record in the control of VAT taxpayersbecause we only audit infrequently and individual officers do not normallyaudit the same taxpayer twice. The audit visit report gives future auditors



useful information about what has been done on earlier visits and whatsystems and records the taxpayer keeps.All of the factors referred above should be covered in your visit andreported on in the “Audit Visit Report” (Appendix C). Additionally anyother matters which may be important now or to a future auditor shouldbe mentioned in the report, because the selection of future audit visits willbe decided not just on the basis of the declaration but also any otherinformation which is available.Have You Understood ?Objective questions :1. What is the expansion of CST?

a. commercial sales tax b. common sales taxc. compensation sales tax d. central sales tax

2. Expand TNGST._______________a. Tamil Nadu Government Sales Taxb. Total number of goods sales tax

Short questions :3. Define corporate tax planning.4. Write short note on: Value Added TaxExtended questions :5. Discuss the procedures to be followed in corporate planning.6. Explain the deductions in corporate planning.7. Critically examine the Sales Tax Act.8. Discuss about the TNGST and CST.9. Evaluate the functions of VAT.SummaryIn many countries, in addition to legally imposed taxes there are alsoarbitrary and irregular tax-like levies imposed by the authorities. Theselevies are a part of a larger phenomenon involving the need to make extrapayments when interacting with government officials in many countries,particularly at the local level and at the lower levels of bureaucracy. Theselevies also form a part of the burden of taxation and have socio-economicconsequences. Nevertheless, these irregular payments are not capturedin the traditional economic databases, including that involving governmentfinance. When such irregular levies arise in-lieu of legally imposed taxes,the tax revenue collection will fall below what can be collected onobjective grounds. When they arise in addition to the legally imposedtaxes, the tax burden increases in an arbitrary and capricious manner,with detrimental effects on equity and efficiency in resource allocation.The VAT design will significantly bring in simplicity and transparency inthe tax structure, thereby improving tax-compliance and eventually



boosting the revenue growth of state governments. The hallmark of theVAT system is that VAT liability will be self-assessed by the dealersthemselves in terms of submission of returns upon setting off the tax credit.The existing system of compulsory assessment at the end of each yearwill be discontinued. Compulsory assessments will now be limited to afew cases where a specific notice is issued. This would make taxadministration simpler and reduce the costs involved in revenue collection.This system of self-assessment will be supplemented by auditedmechanism where the assessments of a certain number of traders, selectedon a scientific basis, will be assessed every year. This will ensureaccountability and transparency in the system while avoiding undueharassment of traders and dealers. Due to the inherent transparency andaccountability in the system, VAT leads to not only better taxadministration but also higher levels of compliance and lesser evasion.Tax evasion is a grave problem in a developing country like ours as itleads to a creation of a ‘resource crunch’ for developmental activities ofthe state. Reputed international institutions like the World Bank and IMFpoint out that the VAT regime prevents tax evasion and boosts revenuesto help cash starved governments to come out of their debt-trap.





5. Consumer Protection Act and Introduction of Cyber Laws

5.1 Consumer Protection Act

5.1.1 Introduction about Consumerism

Consumerism is the basis as to the protection of consumers. The followingquestions are important to be discussed.i) How Consumers can be protected?ii) Consumers are protected against what?Answer to the above questions may be aptly termed with ‘Consumerism’.Thus, who is a Consumer? When and by whom a complaint can be made?And what is the relief available to consumers? are the aspects of‘Consumerism’ It can be compared with a coin having two sides, viz.,trader and consumer (customer). The words trader and customer haveits relevance since the date of civilizations. So protection of interest ofcustomers has been a matter of concern from older times and what wefind today is not a product of a day or a year but has been a matter ofconstant process.


After studying this unit you should be able to:• Understand about the objectives of the Consumer Protection Act.• Know about the scope of the Consumer Protection Act.• Describe the essential elements of the Consumer Protection Act.• Analyse the scheme of the Consumer Protection Act.• Understand the functions of Consumers Protection Councils.• Specify the role of Consumers Protection Courts.• Forecast the emerging scenario of Consumerism.

CONSUMER PROTECTION ACT ANDINTRODUCTION OF CYBER LAWS

UNIT - V



In 19th century manufacturer’s liability was first time established in theleading case of Carlil v. Carbolic Smoke Ball Company. Further, thejudgment in Donoghue v. Stervension gave impetus to it, where LordAtkin laid down a very important principle of determining duty of amanufacturer. The facts briefly were that the defendant, a manufacturerof ginger-beer. The retailer sold it to A, who had given it to his friendMiss Donoghue. She drank the ginger-beer. The battle contained thedecomposed remains of a snail which were not, and could not be, detecteduntil the greater part of content of the battle had been consumed. As aresult, she alleged that she became seriously ill in consequence and suedthe manufacturer for negligence. Lord Atkin, in this case laid down theprinciple of duty to take reasonable care to the consumer where productsresult in an injury to the consumer’s life or property.This case was followed by the Judicial Committee of the Privy Council in1935 in Grant v. Australian Knitting Mills Ltd.But, Consumer Movement in England starts after the First World Warwhen Labour Party for the first gave slogan of “Battle for theConsumers. By lapse of time this movement became stronger and underpressure, British Government established Molony Committee. On therecommendation of this committee Consumer Council was constitutedand thereafter various legislations were enacted in England.The United Nations has passed a resolution in April 1985 indicating certainguidelines under which the Government could make law for betterprotection of the interest of the consumers. Such laws were morenecessary in the developing countries to protect the consumers fromhazards to their health and safety and to make them available speedierand cheaper redreSecs. This was a great step in the movement ofconsumerism.The framework for the Consumer Act was provided by a Resolution, dt.9.4.1985 of the General Assembly of the United Nations Organisations.This is known as ‘Consumer Protection Resolution No.39/248’. Indiais a signatory to the said resolution.In India, it was at the end of twentieth century the Consumer protectionwas enacted. The Consumer Protection Act, 1986 received the assentof the President on Dec. 24, 1986, but came into force on 15th April,1987. Prior to this Act, we have the Indian Contract Act, 1827, TheSale of Goods Act, 1927, The Dangerous Drugs Act, 1940. TheAgricultural Produce (Certification Marks) Act, The Prevention of FoodAdulteration Act, 1954. The Indian Penal Code 1860, The Standardsof Weights and Measures Act, etc. 1979 which to some extent protectconsumer interests. However, these laws require the consumer to initiateaction byway of a civil suit involving lengthy legal process which is veryexpensive and time consuming.The Consumer Protection Act was enacted to provide a simple andquicker access to redressal of consumer grievances. The object of theAct is given in the preamble of the Act. It says:“An Act to provide for better protection of the interests of consumers



and for that purpose to make provision for the establishment of consumercouncils and other authorities for the settlement of consumer’ disputesand for matters connected therewith”.

5.1.3 The Consumer Protection Act 1986

The Consumer Protection Bill, 1986 sets out objects and reasons whichhave been mentioned under S 6 of the Act. They are:1. The right to be protected against marketing of goods which are hazardous

to life and property.2. The right to be informed about the quality, quantity, potency, purity,

standards and price of goods to protect the consumer against unfairtrade practices;

3. The right to be assured, wherever possible, access to variety of goodsat competitive prices,

4. The right to be heard and to be assured that consumer’s interest willreceive due consideration at appropriate forums,

5. The right to seek redressal against unfair trade practice or unsulptuousexploitation of consumers and

6. The right to consumer education.Virtually, this is the Consumer’s Charter which has been provided underS.6 of the Act.The following rights have been added by the Amendment Act, 1993 and2002 respectively.

7. The right to be protected from unfair trade practices as defined undersection 36A of M.R.T.P.Act, 1969 and

8. Protection from spurious goods or offering such goods for sale oradopting deceptive practice in the provision of services.

The above mentioned, rights may be explained as follows:Right to SafetyIt is right to be protected against the marketing of goods and serviceswhich are hazardous to life and property. Traders must ensure that goodsare safe for users, in case of hazardous goods; they give clear instructionsas to mode of use, the risk involved in improper use of goods, vital safetyinformation is conveyed to consumers. Where product is found such as is likely to be hazardous traders shouldeither recall it and modify the same, or replace it with a new product, oradequately compensate for it.Right to informationIt is right to be informed about the quality, quantity, potency, purity,standards of price of goods or services, with a view to protect theconsumer. Consumer should be instructed in the proper use of goodsand should be informed of the risks involved in the intended or normally



foreseeable use. Vital safety norms should be conveyed to consumersagainst unfair trade practices.This is very significant right of consumers, since adequate information isvery important in order to make a right choice of the goods and services.This ensures consumers of having maximum information about the widevariety of competing goods available in the market. Now, the SupremeCourt has designated this legal right as a fundamental right of the consumerwithin the purview of Articles 19(1)(a), 21 & 25 of the Constitution.Right to chooseIt is a right to be assured, wherever possible, access to variety of goodsat competitive prices. It can be made me made meaningful by ensuringaccess to a variety of goods and services at competitive prices. Fair andeffective competition in the market must be encouraged so as to provideconsumers with the widest range of products and the services at thereasonable price.Right to RepresentIt is a right to be heard and to be assured that consumer’s interest willreceive due consideration at appropriate forums. Under the provisionsof the Act every consumer has a right to file complaint and be heard inthat context.Right to RedressalIt is a right to seek redressal against unfair trade practices or restrictivetrade practices or unscrupulous exploitation of consumers. This right hasbeen ensured by establishing three-tier system of consumer FORA andby providing procedure of getting redress as well as recognizing restrictiveand unfair trade practices as a ground to make a complaint.Right to EducationThe right to consumer education is a right which ensures that consumersare informed about the practices prevalent in the market and the remediesavailable to them. Booklets informing citizens about their rights to serviceswill be made available. The Government should also plan to set-upmonitoring agencies for this purpose.The role of media and NGOs maybe significant in this direction. Widerpublicity of consumer rights and the rights available in the Act is neededto make this right effective throughout the country.Protection from Unfair Trade PracticesThis has been provided by the Amendment Act, 1993 which ensuresprotection to consumers against unfair trade practices of traders.Protection against Spurious GoodsThis right has been added by the Amendment Act, 2002. Goods whichare spurious or hazardous shall be prevented from marketing. This isessential which protects the public health and life. The rationale behindthis provision is to ensure physical safety of the consumers.



In the post period of the Act some leading cases like LucknowDevelopment Authority v. M.K.Gandhi (A.I.R. 1994 S.C.787), All IndiaMedical Association v. V.P.Santha (A.I.R.1996 SC 500), J.J.Merchantv. Sri Nath Chaturvedi (A.I.R. 2002 S.C.184) have strengthenedconsumerism very significantly.In the span of 16 years there has been drastic amended in the Act, viz.,in 1993 and 2002. With the amendment of the Consumer ProtectionAct, 1986 in 2002, the law of Consumer Protection in India has beentotally changed. The experience of working of the enactment has broughtout many shortcomings and the needs of judicial delivery system throughRedressal Agencies with the passage of time having changed, had beenthe causes of such overhauling of the system as a whole. The newprovisions have been made in furtherance of protection of the interest ofconsumers. The new changes have finally amended the consumer courtswith teeth to protect their rights.Author’s view is that the Consumer Protection Act when passed in theyear 1986 was a child. After Amendment in 1993 it became young andafter Amendment in the year 2002, it has attained its maturity but stillmove needs to be done. Voices are raised for imposition of fees forfiling complaints in consumer courts because it is against the spirit of theAct to provide a cheap and simple relief to consumers. There should bespecific provisions for service providers. Financial services which covershares and stocks including debentures should also be brought up withinthe purview of the Act. Adequate infrastructure also provided for thesmooth functioning of these courts.Right to information: A Fundamental Right of consumers“Right to know whether food products, cosmetics and drugs are of non-vegetarian or vegetarian origin; is fundamental Right of Consumers.”Consumerism is the basic thought that ‘consumer needs to be protected’.The fundamental questions which spring from this basic thought arei) How consumers can be protected?ii) Consumers are protected against what?The Consumer Protection Act is an apt answer of the above twoquestions. The Act provides a machinery for redressal agencies knownto ‘Consumer FORA’ and certain rights of consumers viz., right to safety,right to information, right to choose, right to represent, right to redressaland right to education.These are the legal rights of Consumer and Consumer Forum is meant toprotect them. ‘Right to information’ is a right to be informed about thequality, quantity, potency, purity, standard and price of goods and services,with a view to protect the consumer against unfair trade practices.‘Right to information’ though a legal right has now assumed as afundamental right of consumers.This question came for discussion before the Apex Court in Ozir Husainv. Union of India (A.I.R.2003 S.C. 103). In this case the petitioner



claims to be animal welfare volunteer and a member of several animalwelfare organizations. He is also stated to be a conscientious objector ofconsumption and use of animals and their derivatives for food, cosmeticsand drugs. It has been highlighted in the petition that more than 60% ofthe people of this country are vegetarian and over 50% of them are illiterateand large number of them cannot read or write English. It is also urgedthat there should be complete disclosure of constituents of cosmetics andfood products and that such food products should bear an easilyrecognizable symbol conveying the origin or ingredients of the products,whether vegetarian or non-vegetarian, so that literate or illiterate consumerscan make an informed choice before select ing theproducts.By this public interest writ petition the petitioner sought:i) a direction to the respondents to protect the rights of innocent conscientious

consumers who object to the use of animals in whole or impart or theirderivatives in food, cosmetics and drugs, etc. by making the manufacturersand packets thereof to disclose the ingredients of the aforesaid productsso that they may make an informed choice with regard to theirconsumption;

ii) a direction to the manufacturers and packers of cosmetics, drugs andarticles of food for complete and full disclosure of the ingredients of theirproducts being sold to consumers;

iii) a declaration that the consumers have right of making an informed choicebetween the products made or derived from animal and non-animalingredients; and

iv) a direction to manufacturers and packers of food, cosmetics and drugsthat the products made from animals should bear an easily identifiablesymbol conveying that it has an animal ingredient.

The petitioner pleads to the Constitution mandates disclosure ofinformation. The Supreme Court discussed the above provisions of Art.19(1)(a), 21 and 25 of the constitution separately in detail.

5.1.4 Commentary on the Consumer Protection Act, 1986

Definitions (S.2)Section 2 of the Act defines certain words used in the various sections.These definitions are relevant in order to have clear connotation of theprovisions of the Act. In absence of such definition the context of theprovisions maybe interpreted differently. Definitions - (1) In this Act, unless the context otherwise requires -a) “Appropriate laboratory” means a laboratory or organisation –i) recognised by the Central Governmentii) recognised by a State Government , subject to such guidelines as may be

prescribed by the Central Government in this behalf; oriii) any such laboratory or organisation established by or under any law for



the time being in force, which is maintained, financed or aided by theCentral Government or a State Government for carrying out analysis ortest of any goods with a view to determining whether such goods sufferfrom any defect.

This definition is more wider than the repealed definition of the originalAct which says “appropriate laboratory” means a laboratory ororganisation recognised by the Central Government and established byor under any law for the time being in force, which is maintained, financedor aided by the Central Government or a State Government for carryingout analysis or test of any goods with a view to determining whether suchgoods suffer from any defect.Followings are Appropriate Laboratory for the purpose of the Act alaboratory or organisation, should beI. recognised by the Central GovernmentII. recognised by a State Government orIII. any such laboratory or organisationa) established by or under any law for the time being in force;b) which is maintained, financed or aided by the Central Government

or a State Government ; andc) for carrying out analysis or test of any goods with a view to determining

whether such goods suffer from any defect.Object of the Appropriate laboratoryThe purpose of the Act is to protect the consumers from defective goods.The function of appropriate laboratory is to test or analyse the sub-standard, defective or adulterated goods and to give expert opinion asto purity or standard of the goods under question. This helps theconsumer courts in their functioning as per scheme of the Act.Section 2(1)(b) Defines ‘Complainant’“Complainant means-i) a consumer; orii) any voluntary consumer association registered under the Companies Act,

1956 (1 of 1956) or under any other law for the time being in force; oriii) the Central Government or any State Government, who or which makes

a complaint;iv) one or more consumers, where there are numerous consumers having

the same interest;(v) in case of death of a consumer, his legal or representative], who or

which makes a complaint.For the scheme of the Act the words, ‘complainant’ and ‘complaint’ aresignificant. It is the complainant who makes complaint for the remedyprovided in the Act.Who is a complainant?It is the complainant who makes complaint in consumer courts for remedyas to defects in goods or deficiency in services. The Art includes the



following groups of persons as complainant;1. a consumer or2. any voluntary consumer association registered under the

Companies Act, 1956 or under any other law for the time being in force;or To be complainant voluntary consumer association must be registeredunder:

i) The Companies Act, 1956 orii) Any other law such as Societies Registration Act, 1860 oriii) Registered organizations under Law of Trust,3. the Central Government or4. any State Government or5. one or more consumers, where there are numerous consumers having

the same interest or6. legal heir or representative of deceased consumer.As to general principle of law that only an aggrieved person has locusstandi to make complaint does not apply. Here the consumers are thereal aggrieved persons for the purposes o f the Act , butbesides him other persons may also file complaint. This provision makesremedy under the Act simple and popular.Prospective InvestorIt has been decided in Margan Stanley Mutual Fund v. Kartika Das thata person who has only applied for the shares of a company is not acomplainant and he can be complainant only after allotment of such shares.Inclusion of consumer associations and organisations to represent or arguefor consumers before consumers courts will benefit consumers. NGOscan represent consumers before consumers FORA.Complaint: [S. 2(1)(c)].“Complaint” means any allegation in writing made by a complainant that(i) an unfair trade practice or a restrictive trade practice has been adopted

by [any trader or service provider];(ii) the goods bought by him or agreed to be bought by him]suffer from one

or more defects;(iii) the services hired or availed of or agreed to be hired or availed of by him

suffer from deficiency in any respect;(iv) a trader or the service provider, as the case may be, has charged for the

goods or for the services mentioned in the complaint, a prior in excess ofthe price -

a) fixed by or under any law for the time being in force,b) displayed on the goods or any package containing such goods;c) displayed on the price list exhibited by him or under any law for the time

being in force;



d) agreed between the parties;(v) goods which will be hazardous to life and safety when used are being

offered for sale to the public -a) in contravention of any standards relating to safety of such goods as

required to be complied with, by or under any law for the time being inforce;

b) if the trader could have known with due diligence that the goods sooffered are unsafe to the public;

(vi) Services which are hazardous or likely to be hazardous to life andsafety of the public when used, are being offered by the service providerwhich such person could have known with due diligence to be injuriousto life and safety;. With a view to obtaining any relief provided by orunder this Act.Complaint means any allegation in writing before consumer courts with aview to obtaining any relief by or under the Act. Such complaint is madeagainst the seller of the goods or service provider for their certain actswhich are prejudicial to the interest of the consumer. This is the basisupon which prescribed courts under this Act exercise jurisdiction andgrant relief to the complainant.So, procedure for getting relief under the provisions of the Act is verysimple, what is required is a complaint in writing accompanied withdocuments relating to sale or supply of service. There is no need ofcourt fees or service of an advocate, etc. This is in furtherance of theobjective of the Act. It will be relevant to mention here that this act is a Social Legislation andone of the inherent objectives of such social welfare measures is to providebetter, efficient and cheaper services to the people.Originally the scope of the complaint was confined only with respect togoods and services. But by amendment in 1993 and 2002 is scope hasbeen widened and now it includes an unfair trade practice, a restrictivetrade practice or goods or services which are hazardous or likely to behazardous to life and safety of the public. The purpose is to protect thepublic from mal-practices of the busineSecs.Consumer [S.2 (1)(d)] “Consumer” means any person who -i) buys any good for a consideration which has been paid or promised or

partly paid and partly promised, or under any system of deferred paymentand includes any user of such goods other than the person who buyssuch goods for consideration paid or promised or partly paid or partlypromised, or under any system of deferred payment, when such use ismade with the approval of such person, but does not include a personwho obtains such goods for resale or for any commercial purpose; or

ii) [hires or avails of] any services for a consideration which has been paidor promised or partly promised, or under any system of deferred paymentand includes any beneficiary of such services other than the person who



[hires or avails of] the services for consideration paid or promised, orpartly paid and partly promised, or under any system of deferred paymentwhen such services are availed of with the approval of the first mentionedperson [But does not include a person who avails of such services forany commercial purpose];

[Explanation - For the purposes of this clause, “commercial purpose”does not include use by a person of goods bought and used by him andservices availed by him exclusively for the purposes of earning his livelihoodby means of self-employment].The crux of the Act to provide protection to consumers. So protection ofconsumer is the sole subject matter of this Act. As we have seen that oneof the category of complainant is a consumer. So the definition of consumeris not only significant but vital for the purposes of the Act.Who is a Consumer?Consumer is a person who buys any commodity to consume either asstable or otherwise from a shop, business house, corporation, store fairprices shop.In Oxford Dictionary a consumer is defined as a purchaser of goods orservices. In Black’s Law Dictionary it is explained to mean, one whoconsumers, individuals who purchase, use, maintain and dispose ofproducts and services.S.2(1)(d) of the Act defines consumer. This definition contains two parts.The first deals with goods and the other with services. Both parts declarethe meaning of goods and services by use of wide expression. Theirambit is further enlarged by use of exclusive clause. For instance, it isnot only purchaser of goods or hirer of services but even those who usethe goods or who are beneficiaries of services with approval of the personwho purchased the goods or who hired services are included in it.In Murugan Stanley Mutual Fund V. Kartika Das, Supreme Court hasdefined consumer.“The consumer, as the term implies, is one who consumers. Asper the definition, consumer is the one who purchases goods forprivate use of consumption. The meaning of the word consumer isbroadly stated in the above definition so as to include any one whoconsumes goods or services at the end of the chain of production.The comprehensive definition aims at covering every man who paysmoney as the price or cost of the goods and services”.Thus any person who:1. buys goods for consideration or2. hires or avails of any service for consideration is a consumer.

5.1.5 Analysis of the Scheme of the Act

Any ‘person’, Here the term ‘person’ has been used in a very wide sense.It means any individual, corporate body, firm, or any group of associationor persons. So far as the scheme of the Act it includes any individual,



company registered under Companies Act, corporation, firm or societiesregistered under Societies Registration Act, group of persons, or anyassociation of persons. So a club, religious endowment; any Institutionor Institute will be covered under this expression.For consideration: To bring the case within the ambit of this act it isnecessary that goods bought or services availed of must be forconsideration. Here the meaning and scope of consideration is the sameas defined in Contract Act. Payment of tax which goes into the generalrevenue of the state or local authority will not legally constitute paymentof consideration for any specific service.The maintenance of public roads and highways by the Government maybe considered to be a ‘service’ but the road using public cannot beconsidered to have hired this service for consideration.A person who goes to receive medical treatment in a Government Hospitalis not a consumer.For the purposes of the Act consumers may be classified: i) As to goods (buyer of goods) and ii) As to services (hirer of services)i) As to Goods [S. 21(1)(d)(i)]1. Buyer of GoodsAny person, who buys goods for consideration, is a consumer. Anyperson who buys any goods for consideration which has been paid, orpromised or partly paid and partly promised or under any system ofdeferred payment is a consumer.Thus, any buyer of goods for consideration which has been paid orpromised or partly paid and partly promised, or under any system ofdeferred payment such as Hire-Purchase system or Installment sale. Buyermeans any person who buys or agrees to buy goods. Here it is clear thatposition of a buyer depends upon contract of sale.“Contract of Sale” is a contract whereby the seller transfers or agrees totransfer the property in goods to the buyer for a price. Under Sale ofGoods Act a transaction to be a sale, it is necessary that property ingoods (ownership) must be transferred for price. Price must be in termsof money. But for the purpose of Consumer Act the transfer must be forconsideration. It need not be in terms of money. So transactions oftransfer for services, or barter, or exchange will come under the purviewof this Act and such transferee will be a consumer. Consideration mustbe there whether it is actual paid or promised to pay.In view of the above it is clear that the term ‘buyer’ has been used in awide important and it includes a transferee under Exchange, Barter, lease,Hire purchase system, Conditional Sale and like any other transaction.It is also to be noted that the term transfer does not limited only to goodsbut it also includes transfer of other property such as immovable propertylike building, etc.This point may be explained by quoting few cases.



In Mohan Sharma v. Chandigarh Bottling Co. the complainants purchased5 crates of Limca for Rs.440 for serving the same to the guests on marriageof his daughter. After consuming the drink the guests were taken ill andstarted vomiting. The bottles were got examined and found that someforeign particles and fungus were therein. The District Forum directedthe refund of the amount paid for and Rs.200 as compensation. In appealState commission increased the compensation to Rs.5000.In another case Akhil Bhartiya Grahak Panchayat v. M/s. Meghna Metals& Another, the complainant purchased one Prestige Pressure Cookermanufactured by opposite party. In spite of special Gasket system forsafety in the cooker, the cooker burst and the same resulted in damage tothe right hand of the complainant‘s wife. The opposite party was directedto pay compensation of Rs.1,00,000 and to reimburse the medical bills.A person, got allotted a constructed house on Hire Purchase system byGorakhpur Development Authority. It was found that sub-standardmaterials have been used and the house is not up to mark. He is aconsumer and can complaint for the same before consumer court againstGorakhpur Development Authority.2. User of GoodsThe other category of consumer in respect to goods is user of the goods.Consumer includes any user of goods other than the person who buysgoods for consideration paid or promised or partly paid or partly promised,or under any system of deferred payment, when such use is made withthe approval of such person.With the Approval of BuyerAny person who uses goods with the approval of the buyer is alsoconsumers provided that such buyer must have bought the goods forconsideration. So all the family members who use the goods areconsumers. Here consent of the buyer for the use of his family membersor invites or guest, is implied. So a guest who uses goods with the consentof such buyer is also a consumer. Beneficiary of a Contract: In Malkiat Singh v. New Insurance Co. Ltd,2000 (1) CPJ 356, has been held that beneficiary of a contract is aconsumer, hence entitled to file complaint.ii) As to Services [S.2 (1) (d) (ii)]3. Hirer of ServicesAny person who hires or avails of any services for a consideration whichhas been paid or promised or partly paid and partly promised, or underany system of deferred payment.Thus, any person who hires or avails of any service for consideration is aconsumer. The term ‘Service’ has been defined under S. 2(1)(0). Itincludes service of any kind rendered for consideration (See supra).In society there are so many fields in which services are rendered byindividuals, institutions whether private or statutory specially by Banks,Telephone Department, Post Offices, Insurance, whether life or general,



Railways, Doctors, Caterers, Contractors, Transport Operators,Engineers, etc. for consideration. Persons availing or using services ofthem are consumers.In Union of India v. Mrs. S.Prakash, it has been held that the subscribersof telephone are a consumer. As the rental charges paid to the CentralGovernment is the consideration for the services rendered by the Tele-communication Department.A customer of a Bank is a consumer. A person who obtains Bank Draftfrom a Bank is a consumer. A person who hires services of caterers inthe marriage is consumer. A person after buying ticket from Railwaywindow travels by train is a consumer.4. Beneficiary of ServicesIn respect of services, the beneficiary of such service is also a consumer.It includes any beneficiary of such services other than the person whohires or avails of the services for consideration paid or promised, orpartly paid and partly promised, or under any system of deferred payment,when such services are availed of with the approval of such person.5. Deemed ConsumerThe new concept of deemed consumer has been evolved by the SupremeCourt in Regional Provident Fund Commissioner v. Shiv kumar Joshi[A.I.R.2000 SC 331], it was held that the facilities provided by theScheme under the provident Fund Act were “Service”. It was furtherheld that even if the administrative charges for running the Scheme are“paid by the Central Government and no part of it is paid by theemployee, the services of the Provident Fund Commission in running theScheme shall be deemed to have been availed of for consideration bythe Central Government for the benefit of the employees who would betreated as beneficiaries within the meaning of that word used in thedefinition of consumer”. After considering the entire Scheme as providedunder the Employees Provident Fund Act, the S.C. held that “it was aservice within the meaning of S.2 (1) (0) of the Act. It was further heldthat the member of the Scheme is a consumer within the meaning of section2(1)(d) of the Act.Approval of HirerAny person availing any service with the approval of hirer is a consumer.So a tenant using the facilities of telephone, electricity or water supplywith the approval of landlord is a consumer. The term ‘beneficiary’includes all persons using such service with the approval of hirer. AGuest or Licensee is also consumer.In Nagpur Improvement Authority v. T.D.Vankhede, it has been decidedthat beneficiaries are consumers.In L.I.C. v. B.S.Reddy, the National Commission decided that servicesof Life Insurance Municipal Corporation are also service. So supply ofcontaminated water is subject of this Act. Illustrations may be many invarious fields.



In Spring Meadows hospital v. Harjot Ahluwalia, it has been decidedthat the patient and his relatives who are in the service of the patient areconsumer. So mother and father of ailing son getting treatment are alsoconsumer.We may put consumer in the following heads:1. Buyer of goods2. User of the goods3. Hirer of services4. Beneficiary of services5. Buyer for earning his livelihood (see in the heading commercial purpose).Exceptions (who is not consumers)The following are not consumers;1. Buyer of the goods without consideration.2. Hirer of services without consideration.3. Services free of charge.4. Contract of personal services.5. Buyer for resale.6. Buyer for commercial purpose.1. Buyer of the goods without considerationIt is clear from the provisions of the Act that to be consumer one mustbuy goods for consideration. So, any one gets goods without considerationis not a consumer, i.e. anyone who gets goods under a reward, or undera clearance sale or under scheme of free sale or gift is not a consumer.A person who receives movable or immovable property under gift willnot be a consumer because he gets such thing without consideration.Here it is also noted that any person who uses such goods with the consentof the person getting it will also not be a consumer. For example, ‘A’under a sale scheme gets free a Hawkins Pressure cooker at the time ofbuying a Hero Honda motor cycle. ‘A’ `s wife right hand is damagedwhile using the Pressure Cooker since it was defective. Here A or A`swife is not a consumer within the meaning of the Act, so he/she is notentitled for damages.2. Hirer of service without considerationOn the analogy of hirer of this service for consideration it is obvious thatone who avails of any service without consideration is not a consumer.So providing free transport facilities or medical facilities or any serviceby any person or institution will not be under the purview of this Act anduser of such services will not be a consumer.3. Services Free of ChargeAny person who avails of service free of charge will not be a consumer.This exception comes from the definition of ‘service’ under S.2 (1) (0).It provides: rendering of any service free of charge or under a contract ofpersonal service”.



There are so many charitable, religious or welfare societies which renderservices free of charge for the sake of humanity or in the service of society.Such activities do not come within the purview of this Act.4. Contract of Personal ServicesDefinition of service also excludes contract of personal services from thejurisdiction of this Act. Contract of personal service does not constituteconsumer dispute.The term contract of personal service has not been defined in the Act butsuch contracts are quite different from commercial services.Supreme Court has made nice distinction between “contract for service”and “contract of service” in V.P.Santha Case. The former is subjectmatter of this Act whereas the later is not.Contract for ServiceContract for service implies a contract whereby one party undertakes torender services e.g. professional or technical services to or for anotherin the performance of which he is not subject to detailed direction andcontrol but exercise professional or technical skill and uses his ownknowledge and decision. This is subject-matter of this Act.Contract of ServiceContract of service implies a relationship of a master and servants andinvolves the order to obey in the works to be performed and as to itsmode and manner of performance. This is not subject matter of this Act.5. Buyer for Re saleThe definition of consumer does not include a person whoobtains such goods for resale or for any commercial purpose.Where goods have been bought for the purpose of resale, such buyer ofthe goods is not a consumer. If a retailer buys goods from wholesaledealer for the purpose of resale, he will not be a consumer, but when hebuys for consumption, will be a consumer. Where goods have beenbought for resale or consumption is a matter of fact depending on facts,circumstances of the case and conduct of the parties. The raw materialsimported with the object to manufacture finished goods for resale. It is acommercial purpose. Manufacture is not a consumer.6. Commercial purposeThis is the last and most important exception. By the definition it is clearthat a buyer of goods for commercial purpose is not a consumer.The term, “Commercial purpose” has not been defined in the Act. Inabsence of a definition we have to go by its ordinary meaning, ‘commerce’denotes ‘pertaining to commerce’. According to Chamber’s TwentiethCentury Dictionary. It means connected and with or engaged incommerce”.



5.1.6 Consumers Protection Councils

The object of the Act is to protect the interest of consumers and for thatpurpose Consumer Councils and Remedial Agencies have beenestablished under the provisions of the Act.To quote the objects and reasons of the Act:“The Consumer Protection Bill, 1986 seeks to provide for betterprotection of the interest of consumers and for that purpose, to makeprovision for the establishment of consumer councils and otherauthorities for the settlement of consumer disputes and for mattersconnected therewith”.Thus, the Act provides:1. Establishment of the Consumer Councils.2. Establishment of the Remedial Agencies.Classes of councils1. The Central Consumer Protection Council2. The State Consumer Protection Council3. The District Consumer Protection Council.It is, therefore, clear that the Act provides establishment of councils atthree stages: National, State and District.(1) The Central Consumer Protection Council: Secs. 4, 5, 6S.4 -The Central Consumer Protection Council -1. The Central Government shall by notification, establish with effect, such

date as it may specify in such notification, a Council to be known as theCentral Consumer Protection Council (hereinafter referred to as theCentral Council)

2. The Central Council shall consist of the following members, namely: - a) the Minister in charge of the [consumer affairs] in the Central Government,

who shall be its Chairman b)such number of other official or non-official members representing such

interests as may be prescribed.Composition of the Central CouncilThe Central Government shall by notification establish a council to beknown as the Central Consumer Protection Council. This council shallconsist of a chairman and with such other official or non-official membersas may be prescribed. The minister in-charge of the consumer affairs inthe Central Government shall be Chairman.Rule 3 of the Consumer Protection Rules, 1987 provides:The Constitution of the Central Consumer Protection Council and theWorking Groups -



1. The Central Government shall, by notification in the Official Gazetteconstitute the Central Consumer Protection Council (hereinafter referredto as the Central Council) which shall consist of the following members,not exceeding 150, namely-

a) the Minister in-charge of Consumer Affairs in the Central Government)who shall be the Chairman of the Central Council);

b) the Minister of State (where he is not holding independent charge) ofDeputy Minister (in-charge of Consumer Affairs in the CentralGovernment) who shall be the Vice-Chairman of the Central Council;

c) the Minister in-charge of Consumer Affairs in States;d) eight members of Parliament - five from the Lok Sabha and three from

the Rajya Sabha;e) the Secretary of the National Commission for Schedule Castes and

Schedule tribes;f) representatives of the Central Government Departments and autonomous

organisations concerned with consumer interest - not exceeding twenty;g) representatives of the Consumer Organisations or consumers - not less

than thirty five;h) representatives of women - not less than ten;i) persons capable of representing consumer interest and specified above

- not exceeding fifteen;k) the [Secretary in-charge of Consumer Affairs in the Central

Government]shall be the member-secretary of the Central Council.2. The term of the Council shall be three years.3. Any member may, by writing under his hand to the Chairman of the

Central Council, resign from the Council. The vacancies so caused orotherwise, shall be filled from the same category by the CentralGovernment and such person shall hold office so long as the memberwhose place he fills would have been entitled to hold office, if the vacancyhad not occurred.

4. For the purpose of monitoring the implementation of the recommendationsof the Central Council and to suggest the working of the Council, theCentral Government may constitute from amongst the members of theCouncil, a Standing Working Group, under the chairmanship of theMember Secretary of the Council. The Standing Working Group shallconsist of not exceeding 30 members and shall meet as and whenconsidered necessary by the Central Government.

Standing Working GroupFor the purpose of monitoring the implementation of the recommendationsof the Central Council and to suggest the working of the council, theCentral Government may constitute from amongst the members of thecouncil, a Standing Working Group, under the chairmanship of theMember-Secretary of the council.



The Standing Working Group shall consist of not exceeding 30 membersand shall meet as and when considered necessary by the CentralGovernment. Procedure of the Central Council Section 5 and Rule 4 provide procedureas follows:1. The Central Council shall meet as and when necessary, but at least one

meeting of the council shall be held every year.2. The Central Council shall meet at such time and place as the Chairman

may think fit and shall observe such procedure in regard to the transactionof its business as may be prescribed.

Rule 4 - Under sub-section (2) of section 5, the Central Council shallobserve the following procedure in regard to the transaction of itsbusiness -1. The meeting of the Central Council shall be presided over by the

Chairman. In the absence of the Chairman, the Vice-Chairman shallpreside over the meeting of the Central Council. In the absence of theChairman and the Vice-Chairman, the Central Council shall elect amember to preside over that meeting of the Council.

2. Each meeting of the Central Council shall be called by giving, not lessthan ten days from the date of issue, notice in writing to every member.

3. Every notice of meeting of the Central Council shall specify the placeand the day and hour of the meeting and shall contain statement of businessto be transacted threat.

4. No proceedings of the Central Council shall be invalid merely by reasonsof existence of any vacancy in or any defect in the constitution of theCouncil.

5. For the purpose of performing its functions under the Act, the CentralCouncil may constitute from amongst its members, such working groupsas it may deem necessary and every working group so constituted shallperform such functions as are assigned to it by the Central Council. Thefindings of such working groups shall be placed before the Central Councilfor its consideration.

6. The non-official members shall be entitled to first class or second Airconditioned by all trains (including Rajdhani Express) to and for Railwayfare or actual mode of travel whichever is leSecs. Out-station non-official members shall be entitled to a daily allowance of one hundredrupees per day for attending the meetings of the Central Council or anyworking group. Local non-official members shall be paid actualconveyance, hire charges subject to a ceiling of Rs.75.00 per dayirrespective of the classification of the city. Members of the Parliamentshall be entitled to traveling and daily allowances at such rates as areadmissible to such members.

7. The resolution passed by the Central Council shall be recommendatoryin nature.



S.6. Objects of the Central Council - The objects of the Central Councilshall be to promote and protect the rights of the consumers such as -

a) the right to be protected against the marketing of goods [and services]which are hazardous to life and property;

b) the right to be informed about the quality, quantity, potency, purity,standard and price of goods [or services, as the case may be] so as toprotect the consumer against unfair trade practices;

c) the right to be assured, wherever possible, access to a variety of goods[and services] at competitive prices;

d) the right to be heard and to be assured that consumer’s interests willreceive due consideration at appropriate FORA;

e) the right to seek redressal against unfair trade practices [or restrictivetrade practices] or unscrupulous exploitation of consumersand

f) the right to consumer education.Objects of the Central Council have been expressed as The Charter ofProtection of Consumer Rights which may be grouped in the followingheads:1. The right to be protected,2. The right to be informed,3. The right to be assured,4. The right to be heard,5. The right to be seeks redressal,6. The right to be consumer education.(2) The State Consumer Protection Council: Secs. 7, 8S.7 1. [The State Government shall], by notification, establish with effectfrom such date as it may specify in such notification, a Council to beknown as the Consumer Protection Council for thereinafter referred toas the State Council.2. The State Council shall consist of the following members, namely - a) the Minister - in-charge of consumer affairs in the State Government

who shall be its Chairman; b)such member of other official or non-official members representing such

interests as may be prescribed by the State Government. c) such number of other official or non-official members, not exceeding

ten, as may be nominated by the Central Government.3. The State Council shall meet as and when necessary but not less than

two meetings shall be held every year.4. The State Council shall meet at such time and place as the Chairman

may think fit and shall observe such procedure in regard to the transactionof its business as may be prescribed by the State Government.



U.P. Consumer Protection Rules, 1987 has been enacted but it does notprovide the number of members of official or non-official.S.8 Objects of the State Council - The objects of every State Councilshall be to promote and protect within the State the rights of the consumerslaid down in clauses (a) to (f) of section 6.(3) District Council: Secs. 8A, 8BThe Provisions as to composition of District Council have been providedunder sections 8A and 8B by Amendment Act, 2002. In the original Actthere was no such provision.[8A.1. The State Government shall establish for every district, bynotification, a council to be known as the District Consumer ProtectionCouncil with effect from such date as it may specify in such notification.2. The District Consumer Protection Council (hereinafter referred to as the

District Council) shall consist of the following members, namely -a) the Collector of the district (by whatever name called), who shall be its

Chairmanand

b) such number of other official and non-official members representing suchinterests as may be prescribed by the State Government.

3. The District Council shall meet as and when necessary but not less thantwo meetings shall be held every year.

4. The District Council shall meet at such time and place within the districtas the Chairman may think fit and shall observe such procedure in regardto the transaction of its business as may be prescribed by the StateGovernment.

8B. Objects of the District Council - The objects of every District Councilshall be to promote and protect within the district the rights of theconsumers laid down in clauses (a) to (f) of section 6.]

4) Nature of Consumer CouncilThese consumer and other working groups have been established to makeand suggest recommendation for better protection of consumer’sinterest. Thus councils have only recommendatory nature. Itsrecommendation is not binding but only persuasive. Rule 4 provides thatresolution passed by the Central Council shall be recommendatory innature.Remedial Agencies or the Consumer Courts (Consumer -DisputesRedressal Agencies)This takes provision for the establishment of the Remedial Agencies, i.e.,consumer courts for settlement of consumers‘ disputes and for mattersconnected therewith. There is three-tier system in the Act. They are -1. a Consumer Disputes Redressal Forum to be known the “District

Forum”, CDRF2. a Consumer Disputes Redressal Commission to be known as the “State

Commission”, SCDRC, and



3. a National Consumer Disputes Redressal Commission to be known asthe “National Commission”, NCDRC.

Section 9 deals with establishment of these Redressal Agencies:S.9 Establishment of Consumer Disputes Redressal Agencies -There shall be established for the purposes of this Act, the followingagencies, namely -a) a Consumer Disputes Redressal Forum to be known as the “District

Forum” established by the State Government in each district of the Stateby notification;[Provided that the State Government may, if it deems fit, establish morethan one District Forum in a district;]

b) a Consumer Disputes Redressal Commission to be known as the “StateCommission” established by the State Government in the State bynotificationand

c) a National Consumer Disputes Redressal Commission established bythe Central Government by notification.

Commentsi) One or more consumers can file complaint; Chief General Manager,

Calcutta Telephones v. International Packers & Movers, 1 (1994) CPI132: 1994 (1) CPR 252.

ii) When no objection was taken to the territorial jurisdiction of DistrictForum by filling written version, the objection cannot be entertained inappeal raised orally; Essen Computers Ltd. v. Tagore Gracias, 1992(II) CPR 556.

iii) if a redressal forum has no jurisdiction, it cannot entertain the complainton merits; Solvochen Intermediates Pvt. Ltd. v. Boilertech EngineersPvt. Ltd. 1992 (II) CPR 322.

Simple, Cheap and Speedy RemedyThus, consumer courts have been established at three levels, i.e.District, State and National.They are known as:1. District Forum ]2. State Commission, and ] Consumer FORA3. National Commission ]Provided that the State Government may, if it deems fit, establish morethan one District Forum in a district.‘Consumer Protection Act, 1986 is a milestone in the way toprovide cheap and speedy remedy’. The object of the Act is toprovide a simple, speedy and cheaper remedy for the protection ofconsumers. This has been insured in the mechanism and working of theConsumer Forum.



After passing of the Consumer Protection Act, 1986, we find many suchcases coming before the consumer FORA. The Consumer FORA areflooded with consumer cases because the justice is much less expensiveand also much quicker. One need not pay any court fee, or engage alawyer and Consumer FORA can evolve its own procedure to avoidunnecessary delay, which would otherwise be there in civil courts.Here it is relevant to mention that the Consumer Protection Act is socialwelfare legislation and the purpose of the legislation is to provide a better,efficient and cheaper remedy to the consumers. Consumers must bekept free from the complicated judicial proceedings and complicatedobligations. Thus, the manner of getting remedy is quite informal, simpleand free from the shackles and trappings of the civil courts. On the otherhand, one has to wait for years and years for judgment and cost of litigationis also very high.The procedure for remedy under the Act is very simple and easy. It isfree from procedural bindings of the court. No stamp paper, no courtfees and no need of lawyers make the procedure of Consumer Fora verysimple. Though Amendment Act, 2002 requires fees to be deposited bythe complainants but the amount is nominal and that has to be providedby rules.Act also ensures speedy remedy. It should be kept in mind that ConsumerFORA are free from the shackles and trappings of the court; it certainlyhelps in speedy remedy. Working of Consumer FORA has been simplifiedby Amendment Act, 2002 which makes working of the courts efficient.Provision of interim order is also a good sign in this respect.

Act also provides that every complaint shall be heard as expeditiously aspossible and endeavor shall be made to decide the complaint within aperiod of three months from the date of receipt of notice by oppositeparty where the complaint does not require analysis or testing ofcommodities and within five months if it requires analysis or testing ofcommodities. Cases of appeal shall be made to finally dispose of theappeal within a period of ninety days from the date of its admission.

5.1.7 Nature of Consumer FORA (COURTS)Quasi - judicialConsumer Protection Act, 1986 provides formation of the NationalCommission, the State Commission and the District Forum as RemedialAgencies. The purpose of these agencies is to decide consumer disputes.In this way the function of Consumer FORA becomes Quasi-judicial.This is supported by the provisions of S. 13(5) and S. 27(2) whichprovides:Every proceeding before the District Forum shall be deemed to be ajudicial proceeding within the meaning of sections 193 and 228 of theIndian Penal Code (45 of 1860) and the District Forum shall be deemedto be a civil court for the purpose of section 195, and Chapter XXVI ofthe Code of Criminal Procedure, 1973 (2 of 1974)”.This provision equally applies to the National Commission and the StateCommission as well.



Section 28(2) provides:“Notwithstanding anything contained in the code of Criminal Procedure,1973, the District Forum or the State Commission or the NationalCommission, as the case may be, shall have the power of a judicialMagistrate of the first class for the trial of offences under this Act, and onsuch conferment of powers, the District Forum, or the State Commission,or the National Commission, as the case may be, on whom the powersare so conferred, shall be deemed to be a judicial Magistrate of the firstclass for the purpose of the Code of Criminal Procedure, 1973.Keeping in view of the above provision it is clear that within the meaning of:a) Sections 193 and 228 of Indian Penal Code:1. The District Forum shall be deemed to be a Civil Court, and2. The proceeding before the District Forum shall be deemed to be judicial

proceedings.b) For the purpose of Code of Criminal Procedure Code3. The District Forum, the State Commission or the National Commission

shall be deemed to be a judicial Magistrate of the first claSecs.4. The District Forum or the State Commission or the National Commission

shall have the power of a Judicial Magistrate of the first claSecs.Competence of the Parliament to create Parallel Civil CourtThis question was involved in State of Karnataka v. Vishwabharati HouseBuilding Co-operative Society. The Supreme Court held:“Once it held that the Parliament had legislative competence to enact theConsumer Protection Act, the submission that the relevant provisions ofthe constitution required amendments must be neglected. The Parliamentis empowered to establish hierarchy of courts like the District Forum,state commission and the National Commission parallel to the hierarchyof courts established under the constitution, namely, District Courts, HighCourts and Supreme Court in the absence of suitable amendments madein the Constitution of India in terms of Article 368 thereof”.The District Forum, the State Commission and the National Commissionare not manned by lay persons. The President would be a person havingjudicial background and other members are required to have the expertisein the subjects such as economics, law, commerce, etc. It may be truethat by reason of sub-section (2-A) of S. 14 of the Act in case of differenceof opinion between two members the matter has to be referred to a thirdmember and in rare cases, the majority opinion of the members mayprevail over the president. But such eventuality alone is insufficient forstriking down the Act as unconstitutional, particularly, when provisionshave been made therein for an appeal to a higher forum. By reasons ofthe provisions of said Act, the power of judicial review of the High Court,which is a basic feature of the constitution, has not been nor could betaken away?



Establishment of the Consumer FORA do Strike at Independenceof the Judiciary?This constitutional question was involved in the same case. The SupremeCourt held that the provisions of C.P.Act, 1986 do not strike at theindependence if the judiciary. By reasons of provisions of S. 3 of theAct, it is evident that remedies provided there under are not in derogationof those provided under other laws. The said Act supplements and notsupplants the jurisdiction of the Civil Courts or other statutory authorities.The said Act provides for a further safeguard to the effect that in theevent a complaint involves complicated issues requiring recording ofevidence of experts, the complainant would be at liberty to approach theCivil Court for necessary relief has, therefore, been provided under theAct itself. The provisions of the Act are required to be interpreted asbroader, as possible. It has jurisdiction to entertain a complaint despitethe fact the other Forum/Courts would also have jurisdiction to adjudicatethe list.Forum is Competent to Decide Complex IssuesA very significant ruling given by Supreme Court in J.J.Merchant v.Shrinath Chathurvedi that National Commission is required to be headedby a retired Judge of the Supreme Court and the State Commission isrequired to be headed by a retired High Court judge. They are competentto decide complicated issues of law or facts. Hence, it would not beproper to say that in cases where negligence of experts is allegedconsumers should be directed to approach the Civil Court, it would alsobe totally wrong assumption that because the summary trial is provided,justice cannot be done when some questions of facts are required to bedealt with or decided. The Act provides sufficient safeguard.The Learned Counsel Mr.Nariman submitted that since complicatedquestion of law and facts involved in this case depending upon medicalexpert’s opinion summary procedure is not proper remedy for decidingsuch issues, hence complainant should be directed to approach the CivilCourt. This argument was not accepted by the Supreme Court.Supreme Court’s observation was:“It is no doubt true that sometimes complicated questions requiringrecording of evidence of experts may arise in complaint about deficiencyin service based on the ground of negligence in rendering medical servicesby a medical practitioner, but this would not be so in all complaints aboutdeficiency in rendering services by a medical practitioner. There may becases which do not raise such complicated questions and the deficiencyin service may be due to obvious faults which can be easily establishedsuch as removal of the wrong limb, or the performance of an operationon the wrong patient or giving injection of drug to which the patient isallergic. The issues arising in the complaints in such cases can be speedilydisposed of by the procedure that is being followed by the consumerFORA and there is no reason why complaints regarding deficiency inservice in such cases should not be adjudicated by the agencies underthe Act, as examination or cross-examination of the witnesses. Thecommission can easily evolve a procedure permitting the party intends to



cross examine by putting certain questions in writing and those questionsalso could be replied by such experts including doctors on affidavits. Incase where stakes are very high and still party intends to cross examinesuch doctors or experts, there can be video conferencing or askingquestions by arranging telephone conference and at the initial stage thiscost should be borne by the person who claims such video conference.Further cross-examination can be taken by the commission appointedby it at the working place at such experts at a fixed time.S. 3 of the Act which prescribes that the provisions of the Act shall beaddition to and not in derogation of the provisions of any other law forthe time being in force, preserves the right of the consumer to approachthe Civil Court for necessary relief. We are, therefore, unable to holdthat on the ground of composition of the consumer FORA or on theground of the procedure which is followed by the said FORA fordetermining the issues arising before than the service rendered by themedical practitioners are not intended to be included in the expression‘service’ as defined in Section 2(1)(0) of the Act.In a recent case CCI Chambers Co-op. Housing Society Ltd. v. D.C.Bank Ltd. [A.I.R.2004 S.C. 184] it was held that the decisive test is notthe complicated nature of the questions of fact and law arising for decision.The anvil on which entertainability of a complaint by a Forum under theAct is to be determined is whether the questions, though complicatedthey may be, are capable of being determined by the summary enquiry,i.e. by doing away with the need of a detailed and complicated methodof recording evidence. It has to be remembered that the FORA underthe Act at every level are headed by experienced persons. The N.C. isheaded by a person who is or has been a Judge of Supreme Court. TheState Commission is headed by a person who is or has been a Judge ofthe High Court. Each District Forum is headed by a person who is orhas been or is qualified to a District Judge. Mere complication either offacts or of law cannot be a ground for the denial of hearing by a Forumunder the Act.No abuse of the ProcessIn Synco Industries v. state Bank of Bikaner and Jaipur, the SupremeCourt held that the National Commission was right in giving to theappellant liberty to move the Civil Court. This is an appropriate claimfor a Civil Court to decide, and obviously, was not filed before a CivilCourt, to start with because before consumer Forum, any figure indamages can be claimed without having to pay court fees. This, in thatsense, is an abuse of the process of the Consumer Forum.

5.1.8 Limitations of the Consumer FORA

The working of the District forum or the State Commission, or the NationalCommission is subject to the following conditions:1. Summary TrialThe purpose of the Act is to provide for better protection of the interestof consumers, to protect them from misconduct and exploitation in



business and to protect them from unfair trade practices and for this toprovide speedy and cheaper remedy.Thus, only those disputes which could be decided on the basis ofcomplaints only, come within the jurisdiction of this Act. In this way thedisputes which involve affidavit, evidences, examination and crossexamination of witnesses are beyond the purview of this Act. Theconsumer FORA adopts summary trial inconformity with these objectives.In Harsinaran Poult ry Farm v. Allahabad Bank, the StateCommission held that extremely complicated facts and contentious matterscannot be aptly, justly and legally decided by summary trial.In Shri Mashio R.Persira v. Shri Elesbo :Persira, it was concluded thatthe disputes which involve mixed facts and law, are not within the purviewof this Act.The contentious matters are subject matter of civil suits which cannot bedecided by Consumer Courts.Complicated matters and Summary TrialIn J.J.Merchant v. Shrinath Chaturvedi (A.I.R.2002 S.C. 2931) it wasargued that the complicated matters like service of medical practitionerswhich requires examination and cross-examination of witnesses cannotbe decided in summary manner hence complainants should be directedto approach the Civil Court. This argument was negative by the SupremeCourt and held that even there is mechanism in the Act to deal with thesetypes of cases.2. Sub-Judice Matters before Civil CourtsThe consumer FORA cannot exercise jurisdiction over sub-judice matters.Principles of Res Sub-judice have been provided under Section 10 ofthe Civil Procedure Code. According to it a suit must be stayed if thematter directly and substantially in issues it is also directly and substantiallyin issue in a previous suit that is pending. The object of this principle is toprevent two courts of concurrent jurisdiction from simultaneously tryingtwo parallel suits in respect of the same matter in issue. It is to obviateconflict of decisions of two contradictory orders being passed in respectof the same subject matter between the same parties.The principle of sub-judice is an important limitation as to jurisdiction ofthe Consumer FORA.In Savita Chaudhary v. Dr. Ghanshyam Koche, the State Commission,Bombay decided that consumer FORA cannot entertain jurisdiction wherethe matter is already pending in any Civil Court.3. Res JudicateRes Judicate is another limitation on exercise of jurisdiction by ConsumerFORA.The rule of Res-judicate has been enunciated in Section 11 of CivilProcedure Code reads thus:



“No court shall try any suit or issue in which the matter directly andsubstantially in issue has been directly and substantially in issue in a formersuit between the same parties, or between parties under whom they orany of them claim, litigating under the same title, in a court competent totry such subsequent suit or the suit in which such issue has beensubsequently raised, and has been heard and finally decided by suchcourt”.Writ petitionIn this way where writ petition has been filed before High Court and wasdismissed, subsequently a consumer cannot file complaint before consumerFORA.4. Sovereign FunctionsAn act done in exercise of Sovereign power is an act of state whichcannot be questioned by municipal courts. Here distinction betweenacts done in exercise of what are usually leveled Sovereign powers andacts done in non-sovereign is significant. Though Sovereign immunityhas no relevance in the present day as the Supreme Court in N.NagendraRao & Co. v. State of A.P. considered the question of vicarious liabilityof the Government for the negligence of its servants. Now earlier judgmentof Supreme Court in Vidyavati‘s and Kasturi Lal‘s cases has beenoverruled.But for the purpose of this Act services rendered or act done underSovereign powers have relevance and such acts do not come within thepurview of the Act.In view of the above principle the state has not been held liable for tortscommitted by its servants in the following cases.1. Construction and Repair of Military Roads.2. Administration of Justice.3. Function of Police Administration.4. Negligence of officers in performance of statutory duties.5. Seizure of goods during war period, etc.In Akhil Bharatiya Grahak Panchayat v. State of Gujarat, it has beendecided that the courts exercise its powers within the exercise of itsSovereign powers, not for the stamp fees or court fees paid by the litigants.Official functions done by Government officials, are not service underConsumer Protection Act. Act of Government officials cannot at all fallwithin the purview of the Act.The Supreme Court in Regional Provident Fund Commissioner v. Shivkumar joshi (A.I.R. 2000 S.C. 331), held that the services of theProvident Fund Commissioner in running the Scheme shall be deemed tohave been availed of for consideration by the Central Government forthe benefit of the employees who would be treated as beneficiaries withinthe meaning of the word used in the definition of consumer. The S.C.also held that, “it is a service within the meaning of S. 2(1)(0) of the



C.P.Act”. The statutory complexion of Regional Provident FundCommissioner was not accepted by the Supreme Court. This principlewas followed by the Kerala High Court in Kerala State C0-operativeEmployees` Pension Board v. Consumer Dispute Redressal Forum, IdukkiA.I.R. 2004 Ker. 57.Alternative Remedy - No Bar: Existence of Arbitration ClauseExistence of alternative remedy is no bar for exercise of jurisdiction bythe Consumer FORA. So existence of Arbitration Clause does notconstitute bar for the exercise of jurisdiction. This question was involvedin Udaipur Cement Works v. Punjab Water Supply & Sewerage Board,that whether mere existence of an arbitration clause ousts the jurisdictionof FORA? The National Commission held that mere existence of anarbitration clause should not come in the way of aggrieved party for seekinglegitimate relief under the C.P.Act.5. Breach of ContractBreach of contract has to be seen by the Civil Courts, it does not comewithin the purview of this Act. In Sahul Ahmad v. G.S.Sales Corporation& Ors. the failure of opposite party to supply generator after 30 days ofpayment. This transaction purely a sale transaction. Service of theopposite party is not hired. Failure to supply generator amounts to breachof contract. There was no deficiency in service. The complainant wasnot a consumer.“Jurisdiction of consumer courts; nature and extent”To start with the statement of objects and reasons and the scheme of1986 Act, it is apparent that the main objective of the Act is to providefor better protection of the interest of the consumer and for that purposeto provide for better redressal mechanism through which cheaper, easier,expeditious and effective redressal is made available to consumers. Toserve the purpose of the Act, various quasi-judicial forums are set up atthe District, State and National level with wide range of powers vested inthem. These quasi-judicial forums observing the principles of naturaljustice are empowered to give relief of a specific nature and to award,wherever appropriate, compensation to the consumers and to imposepenalties for non-compliance of their orders.5.1.9 Objects and purpose of the Act in Present ScenarioBefore proceeding further, it is useful to know the background, the objectsand reasons and purpose for which the 1986 Act is enacted.Consequent upon Industrial Revolution and vase development andexpansion in the filed of international trade and commerce, variety ofconsumer goods entered the market to meet the needs of the consumersand most of services like insurance, transport, electricity, housing,entertainment, finance and banking have been made available to theconsumers. Well organized sectors of manufactures and traders withbetter energy and markets have emerged affecting relationship betweenthe Traders and consumers. With the help and aid of media both electronicand print, the advertisements of goods and services in television,



newspapers and magazines have created great impact and influence onthe demand for the same by the consumers though there may bemanufacturing defects or deficiencies or shortcomings in the quality,quantity and purity of the goods or there maybe deficiency in the servicesrendered. In the interest of the public and to protect the consumers, itbecame necessary to check adulterated and substandard articles in themarket.Despite various other statutes such as Indian Contract Act, 1872, Saleof Goods Act, 1930, the Indian Penal Code, 1860, The standard ofWeights and Measures Act, 1976 and the Motor Vehicles Act, 1988 etc.being in operation, very little could be achieved in the field of consumerprotection. Though the MRTP Act, 1969 and the Prevention ofAdulteration Act, 1954 provide relief to the consumers yet it becomenecessary to protect the consumers from the exploitation and to savethem from adulterated and substandard goods and deficiency in serviceand to safeguard their interest.Art. 21 of the Constitution and Consumer ProtectionThis is also in consonance with the guaranteed right to life and personalliberty under Article 21 of the Indian Constitution. The expression‘personal liberty’ in Article 21 is of widest amplitude and it covers avariety of rights which go to constitute the personal liberty of man. InManeka Gandhi`s (A.I.R. 1981 S.C. 746) case the Supreme Court gavea new dimension to Article 21. It held that the right to live is not merelyconfined to physical existence but in includes within its ambit the right tolive with human dignity. Right to live is not restricted to mere animalexistence but it means something more than just physical survival. Theright to ‘live’ is not confined to the protection of any faculty or limbthrough which life is enjoyed or the soul communicates with the outsideworld but is also includes “the right to live with human dignity”, and allthat goes along with it, namely, the bare necessities of life such as, adequatenutrition, clothing and shelter and facilities for reading, writing andexpressing ourselves in diverse forms.General Assembly ResolutionIn General Assembly a Consumer Protection Resolution No.39/248 waspassed and India is a signatory to this Resolution. The United Nationshas passed a resolution in 1985 indicating certain guidelines under whichthe governments could make laws for better protection of the interest ofthe consumers and such laws were more necessary in developingcountries to protect the consumer from hazardous to their health andsafety and to make them available speedier and cheaper redreSecs.With this background, the 1986 Act was enacted. The statement ofobjects and reasons show that the Consumer Protection Bill, 1986 soughtto provide for better protection of the interest of the consumers and forthe purpose, to make provision for the establishment of consumer counciland other authorities in the settlement of consumer disputes and for mattersconnected therewith. It seeks, inter alia, to promote and protect therights of consumers such as protection against marketing of goods which



are hazardous to life and property; the right to be informed about thequality, quantity, potency, purity, standard and price of goods to protectthe consumer against unfair trade practice; the right to be assured,wherever possible, access to an authority of goods at competitive prices,the right to be heard and to be assured that the interest of consumers willreceive due consideration at appropriate forums, the right to seek redressalagainst unfair trade practices or unscrupulous exploitation of consumersand right to consumer education.Speedy and Simple remedyThe object is also to provide speedy and simple redressal to consumerdisputes, a quasi judicial machinery is sought to be set up at the District,state and central levels. These quasi judicial bodies will observe principlesof natural justice and have been empowered to give relief of specificnature and to award wherever appropriate, compensation to consumers.Penalties for non-compliance of orders given by the quasi judicial bodieshave also been provided.The preamble of the Act declares that it is an Act to provide for betterprotection of the interest of consumers and for that purpose to makeprovision for the establishment of consumer councils and other authoritiesfor the settlement of consumer’s disputes and matters connected therewith.Additional RemedyIn Section 3 of the Act is clear and unambiguous terms, it is stated thatthe provisions of 1986 Act shall be in addition to and not in derogation ofthe provisions of the any other law for the time being in force. The scopeand extent of Section 3 first time came for consideration before SupremeCourt in the leading case Lucknow Development Authority v. M.K.Gupta(A.I.R.1994 S.C. 787), this Court observed thus:Supreme Court’s view“We therefore, come straightaway to the legal issue involved in theseappeals. But before doing so and examining the question of jurisdictionof the District Forum, or State or National Commission to entertain acomplaint under the Act, it appears appropriate to ascertain the purposeof the Act, the objective it seeks to achieve and the nature of social purposeit seeks to promote as it shall facilitate in comprehending the issuedinvolved and assist in construing various provisions of the act effectively.To begin with the preamble of the Act, which can afford useful assistanceto ascertain the legislative intention, it was enacted, “to provide for theprotection of the interest of the consumers”. Use of the word ‘protection’furnishes key to the minds of the makers of the Act. Various definitionsand provisions which elaborately attempt to achieve this objective haveto be construed in this light without departing from the settled view that apreamble cannot control otherwise plain meaning of a provision. In fact,the law meets long felt necessity of protecting the common man fromsuch wrongs for which the remedy under ordinary law for various reasonshas become illusory. Various legislations and regulations permitting thestate to intervene and protect interest of the consumers have become a



haven for unscrupulous ones as the enforcement machinery either doesnot move or it moves ineffectively, inefficiently and for reasons which arenot necessary to be stated. The importance of the Act lies in promotingwelfare of the society by enabling the consumer to participate directly inthe market economy. It attempts to remove the helpless of a consumerswhich he faces against powerful, business, described as, a net work ofrackets or a society in which, the producers have secured power to ‘rabthe rest’ and the might of public bodies which are degenerating intostorehouses of inaction where papers do not move from one desk toanother as a matter of duty and responsibility but for extraneousconsideration leaving the common man helpless, bewildered and shocked.The malady is becoming so rampant, widespread and deep that the societyinstead of bothering, complaining and fighting against it, is accepting aspart of life. The enactment is these unbelievable yet harsh realities appearto be a silver lining, which may in course of time succeed in checking therot”.Further, in Fair Air Engineers Pvt. Ltd. v. N.K.Modi (A.I.R. 1997S.C.533) Supreme Court after referring to LDA case (Supra), held thatthe provisions of the Act are to be construed widely to give effect to theobject and purpose of the Act. It went on to say that it is seen thatSection 3 envisages that the provisions of the Act are in addition to andare not in derogation of any other law in force. The words “interrogationof the provisions of any other law for the time being in force” would begiven proper meaning and effect because Parliament was aware of theprovisions of the Arbitration Act, the Contract Act, 1872 and theconsequential remedy available u/s 9 of the Code of Civil Procedure, i.e.to avail a right of civil action in a competent Court of Civil jurisdiction,Nonetheless, the Act provides the additional remedy. Further dealingwith the jurisdiction of the Forums under the 1986 Act, the Courtobserved:“It would therefore be clear that the legislature intended to provide aremedy in addition to the consentient arbitration which could be enforcedunder the Arbitration Act or the Civil action in a suit under the provisionsof the code of Civil Procedure. Thereby as seen, Section 34 of the Actdoes not confer an automatic right nor create an automatic embargo onthe exercise of the power by the judicial authority under the Act. It is amatter of discretion. Considered from this prospective, we hold thatthough the District Forum, state and National Commission are judicialauthorities for the purpose of Section 34 of the Arbitration Act, in viewof the object of the Act and by operation of Section 3 these of, we are ofthe considered view that it would be appropriate that these forums createdunder the Act one at liberty to proceed with the matters in accordancewith the provisions of the Act rather than relegating the parties to anarbitration proceeding pursuant to a contract entered into between theparties. The reason is that the Act intends to relieve the consumers ofthe cumbersome arbitration proceedings or civil action unless the forumson their own and on the peculiar facts and circumstances of a particularcase come to the conclusion that the appropriate forum for adjudicationof the disputes would be otherwise those given in the Act.



Again in Spring Meadows Hospital and another v. Harjol Athluwalia(A.I.R.1998 S.C. 1801), this court having taken note of the backgroundin which the 1986 Act came to be placed on the statue book, observedthat the Act creates a framework for speedy disposal of consumer disputesand an attempt has been made to remove the existing evils of the ordinarycourt system. The Act being a beneficial legislation should receive aliberal construction.Further in Secretary, Thirumurugan Co-op. Agr. Credit Societyv. Lalitha (A.I.R. 2004 S.C.448), this Court held that:“From the statement of objects and reasons and the scheme of ConsumerProtection Act, it is apparent that the main objective of the Act is toprovide for better protection of the interest of the consumer and far thatpurpose to provide for better redressal mechanism through which cheaper,easier, expeditious and effective redressal is made available to consumers.As per Section 3 of the computer Act the provisions of any other law forthe time being in force. Having due regard to the scheme of the Act andpurpose sought to be achieved to protect the interest of the consumers,better the provisions are to be interpreted broadly positively andpurposefully in the context of the present case to give meaning toadditional/extended jurisdiction particularly when S. 3 seeks to provideremedy under the Act in addition to other remedies provided under otherActs unless there is clear bar”.Supreme Court further observed“Consumer Forum does not have jurisdiction to decide the disputebetween members and co-operative society as neither S. 99 nor S.156of the Tamil Nadu Co-operative Societies Act, 1983 ousts the jurisdictionof the consumer forum. The remedies that are available to an aggrievedparty under the consumer protection Act are wider. For instance, inaddition to granting a specific relief the forums under the C.P. Act havejurisdiction to award compensation for the mental agony, suffering etc.,which possibly could not be given under the Act in relation to disputeunder S. 90 of T.N. Co-operative Societies Act. Merely because therights and liabilities are created between the members and the managementof the society under the Act and forums are provided, it cannot takeaway or exclude the jurisdiction conferred under the Consumer ProtectionAct expressly and intentionally to serve a definite cause in terms of theobjects and reasons of the C.P. Act. Therefore, the view taken by theNational Commission that the provisions under the T.N. Co-operativeSocieties Act relating to reference of disputes to arbitration shall prevailover the provisions of the C.P. Act is incorrect and untenable”.District forum (Remedial Agencies or consumer courts)S. 10 Composition of the District Forum - 1. Each District Forumshall consist ofa) a person who is, or has been, or is qualified to be a District Judge, who

shall be its President;b) two other members, one of whom shall be a woman, who shall have the

following qualifications, namely;



i) be not less than thirty five years of age,ii) possess a bachelor’s degree from a recognized university,iii) be persons of ability, integrity and standing, and have adequate

knowledge and experience of at lease ten years in dealing with problemsrelating to economics, law, commerce, accountancy, industry, publicaffairs or administration.

Provided that a person shall be disqualified for appointment as a member,if he -a) has been convicted and sentenced to imprisonment for an offence which,

in the opinion of the State Government, involves moral turpitude; orb) is an undischarged insolvent; orc) is of unsound mind and stands so declared by a competent court; ord) has been removed or dismissed from the service of the

Government or a body corporate owned or controlled by theGovernment; or

e) has, in the opinion of the State Government, such financial or other interestas is likely to affect prejudicially the discharge by him of his functions asa member; or

f) has such other disqualifications as may be prescribed by the StateGovernment)

(1A)- Every appointment under sub-section (1) shall be made by the StateGovernment on the recommendation of a selection committee consistingof the following namely;

i) The President of the state Commission - Chairmanii) Secretary, Law Department of the State - Memberiii) Secretary, in charge of the Department

dealing with consumer affairs in the State - MemberProvided that where the President of the State Commission is, by reasonof absence or otherwise, unable to act as Chairman of the SelectionCommittee, the State Government may refer the matter to the ChiefJustice of the High Court for nominating a sitting Judge of that HighCourt to act as Chairman.

(2) Every member of the District Forum shall hold office for a term of fiveyears or up to the age of sixty five years, whichever is earlier:Provided that a member shall be eligible for re-appointment for anotherterm of five years or up to the age of sixty five years, whichever is earlier,subject to the condition that he fulfils the qualifications and other conditionsfor appointment mentioned in clause (b) of sub section (1) and such re-appointment is also made on the basis of the recommendation of theSelection Committee.



Provided further that a member may resign his office in writing under hishand addressed to the State Government and on such resignation beingaccepted, his office shall become vacant and may be filled by appointmentof a person possessing any of the qualifications mentioned in sub-section(1) in relation to the category of the member who is required to beappointed under the provisions of sub-section (1A) in place of personwho has resigned:Provided also that person appointed as the President or as a member,before the commencement of the Consumer Protection (Amendment)Act, 2002, shall continue to hold such office as President or member, asthe case may be, till the completion of his term.

3) The salary or honorarium and other allowances payable to, and the otherterms and conditions of service of the members of the District Forumshall be such as may be prescribed by the State Government.Provided that the appointment of a member on whole-time basis shall bemade by the State Government on the recommendation of the Presidentof the State Commission taking into consideration such factors as maybe prescribed including the work load of the District Forum.

CommentsThe pension received by the presidents of the District Consumer Forumin respect of their previous services as District Judge is subject todeduction from their salary as President of the Forum fixed underprovisions of the Act; M.S.Chawla v. State of Punjab, A.I.R. 2001S.C.1706.Suggestion: Author’s view is that as to composition of the District Forumprovisions of Section 10(1)(a) & (b) shall be substituted as follow :“Not less than two, and not more than such number of members, as maybe prescribed, and one of who shall be a woman, who shall have thefollowing qualifications, provided that one member shall be from amongstpersons having a judicial background.This provision will create credibility of the working and functioning of theDistrict Fora and in all the cases functioning of the District Forum will becontrolled by the persons having judicial background and in case wherethe President is absent the proceedings of the District Forum will bepresided by a judicial person.

Scheme of S. 10 may be discussed in the following heads:1. Composition of District Forum.2. Selection Committee for Composition.3. Qualifications, disqualifications, salary, allowance of chairman and

members.4. Place of sitting and other matters.5. Removal of members.



1. Composition of District ForumDistrict Forum shall consist ofa) a person who is, or has been or is qualified to be a District Judge, who

shall be its Presidentb) two other members, one of whom shall be a womanThe Whole time memberProvided that the appointment of a member on whole-time basis shall bemade by the State Government on the recommendation of the Presidentof State Commission, taking into consideration such factors as may beprescribed including the work load of the District Forum. [Proviso ofS. 10(3)]More than one District ForumBy Amendment act, 1993 State Government may establish more thanone district Forum in a district [S.9 (a) proviso].2. Selection committee (S.10 (1A)]Every appointment for District forum shall be made by the StateGovernment on the recommendation of a selection committee consistingof the following, namely -i) The President of the State Commission - Chairmanii) Secretary, Law Department of the State - Memberiii) Secretary, in charge of the Department dealing with consumer affairs

with state-Member.Provided that where the President of the State Commission is, by reasonof absence or otherwise, unable to act as Chairman of SelectionCommittee, the State Government may refer the matter to the Chief Justiceof the High Court for nominating a sitting Judge of that High Court to actas Chairman.The provision of Selection committee is a novel provision provided inthe Act by Amendment Act, 1993 to remove the delay in constitutingDistrict Forum.3. Qualifications of Chairman and MembersChairman [S.10 (1)(a)] : The Chairman of the District Forum must be ajudge, or has been a judge, or is qualified to be a District JudgeMembers: The members shall have the following qualifications, namely:i) be not less than thirty years of age;ii) possess a bachelor’s degree from a recognised University;iii) be persons of ability, integrity and standing, and have adequate

knowledge and experience of at-least ten years in dealing with problemsrelating to economics, law, commerce, accountancy, industry, publicaffairs or administration. [S. 10(1)(b)]

i) and (ii) have been added by Amendment Act, 2002.



Disqualifications [S. 10(1)(b)]A person shall be disqualified for appointment as a member, if hea) has been convicted and sentenced to imprisonment for an offence which,

in the opinion of the State Government , involves moral turpitude orb) is an undischarged insolvent orc) is of unsound mind and stands so declared by a competent court ord) has been removed or dismissed from the service of the Government or a

body corporate owned or controlled by the Government ore) has, in the opinion of the State Government, such financial or other

interests as is likely to affect prejudicially the discharge by him of hisfunctions as a member or

f) has such other disqualifications as may be prescribed by StateGovernment.

Those disqualifications have been added by Amendment Act, 2002.RemovalIn addition to provisions of S. 10(2), State Government may removefrom the office, the president and member of a District Forum who: (Rule3(5) of U.P. Consumer Protection Rules, 1987):a) has been adjudged an insolvent orb) has been convicted of an offence which in the opinion of the State

Government, involved moral turpitude orc) has become physically or mentally incapable of acting as such member, ord) has acquired such financial or other interest as is likely to affect prejudicially

his functions as a member ore) has so abused his position as to render his continuance in office

prejudicially to the public interest:Provided that the president and member shall not be removed from hisoffice on the ground specified in clauses (d) and (e) in sub-rule (5) excepton an enquiry held by State Government in accordance with suchprocedure as it may specify in this behalf and finds the member to beguilty of such ground.

g) The President or any member ceasing to hold office as such shall nothold any administration of an organisation which has been the subject ofany proceeding under the Act during his tenure for a period of 5 years,from the date on which he ceases to hold such office. Rule 3(9).

Before appointment, the president and members of the D.F. shall have totake an undertaking that he does not and will not have any such financialor other interests as is likely to affect prejudicially.Transfer of President/MemberAs regards transfer of President/Member of the District Forum noprovision has been provided in the Act but it has been upheld by theSupreme Court in State of Rajasthan v. Anand Prakash Solanki (2002A.I.R.S.C.W 4418), merely because there is no cadre as such of thePresident and the members of the District Forum, it cannot be said thatthe President/Members of the District Forum are not liable to be



transferred. As District FORA, more than one is a constituted within thestate there is nothing wrong in the President or Members of one DistrictForum being appointed by transfer to another D.F. subject to therequirement of sub-section (1A) of S. 10 being satisfied. Suchappointment by transfer shall be made by the State Government but onlyon the recommendation of the committee consisting as per sub-section(1A) of S. 10. Such transfer cannot be a frequent or routine feature andsuch power is exercised in public interest or in such exigencies ofadministration. Transfer is an incidence of public service and the powerto transfer is available to be exercised by the employer public serviceand the power to transfer is available to be exercised by the employerunless there is an express bar or restraint on the exercise of such powercan be spelt out.The Supreme Court further held that power to appoint includesappointment by transfer and State Government as employer is competentto transfer on recommendations of committee constituted under S.10(1A) of the Act.Duration [S.10 (2)]Every member of the District Forum shall hold office for a term of fiveyears or up to the age of 65 years, whichever is earlier. Provided that amember shall be eligible for re-appointment for another term of five yearsor up to the age of sixty-five years, whichever is earlier, subject to thecondition that he fulfils the qualifications and other conditions as above.ResignationA member may resign his office in writing under his hand addressed tothe State Government and on such resignation being accepted his officeshall become vacated may be filled by appointment as above mentionedin S.10(2): Provided further that a person appointed as the President or as a member,before the commencement of the C.P. (Amendment) Act, 2002 shallcontinue to hold such office as President or member, as the case may be,till the completion of his term.Salary [S.10 (3)]The salary or honorarium and other allowances payable to and the otherterms and conditions of service of the members of the District Forumshall be as may be prescribed by the State Government.Rule 3 of U.P. Consumer Protection Rules, 1987 provide the salary orother allowances as:1) The president of the District Forum shall receive the salary of the judge

of a District Court if appointed on whole-time basis or an honorarium ofRs.150 per day if appointed on part-time basis.Other members if sitting on whole-time basis, shall receive a consolidatedhonorarium of Rs.2000 per month and if sitting on part-time basis, aconsolidated honorarium of Rs.150 per day for the sitting.



2) The President and the members of the District Forum shall be entitledfor such traveling allowance and daily allowance on official tour as areadmissible to Grade I officers of the State Government.

3) The salary, honorarium and other allowance shall be defrayed out of theconsolidated fund of the State Government.

The terms and conditions of the service of the president and the membersof the District Forum shall not be varied to their disadvantage during theirtenure of office.4. Salary of the President of District ForumThere is no doubt that if any RHJS officer has been appointed as Presidentof the District Consumer Forum, he gets the same salary includingperquisites, allowance and benefits as were payable to him as a judge ofthe District Court. This becomes terms and conditions of his service.But all are not getting the same salary, which depends upon how seniorhe is in service. After earning increment the senior District Judge may gethigher pay than the District Judge who has recently been promoted orappointed. There is difference in the amount of salary of Judge of DistrictCourt. The amount depends upon his seniority in Rajasthan Higher JudicialService, though both are called the judges of the District Court. Theamount of salary of President of District Forum will be the amount hewas getting in RHJS at the time of appointment in Consumer Forum asPresident of District Consumer Forum (State of Rajsasthan v. ShyamSunder Gupta, A.I.R.2003 NOC 577 Raj].In M.S.Chawla v. State of Punjab it was held that the pension receivedby the Presidents of the D.F. in respect of their previous services asDistrict Judges is subject to deduction from their salary as President ofthe Forum fixed under provisions of the Act.5. Establishment of Forum: MandatoryThe word used in S. 10 of the Act, “shall” indicates that it is the duty ofstate to constitute District Forum in Districts is mandatory provision. Inpublic interest litigation, it was alleged that District Forum were not setup in all the districts. The Supreme Court by its order dated 5.8.91directed that only in those districts where minimum monthly load was lessthan 150 cases consistently for a period of six months, it would be opento the State/U.T. to continue the arrangement of sitting District Judge asthe President of districts must have regular District Forums. In view ofthis ad-hoc or stop-gap arrangements, most of the states showed totallack of sense of urgency for setting up regular district-wise fora asenvisaged by the Act and insisted upon by the Supreme Court. The HighCourts showed their inability to spare the District Judge for the said ad-hoc arrangement for a long time in view of pressure of regular work.Hence, directions issued by the S.C. Inter alia that workload exceedsminimum monthly 150 cases for six months, the High Court will conveythe same to the state District / U.T. which will appoint a regular DistrictForum within 6 months. Where workload does not exceed the minimumso fixed, the ad-hoc arrangement may continue for one year during which



period Government will constitute a regular District Forum. (Commoncause, A.Registered Society v. Union of India, A.I.R. 1997 S.C.).Jurisdiction of the district forum (S.11)

5. S. 11 Jurisdiction of the District Forum1. Subject to the other Provisions of this Act, the District Forum shall have

jurisdiction to entertain complaints where the value of the goods orservices and the compensation, if any, claimed [does not exceed rupeestwenty lakhs.

2. A complaint shall be instituted in a District Forum within the local limitsof whose jurisdiction -

a) the opposite party or each of the opposite parties, where there are morethan one, at the time of the institution of the complaint, actually andvoluntarily resides or [carries on business or has a branch office or]personally works for gain, or

b) any of the opposite parties, where there are more than one, at the timeof the institution of the complaint, actually and voluntarily resides, or[carries on business or has a branch office], or personally works forgain, provided that in such case either the permission of the DistrictForum is given, or the opposite parties who do not reside, or [carry onbusiness or have a branch office], or personally work for gain, as thecase may be, acquiesce in such institution, or

c) the cause of action, wholly or in part, arises,The Act provides jurisdiction of D.F. (to hear and try) the complaints asfollows:1. Pecuniary Jurisdiction and (S. 11(1))2. Local or Territorial Jurisdiction (S.11 (2))3. Other Jurisdiction (Rule 10 of Consumer Protection Rules, 1987).1. Pecuniary JurisdictionThe District Consumer Forum shall have jurisdiction to entertaincomplaints where the value of the goods or services and the compensation,if any claimed does not exceed rupees twenty lakhs.[Originally this pecuniary jurisdiction was rupees one lakh which wasraised up to rupees five lakhs by Amendment Act, 1993.]Thus, scheme of pecuniary jurisdiction may be explained -1. value of the goods, or2. value of the services, and3. value of the compensationSo, it is clear that either the value of goods or services including thevalue of the compensation, if any must be rupees twenty lakhs and notmore. If it becomes rupees twenty lakhs and one, the jurisdiction will beshifted to State Commission.In Public Health Engineering Department v. Consumer Protection Samiti,



the complainants suffered from Jaundice as they used contaminated watersupplied by the municipality. The value of claimed compensation of eachperson was Rs.10,000 and which in total comes more than one lakh. Itwas held by the National Commission that complaint was beyond thejurisdiction of the District Forum.It should be noted here that prepositions ‘or’ and ‘and’ have been usedbetween, I, II, & III respectively. It means value of goods or servicesincluding compensation must be of Rs. 20 lakhs.In Premier Automobiles Ltd. v. Dr. Manoj Ram Chandran & others, thematter before the National Commission was that the increase in pecuniarylimit will have any effect on jurisdiction as to pending complaints? It wasdecided by the National Commission in negative. The amendment as topecuniary jurisdiction has prospective effect. It does not applyretrospectively. Thus such amendments will have no effect on pendingcases.2. Local or Territorial JurisdictionAs to purposes of the Act local or territorial jurisdiction may be:i) where opposite party resides or carry on business : The opposite

party or each of the opposite parties, where there are more than one atthe time of the institution of the complaint, actually and voluntarily residesor carries on business or has a branch office or personally works forgain or

ii) any of the opposite parties, where there are more than one at the time ofinstitution of the complaint, actually and voluntarily resides, or carries onbusiness or has a branch office or personally works for gain, providedthat in such case either,

a) the permission of the District Forum is given orb) the opposite parties who do not reside, or carry on business, or have a

branch office, or personally work for gain, acquiesce in such institution oriii) the cause of action, wholly or in part, arises.

Normally District Consumer Forum will exercise its jurisdiction withinthe limits of its district and where there are more than one district forumin that case such forums will exercise their jurisdiction subject to thelocal limits as may be prescribed.In State of Punjab v. Nanak Chand, it was held that as regardsmanufactured goods cause of action also arises as to place where goodshave been put to market.

3. Territorial jurisdiction of District ForumS. 11 were aptly discussed in Lucky Forwarding Agency V. Smt. BinderDevi. (A.I.R.2003 M.P.261)In this writ petition the petitioner Lucky Forwarding Agency, a registeredpartnership firm engaged in Commission Agency at Lucknow and hasno branch office anywhere in the country. All the partners of the petitioner



firm reside at Lucknow and none of them voluntarily resides or carrieson business at Rewa. As a Commission Agent, the job of petitioner is toarrange trucks for transportation of goods. The complainant ‘A’ hadsent his representative to Uttar Pradesh to purchase 240 quintals ofsugar from Kishan Sahkar Sugar Mills Ltd. Mehmudabad, DistrictSitapur (U.P). Representative of the complainant engaged the petitionerat Lucknow and asked him to arrange trucks for transportation of sugar.The trucks were arranged one of them did not reach safely and ultimatelygoods loaded on that truck did not reach the destination at Rewa.Late Shri Moolchand filed a complaint in the District Forum at Rewaindicating that the petitioner was responsible for safe delivery of goodsat Rewa and as the same was not delivered the petitioner was guilty ofdeficiency in service as defined in S. 2 (g) of the Act. The oppositeparty (petitioner) objected filing of complaint at Rewa. It was pointedout that S. 11 of the Act was not attracted to this case as it did notdisclose that the cause of action wholly or in part to have been arisenwithin the local limits of Rewa. The District Forum Rewa lack territorialjurisdiction, hence complaint is not maintainable at Rewa. After thedeath of original complainant the legal heirs were substituted.The District Forum decided the dispute and directed payment of Rs.1,41,000 towards cost of sugar long with interest at the rate of 6% perannum. On appeal before the State and National Commission, orderpassed by the D.F. was affirmed, hence this writ petition for issue of writof certiorari for quashment the order passed by the D.F. and affirmationthereof by the State and National Commission. The High Court heldthat since the goods were sent from Mehmudabad and the same was tobe delivered at Rewa and therefore, the complaint was rightly entertainedby the District Forum at Rewa. The stance of the petitioner that theD.F. at Rewa had no territorial jurisdiction is sans substance,consequently, the writ petition, being devoid of merit, stands dismissed.

Jurisdiction ClauseIn Prakash Roadlines Ltd. V. M/s. Micron Instruments pvt. Ltd. Thefinding of the District Forum that the consignee is maintaining its office atChandigarh and that the goods were despatched for Chandigarh, theForum here rightly had the territorial jurisdiction at Chandigarh. TheState Commission did not think proper to interfere. The appellant‘sargument that the transaction was subject to Bangalore jurisdiction wasnot accepted.As to jurisdiction clause Kashi Ram v. Maruti Udyog Ltd. case is alsonotable. It is found that the District Forum, Bilaspur in the facts andcircumstances of the case has jurisdiction otherwise u/s 11 of the Act todecide the complaint, the court should not readily infer about the exclusionof the jurisdiction of the District Forum. If two interpretations arepossible, the interpretations which go in favour of the consumer, shouldnormally be adopted by the courts. We have scrutinised clause 10 of theaffidavit reproduced above and in our opinion the jurisdiction to try thecomplaint does not vest exclusively in the courts at Chandigarh. No



doubt, the word ‘only’ has been used in the affidavit at the same time thesecond part of the clause itself permits the trial of the complaint outsidethe courts of Chandigarh as it further stipulates that in any case anycomplaint or petition is filed outside the courts of Chandigarh then thelitigation cost incurred to fight the case shall be borne by him. Thecommission relied upon the judgment of L.D.A. v. M.K. Gandhi. TheSupreme Court held that the provisions of the Act have to be construedin favour of the consumer to active the purpose of enactment as it is asocial benefit-oriented legisaltion. The primary duty of the court whileconstruing the provisions the said enactment is to adopt a constructiveapproach subject to that it should not do violence to the language of theprovisions and is not contrary to attempted objectives of the enactment.Jurisdiction of District Forum was raised in recent case of AmercianExpress Banks Ltd. v. Rajesh Gupta & ors. The petitioner afterconsultation from Americal Express Bank purchased Traverllers Chequeat Delhi from the banker of American Express Bank. The petitioner lostthe Travellers cheque along with passport and other relevant documentsat Delhi. The petitioner at the time of the filing of the refund claim wasresiding in New Delhi and also carried on business at Noida near NewDelhi. The petitioner at the time of the filing of the refund claim wasresiding in New Delhi and also carried on business Noida near NewDelhi. The petitioner on the basis of alleged dialogue at Calcutta withAmerican Express Banks filed complaint at District Forum Calcutta. TheNational Commission held that since no part of the cause of action hadarisen at Calcutta, therefore, District Forum Calcutta has no jurisdiction.It was held that the petitioner‘s reference to his alleged dialogue ordealings in respect of Travellers‘ cheques within the office of Calcuttawas wrong, misleading, meaningless and concocted by the petitioner onlywith the aim of securing territorial jurisdiction of the Forum.4. Other jurisdictionRule 10 of National Consumer Protection Rules, 1987 provides thefollowing additional jurisdiction of the National Commission, StateCommission and District Forum.(1) Power to require any person(a) Production of Books, Accounts, Documents or Commodities

Where such books, accounts, document or commodities are requiredfor the purpose of this Act District Forum may require from such personin whose custody they are, for production of books, accounts, documentsor commodities.

(b) To Furnish InformationThe District Court may require furnishing to an officer so specified, suchinformation.

(c) Power to Entry and SearchThe District Forum may order any officer for entry and search of anypremises if it has any ground to believe that any book, paper,commodity or document which may be required to be produced in such



proceeding are being, or may be destroyed, mutilated, altered, falsifiedor secreted.

(d) Order for SeizureThe District Forum may also order for seizure of the above documents.

(e) Order for RetentionThe National Commission, the State Commission of the District Forum,as the case may be, on examination of such seized documents orcommodities, as the case, may order the retention thereof may return tothe party concerned.

Comments(i) Objections regarding territorial jurisdiction should be taken at the earliest

opportunity or the same deemed to have been waived; KurukshetraUniversity v. Vinary Prakash Verma, II (1993) CPJ 647.

(ii) A petition of complaint can be filed against corporation carrying onbusiness within the territory of District Forum or Commission even thoughits sole or principal office is situated outside state limits; ConsumerEducation and Research Society v. Canara Bank, (1991) 1 CPR 405.

Estoppel as to JurisdictionIt was held in Vikas Motor Ltd. v. P.K. Jain, that such party was estoppedfrom raising the plea relating to jurisdiction at the SLP stage as he couldnot be permitted to approbate and reprobate at the same time aftersubmitted to the territorial jurisdiction of the District Forum.1. Manner in which Complaint shall be madeSection 12 provides the manner in which complaint under the Act shallbe made.Manner in which complaint shall be made -1. A complaint in relation to any goods sold or delivered or agreed to be

sold or delivered or any service provided or agreed to be provided maybe filed with a District Forum by -

(a) the consumer to whom such goods sold or delivered or agreed to besold or delivered or any service provided or agreed to be provided maybe filed with a District Forum by -

a) the consumers to whom such goods are sold or delivered or agreed tobe sold or delivered or such service provided or agreed to be provided;

b) any recognised consumer association whether the consumer to whomthe goods sold or delivered or agreed to be sold or delivered or serviceprovided or agreed to be provided is a member of such association ornot;

c) one or more consumers, where there are numerous consumers havingthe same interest, with the permission of the District Forum, on behalfof, or for the benefit of all, consumers so interested, or

d) the Central or the State Government as the case may be, either in itsindividual capacity or a representative of interests of the consumers ingeneral,



2. Every complaint filed under sub section (1) shall be accompanied withsuch amount of fee and payable in such manner as may be prescribed.

3. On receipt of a complaint made under sub-section (1), the District Forummay, by order, allow the complaint to be proceeded with or rejected:

Provided that a complaint shall not be rejected under this sub-section,unless an opportunity of being heard has been given to the complainant.Provided further that the admissibility of the complaint shall ordinarily bedecided within twenty one days from the date on which the complaintwas received.

4. Where a complaint is allowed to be proceeded with under sub-section(3) the District Forum may proceed with the complaint in the mannerprovided under this Act:

Provided that where a complaint has been admitted by the District Forum,it shall not be transferred to any other court or tribunal or any authorityset up by or under any other law for the time bring in force.Explanation- For the purposes of this section, “recognised consumerassociation” means any voluntary consumer association registered underthe Companies Act, 1956 (1 of 1956) or any other law for the time beingin force.Section 12 contains following three aspects: I. by whom complaint may be filed and S. 12(1)II. the manner in which complaint shall be made S. 12(2),(3) and (4),III. admissibility of a complaint.2. Who can file Complaint? According to S. 12(1) the complaint under the Act can be filed by:(a) By Consumer:The consumer to whom such goods are sold or delivered or agreed to besold or delivered or such service provided or agreed to be provided.It should be kept in mind that every person who is consumer may filecomplaint. So the buyer of goods or to who service has been providedand the persons who are beneficiaries of such or availing services arealso included (see definitions of consumer).(b) Any Recognised consumer AssociationAny recognised consumer association whether the consumer to whomthe goods sold or delivered or agreed to be sold or delivered or serviceprovided or agreed to be provided is a member of such association ornot. Association must be registered under the Indian Companies Act,1956 or the Society Registration Act.There are 314 recognised Consumer Associations given in the Appendices.SEBI may also file complaint for the protection of the interest of theconsumers.Can Attorney Holder File Complaint?In Punjab National Bank v. Ramakant Yadav, the State Commission, Patnaheld that holder of attorney cannot file complaint and he will not beconsidered complainant within the meaning of the Act.



c) By One or More consumersThe complaint may be filed by one or more consumers, where there arenumerous consumers having the same interest, with the permission of theDistrict Forum, on behalf of, or for the benefit of all, consumers sointerested.d) Central or State GovernmentThe Central of State Government, as the case may be, either in itsindividual capacity or as a representation of interests of the consumers ingeneral may be complainant or file complaint.3. The manner of Filing complaintsThe object of the Act is to provide simple, speedy and cheaper measuresfor the protection of consumers. This has been insured under S. 12 ofthe Act S. 12 provide the manner in which the complaint shall be filed isvery simple and easy.Here it is relevant to mention the judgment of the Supreme Court in L.D.A.v. M.K.Gandhi. The judgment of Supreme Court in this leading casewas that the Consumer Protection Act is social welfare legislation andthe purpose of this legislation is to prove a better, efficient and cheaperremedy to the consumers. So consumers must be kept free from thecomplicated judicial proceedings and the complicated obligations. Thus,the manner is quite informal and free from the shackles and trappings ofthe Civil Courts.Such manner is needed to be provided in the Rules, State ConsumerRules, 1987 does not provide but it has been provided in the ConsumerProtection Rules, 1987. (Central) Rule 14 provides that a complaintcontaining the following particulars shall be presented by the complainantin person or by his agent to the National Commission or be sent byregistered post, addressed to the National Commission-a) the name, description and the address of the complainant,b) the name, description and address of the opposite party or parties, as

the case may be, so far as they can be ascertainedc) the facts relating to the complaint and when and there it arose;d) documents in support of the allegations contained in the complaint, ande) the relief which the complaint claims.The same is the manner in case of filing of complaint before the stateCommission or the District Forum. The complainant can file complaintbefore National Commission or State Commission or District Forumdirectly subject to pecuniary jurisdiction, i.e. above one crore to theNational Commission, where it exceeds rupees twenty lakhs but doesnot exceed rupees one crore to the state Commission and up to Rupeestwenty lakhs to the District Forum. There is no need of Advocate or anyother pleader; however complainant may take the help of advocate.



Fees. Sec. 12(2)Every complaint filed under sub-section (1) shall be accompanied withsuch amount of fee and payable in such manner as may be prescribedpayment of fees was not required under original provisions of the Act. Ithas been provided by Amendment Act, 2002. There was India-basedagitation against the imposition of fees. Keeping in view this wide-basedagitation no rule has yet been made for imposing fee. In absence ofprescribed rule the complaints are being filed without any fees.4. Admissibility of the Complaint: S. 12(3)Sec. 12(3) has also been added by Amendment Act, 2002. On receiptof a complaint made as above, the District Forum may, by order, allowthe complaint to be proceeded with or rejected. Thus, the District Forummay decide as to admissibility of the complaint.Provided that a complaint shall not be rejected under this sub-sectionunless an opportunity of being heard has been given to the complainant.It was noticed that a complaint has to litigate for a long time, some timefor years before getting any redressal from a Consumer Fora. Many atime after long proceedings it was found that the remedy could not beprovided under summary consumer jurisdiction and the parties were askedto seek remedy from Civil Court, of course by condoning the periodspend in consumer proceedings for the purpose of limitation. This is thereason that new Section 12(3) of the Act provides for admission orrejection of the complaint by an order of the Fora.After a complaint is received, the Fora are required to decide theadmissibility of the complaint within period of 21 days. This will leaveminimum chances of being referred any matter to Civil Courts on theground that it could not be decided under summary proceeding of thefora as the matter involves some complicated and complex issues. Thisis in the interest of consumers.Time Limit for Deciding Admissibility. S.12(3)The admissibility of a complaint must be decided within 21 days from thedate on which the complaint was received.If the District Forum allows admissibility of a complaint it may proceedwith the complaint in the manner provided under this act. [S.12 (4)].No Transfer Provision of S. 12(4)Provision of sub-section 4 prohibits the transfer of the complaint to anyother court or tribunal or any other authority set-up by or under anyother law for the time being in force after a complaint has been admittedby the District Forum Under s. 12(3).5. Procedure on Admission of Complaint (s. 13)When a complaint is filed subject to the provisions of S. 12 and itsadmissibility is accepted then the District Forum shall proceed with thecomplaint in accordance with the provisions of S. 13.



Sec13. [Procedure on admission of complaint]-1) The District Forum shall, [on admission of a complaint], if it relates to

any goods -(a) refer a copy of the admitted complaint, within twenty-one days from the

date of its admission to the opposite party mentioned in the complaintdirecting him to give his version of the case within a period of thirty daysor such extended period not exceeding fifteen days as may be grantedby the District Forum];

b) where the opposite party on receipt of a complaint referred to him underclause (a) denies or disputes the allegations contained in the complaint,or omits or fails to take any action to represent his case within the timegiven by the District Forum, the District Forum shall proceed to settlethe consumer dispute in the manner specified in clauses (c) to (g);

c) where the complaint alleges a defect in the goods which cannot bedetermined without proper analysis or test of the goods, the DistrictForum shall obtain a sample of the goods from the complainant, seal itand authenticate it in the manner prescribed and refer the sample sosealed to the appropriate laboratory along with a direction that suchlaboratory make an analysis or test, whichever may be necessary, with aview to finding out whether such goods suffer from any defect alleged inthe complaint or from any other defect and to report its findings thereonto the District Forum within a period of forty-five days of the receipt ofthe reference or within such extended period as may be granted by theDistrict Forum;

d) before any sample of the goods is referred to any appropriate laboratoryunder clause (c) the District Forum may require the complainant to depositto the credit of the Forum such fees as may be specified, for payment tothe appropriate laboratory for carrying out the necessary analysis or testin relation to the goods in question;

e) the District Forum shall remit the amount deposited to its credit underclause (d) to the appropriate laboratory to enable it to carry out theanalysis or test mentioned in clause (c) and on receipt of the report fromthe appropriate laboratory, the District Forum shall forward a copy ofthe report along with such remarks as the District Forum may feelappropriate to the opposite party;

f) if any of the parties disputes the correctness of the findings of theappropriate laboratory, or disputes the correctness of the methods ofanalysis or test adopted by the appropriate laboratory, the District Forumshall require the opposite party or the complainant to submit in writinghis objections in regard to the report made by the appropriate laboratory;and

g) the District Forum shall thereafter give a reasonable opportunity to thecomplainant as well as the opposite party of being heard as to thecorrectness or otherwise of the report made by the appropriate laboratoryand also as to the objection made in relation thereto under clause (f) andissue an appropriate order under section 14.



(2) The District Forum shall, if the [Complaint admitted] by it under section12 relates to goods in respect of which the procedure specified in sub-section (1) cannot be followed, or if the complaint relates to any services

a) refer a copy of such complaint to the opposite party directing him to givehis version of the case within a period of thirty days or such extendedperiod not exceeding fifteen days as may be granted by the District Forum;

b) where the opposite party, on receipt of a copy of the complaint referredto him under clause (a) denies or disputes the allegations contained in thecomplaint, or omits or fails to take any action to represent his case withinthe time given by the District Forum, the District Forum shall proceed tosettle consumer dispute -

i) on the basis of evidence brought to its notice by the complainant and theopposite party, where the opposite party denies or disputes the allegationscontained in the complaint, or

ii) exparty on the basis of evidence brought to its notice by the complaintwhere the opposite party omits or fails to take any action to representhis case within the time given by the Forum;

(c) where the complainant fails to appear to appear on the date of hearingbefore the District Forum, the District Forum may either dismiss thecomplaint for default or decide it on merits.

(3) No proceedings complying with the procedure laid down in sub-sections(1) and (2) shall be called in question in any court on the ground that theprinciples of natural justice have not been complied with.

(3A) Every complaint shall be heard as expeditiously as possible and endeavorshall be made to decide the complaint within a period of three monthsfrom the date of receipt of notice by opposite party where the complaintdoes not require analysis or testing of commodities and within five monthsif it requires analysis or testing of commodities.

Provided that no adjournment shall be ordinarily granted by the DistrictForum unless sufficient cause is shown and the reasons for grant ofadjournment have been recorded in writing by the Forum:Provided further that the District Forum shall make such orders as to thecosts occasioned as may be provided in the regulations made under thisAct.Provided also that in the event of a complaint being disposed of after theperiod so specified this District Forum shall record in writing, the reasonsfor the same at the time of disposing of the said complaint.

(3B) where during the pendency of any proceeding before the District Forum,it appears to it necessary, it may pass such interim order as is just andproper in the facts and circumstances of the case

(4) For the purposes of this section, the District Forum shall have the samepowers as are vested in a civil court under Code of Civil Procedure,1908 (5 of 1908) while trying a suit in respect of the following matters,namely -



i) the summoning and enforcing the attendance of any defendant orwitness and examining the witness on oath,

ii) the discovery and production of any document or other material objectproducible as evidence,

iii) the reception of evidence on affidavits,iv) the requisitioning of the report of the concerned analysis or test from the

appropriate laboratory or from any other relevant source.Have you under stood ?Objective questions :1. Complaint should be in _________________________form

a. oral b. written c. oral (or) written d. none of these2. The standing working group shall consists of not

exceeding__________membersa. 20 b. 40 c. 30 d. 25

3. The consumer courts have been established at three levels one is Districtforum, second is state commission and third is _______________a. consumer self group b. joint action committeec. national commission d. tribunal

4. The qualification of a member of a district forum is__________a. not less than 50 years b. not less than 45 yearsc. not less than 60 years d. not less than 30 years

5. The time limit for the admissibility of the petition by the district forumis________

a. 25 days b. 30 days c. 21 days d.45 daysAnswers

1. b 2. c 3. c 4. d 5. cII- Short Answer Questions :6. Trace the history and growth of the Consumer Protection Act.7. Who is a consumer?8. Who is a Complainant?9. Define Goods and services.10. What is deficiency in services?III- Long Answer Questions :11. Describe the constitution of consumer protection council.12. Explain the process of complaint to redressal.13. Discuss the factors considered for the decision on jurisdiction of

consumers courts.



SummaryThe Consumer Protection Act, 1986 is one of the benevolent sociallegislation intended to protect the large body of consumers fromexploitation. The Act has come as a panacea for consumers all over thecountry and has assumed the shape of practically the most importantlegislation enacted in the country during the last few years. It has becomethe vehicle for enabling people to secure speedy and inexpensive redressalof their grievances. With the enactment of the law, consumers now feelthat they are in a position to declare “sellers be aware” whereas previouslythe consumers were at the receiving end and generally told “buyers beaware”.The Act postulates establishment of Central Consumer Protection Counciland the State Consumer Protection Councils for the purpose of spreadingconsumer awareneSecs. Central Council is headed by Minister in-chargeof the Consumer Affairs in the Central Government and in the State it isthe Minister in-charge of the Consumer Affairs.

5.2 Introduction of Cyber LawsNew communication systems and digital technology have made dramaticchanges in the way we live and the means to transact our daily busineSecs.There is a remarkable change in the way people transact busineSecs.Businessmen are increasingly using computers to create, transmit and storeand retrieve and speedier to communicate. Although people are awareof the advantages which the electronic form of business provides, peopleare reluctant to conduct business or conclude and transaction in theelectronic from due to lack of appropriate legal framework. Electroniccommerce eliminates need for paper based transactions. The two principalhurdles which stand in the way of facilitating electronic commerce andelectronic governance, are the requirements of writing and signature forlegal recognition. At present many legal provisions assume the existenceof paper based records and documents which should bear signatures.The law of evidence is traditionally based upon paper based records andoral testimony. Hence to facilitate-commerce, the need for legal changeshas become an urgent necessity.The government of India realized the need for introducing a new law andfor making suitable amendments to the existing laws to facilitate e-commerce and give legal recognition to electronic records and digitalsignatures in turn will facilitate the conclusion of contracts and the creationof legal rights and obligations through the electronic communication likeInternet. This gave birth to the Information Technology Bill, 1999.In May 2000, both the houses of the Indian Parliament passed theInformation Technology Bill. The Bill received the assent of the Presidentin August 2000 and came to be known as the Information TechnologyAct, 2000. Cyber Law is contained in the IT, Act, 2000. This Act aimsto provide the legal infrastructure for e-commerce in India and wouldhave a major impact for e-businesses and the new economy in India.Therefore, it is important to understand what are the various perspectivesof the IT Act, 2000 and when it offers.



The Information Technology Act, 2000 also aims to provide the legalframework under which legal sanctity is accorded to all electronic recordsand other activities carried out by electronic means. The Act states thatunless otherwise agreed, an acceptance of contract may be expressedby electronic means of communication and the same shall have legalvalidity and enforceability. Information technology act, 2000Arrangement of Sections: The Act consists of 94 sections spread overthirteen chapters, and four schedules to the Act, The various chaptersare discussed in detail later. The Schedules to the Act contain relatedamendments made in other acts as outlined in the objectives of the Act,namely, the Indian Penal Code, the Indian Evidence Act, 1972, theBanker’s Book Evidence Act, 1891 and the Reserve Bank of India,1934.

5.2.1 Learning Objectives :

After studying this unit you should be able to:• Understand about the objectives of the Information technology Act• Know about the formalities of electronic records authentication.• Determine the need and scope the Electronic commerce.• Know what is Electronic signatures and its procedures of recognition.• Understand the functions of Cyber regulations Appellate Tribunal• Specify the role of Cyber regulations advisory committee.

5.2.2 Objectives of Information Technology Act, 2000

The objectives of the Act are:• to grant legal recognition for transactions carried out by means of

electronic date interchange and other means of electronic communicationcommonly referred to as “electronic commerce” in place of paper basedmethods communications;

• to give legal recognition to digital signature for authentication of anyinformation or matter which requires authentication under any law;

• to facilitate filing of documents with government departments;• to facilitate electronic storage of date;• to facilitate and give legal sanction of electronic fund transfers between

banks and financial institutions;• to give legal recognition for keeping books of account by bankers in

electronic form. Evidence Act, 1891 and the Reserve Bank of IndiaAct, 1934.

Scope of the Act.The Act extends to the whole of India and unless otherwise provided inthe Act, it applies also to any offence or contravention there under



committed outside India by any person. The Act shall not apply to thefollowing:• a negotiable instrument as defied in Section 13 of Negotiable Instruments

Act, 1881• a power of Attorney as defined in Section 1A of the Powers-of-• a trust as defined in Section 3 of the Indian Trusts Act, 1882;• a will as defined in of section 2 ® of Indian Succession Act, 1925 including

any other testamentary disposition by whatever name called;• any contract for the sale or conveyance of immovable property or any

interest in such property;• any such class of documents or transactions as may be notified by the

Central Government in the Official Gazette.

5.2.3 Definitions (Section 2)

(a) “Access” with its grammatical variations and cognate expressions meansgaining entry into, instructing or communicating with the logical,arithmetical, or memory function resources of a computer, computersystem or computer network;

(b) “Addressee” means a person who is intended by the originator to receivethe electronic record but does not include any intermediary;

(c) “Affixing digital signature” with its grammatical variations and cognateexpressions means adoption of any methodology or procedure by a personfor the purpose of authenticating an electronic record by means of digitalsignature;

(d) “Appropriate Government” means the Central Government except inthe following two cases where it means the State Government; (i) inmatter enumerated in List II of the Seventh Schedule to the Constitution;(ii) relating to any state law enacted under List III of the Seventh Scheduleto the Constitution;

(e) “Asymmetric crypto system” means a system of a secure key pairconsisting of a private key for creating a digital signature and a publickey to verify the digital signature;

(f) “Computer” means any electronic magnetic, optical or other high-speeddate processing device or system which performs logical, arithmetic andmemory functions by manipulations of electronic, magnetic or opticalimpulses, and includes all input output, processing, storage, computersoftware, or communication facilities which are connected or related tothe computer in a computer system or computer network;

(g) “Computer network” means the interconnection of one or more computersthrough - (i) the use of satellite, microwave, terrestrial line or othercommunication media; and (ii) terminals or a complex consisting of twoor more interconnected computers whether or not the interconnection iscontinuously maintained;



(h) “Computer resource” means computer system, computer network, data,computer data base or software;

(i) “Computer system” means device or collection of devices, includinginput and output support devices and excluding calculators which arenot programmable and capable of being used in conjunction with externalfiles, which contain computer programmes, electronic instructions, inputdata and output data, that performs logic, arithmetic, data storage andretrieval, communication control and other functions.

(j) “Data” means a representation of information, knowledge, facts, conceptsor instructions which are being prepared or have been prepared in aformalized manner, and is intended to be processed, is being processedor has been processed in a computer system or computer network, andmay be in any form (including computer printouts magnetic or opticalstorage media, punched tapes or stored internally in the memory of thecomputer.

(k) “Digital signature” means authentication of any electronic record by asubscriber by means of an electronic method or procedure in accordancewith the provisions of Section 3.

(l) “Electronic form” with reference to information means of any informationgenerated, sent, received or stored in media, magnetic, optical, computermemory, micro film, computer generated micro fiche or similar device ;

(m) “Electronic record” means data, record or date generated, image orsound stored, received or sent in an electronic form or micro film orcomputer generated micro fiche;

(n) “Function” in relation to a computer, includes logic, control arithmeticalprocess, deletion, storage and retrieval and communication ortelecommunication from or within a computer;

(o) “Information” includes data, text, images, sound, voice, codes, computerprogrammes, software and database or micro film or computer generatedmicro fiche.

(p) “Intermediary” with respect to any particular electro message meansany person who on behalf of another person receives stores or transmitsthat message or provides any service with respect to that message;

(q) “Key pair” in an asymmetric crypto system, means a private key and itsmathematically related public key, which are so related that the publickey can verify a digital signature created by the private key;

(r) “Originator” means a person who sends, generates, stores or transmitsany electronic message or causes any electronic message to be sent,generated, stored or transmitted to any other person but does not includean intermediary;

(s) “Prescribed” means prescribed by rules made under this Act;(t) “Private key” means the key of a key pair used to verify a digital

signature and listed in the Digital Signature Certificate;



(u) “Secure system” means computer hardware, software, and procedurethat -

(a) are reasonably secure from unauthorised access and misuse;(b) provide a reasonable level of reliability and correct operation;(c) are reasonably suited to performing the intended functions; and(d) adhere to generally accepted security procedures;(v) “verify” in relation to a digital signature, electronic record or public key,

with its grammatical variations and cognate expressions means todetermine whether -

(a) the initial electronic record was affixed with the digital signature by theuse of private key corresponding to the public key of the subscriber;

(b) the initial electronic record is retained intact or has been altered sincesuch electronic record was so affixed with the digital signature.

5.2.4 Authentication of Electronic Records (Section 3)The section provides the conditions subject to which an electronic recordmay be authenticated by means of affixing digital signature. The digitalsignature is created in two distinct steps, first the electronic record isconverted in to a message digest by using a mathematical function knownas ‘hash function’ which digitally freezes the electronic record thusensuring the integrity of the content of the intended communicationcontained in the electronic record. Any tampering with the contents ofthe electronic record will immediately invalidate the digital signature.Secondly, the identity of the person affixing the digital signature isauthenticated through the use of a private key which attaches itself to themessage digest and which can be verified by anybody who has the publickey corresponding to such private key. This will enable anybody toverify whether the electronic record is retained intact or has been tamperedwith since it was so fixed with the digital signature. It will also enable aperson who has a public key to identify the originator of the message.For the purpose of this sub-section, ‘hash function’ means an algorithm,mapping or translation of one sequence of bits into another generallysmaller, set known as ̀ hash result` such that an electronic record yieldsthe same hash result every time the algorithm is executed with the sameelectronic record as its input making it computationally infeasible -a. to derive of reconstruct the original electronic record from the hash result

produced by the algorithm;b. that two electronic record can be produced the same hash result using

the algorithm.5.2.5 Electronic Governance (Sections 4-10)

Section 4 - This section provides for ‘legal recognition of electronicrecords’. It provides that where any law requires that any information ormatter should be in the typewritten or printed form then such requirementshall be deemed to be satisfied it if it in electronic form.



Section 5 - This section provides for legal recognition of Digital signature.Where any law requires that any information or matter should beauthenticated by affixing the signature of any person, then such requirementshall be satisfied if it is authenticated by means of Digital signatures affixedin such manner as may be prescribed by the Central Government.For the purposes this section ‘signed’ with its grammatical variations andcognate expressions, shall with reference to a person, mean affixing ofhis hand written signature or any mark or any document and the expression`signature` shall be construed accordingly.Section 6 - lays down the foundation of Electronic Governance.It provides that the filing of any form, application or other documents,creation, retention or preservation of records, issue or grant of anylicense or permit or receipt or payment in government offices and itsagencies may be done through the means of electronic form. Theappropriate Government has the power to prescribe the manner andformat of the electronic records and the method of payment of fee in thatconnection.Section 7 - This Section provides that the documents, records orinformation which to be retained for any has specified period shall bedeemed to have been retained if the same is retained in the electronicform provided the following conditions are satisfied:i. the information therein remains accessible so as to be usable subsequently.ii. the electronic record is retained in its original format or in a format which

accurately represents the information contained.iii. the details which will facilitate the identification of the origin, destination,

dates and time of despatch of receipt of such electronic record areavailable therein.

This section does not apply to any information which is automaticallygenerated solely for the purpose of enabling an electronic record to bedispatched or received.Moreover, this section does not apply to any law that expressly providesfor the retention of documents, records or information in the form ofelectronic records.Section 8 - provides for the publication of rules, regulations andnotifications in the Electronic Gazette. It provides that where any lawrequires the publication of any rule, regulation, order, bye-law, notificationor any other matter in the Official Gazette, then such requirement shall bedeemed to be satisfied if the same is published in an electronic form. Italso provides where of Official Gazette is published both in the printedas well as in electronic form, the date of publication shall be date ofpublication of the Official Gazette which was first published in any form.However, Section 9 of the Act provides that the conditions stipulated inSections 6, 7 and 8 shall not confer any right to insist that the documentshould be accepted in an electronic form by any Ministry or departmentof the Central Government or the State Government.



Power to Central Government to make rules (Section 10): This sectionprovides that the Central Government, in respect of Digital Signaturemay prescribe by rules the following:a. the type of digital signatureb. the manner and format in which the digital signature shall be affixedc. the manner or procedure which facilitates identification of the person

affixing the digital signature.d. control processes and procedures to ensure adequate integrity, security

and confidentiality of electronic records or paymentsand

e. any other matter which is necessary to give legal effect to digitalsignatures.

5.2.6. Attribution, Receipt and Dispatch of Electronic records(Sections 11 - 13)

Section 11 Deals with attribution, receipt and dispatch of electronicrecords ‘Attribution‘ with regard to a certain means ‘to consider it to bewritten or made by someone‘. Hence, this section lays down how anelectronic record is to be attributed to the person who originated it.Section 12 provides for the manner in which acknowledgement ofreceipt of an electronic record by various modes shall be made.Section 13 provides for the manner in which the time and place ofdespatch and receipt of electronic record sent by the originator shall beidentified. It is provided that in general, an electronic record is deemedto be despatched at the place where the originator has his pace of businessand received where the addressee has his place of busineSecs.For the purpose of this Section -a. if the originator or the addressee has more than one place of business,

the principal place of business shall be the place of busineSecs.b. if the originator or the addressee does not have a place of business, his

usual place of residence shall be deemed to the place of business;c. usual place of residence‘ in relation to a body corporate, means the

place where it is registered.Secure Electronic Records and Secure Digital Signatures(Section 14 - 16)The I.T. Act sets out the conditions that would apply to qualify electronicrecords and digital signatures as being secure. It contains sections 14 to 16.Section 15 provides for the security procedure to be applied to DigitalSignatures for being treated as a secure digital signature.Section 16 provides for the power of Central Government to prescribethe security procedure in respect of secure electronic records and securedigital signatures. In doing so, the Central Government shall take into



account various factors like nature of the transaction, level of sophisticationof the technological capacity of the parties, availability and cost ofalternative procedures, volume of similar transactions entered into byother parties, etc.

5.2.7 Regulation of Certifying Authorities (Sections 17 - 34)

The I.T.Act contains detailed provisions relating to the appointment andpowers of the controller and certifying Authorities. It contains sections17 to 34.Section 17 Provides for the appointment of controller and other officersto regulate the Certifying Authorities.Section 18 lays down the functions which the controller may perform inrespect of activities of Certifying Authorities.Section 19 provides for the power of the Controller with previousapproval of the Central Government to grant recognition to foreigncertifying Authorities subject to such conditions and restrictions as maybe imposed regulations.Section 20 This section proves that the controller shall be acting asrepository of all digital signature Certificates issued under the Act. Heshall also adhere to certain security procedure to ensure secrecy andprivacy of the digital signatures and also to satisfy such other standardsas may be prescribed by the Central Government. He shall maintain acomputerized database of all public keys in such a manner that they areavailable to the general public.Section 21 This section provides that a license to be issued to a certifyingAuthority to issue Digital Signature Certificates by the controller shall bein such from and shall be in such form and shall be accompanied withsuch fees and other documents after considering the application may eithergrant the license or reject the application after giving reasonableopportunity of being heard.Section 22 This section provides that the application for license shall beaccompanied by a certification practice statement and statement includingthe procedure with respect to identification of the applicant. It shall befurther accompanied by a fee not exceeding Rs.25, 000 and otherdocuments as may be prescribed by the Central Government.Section 23 provides that the application for renewal of a license shall bein such form and accompanied by such fees not exceeding Rs.5,000which may be prescribed by the Central Government.Section 24 deals with the procedure for grant or rejection of license bythe controller on certain grounds.However, that no application shall be rejected under this section, unlessthe applicant has been given a reasonable opportunity of presenting hiscase.Section 25 provides that the controller may revoke a license on groundssuch as incorrect or false material particulars being mentioned in the



application and also on the ground of contravention of any provisions ofthe Act, rule, regulation or order made there under.However, no license shall be revoked unless the Certifying Authority hasbeen given a reasonable opportunity of showing cause against theproposed revocation. Also, no license shall be suspended for a periodexceeding ten days unless the Certifying. Authority has been given areasonable opportunity of showing cause against the proposed suspension.Thereafter, the controller shall publish a notice of suspension or revocation,as the case may be, shall be made available through a web site whichshall be accessible round the clock. It also provided that the controllermay, if he considers necessary, publicize the contents of database in suchelectronic or other media, as he may consider appropriate.Controller’s power to delegate: Under Section 27 controller may inwriting authorize the Deputy Controller, Assistant controller or any officerto exercise any of his powers under the Act.Other powers: The controller shall have power to investigatecontravention of the provisions of the Act or rules or regulations madethere under either by himself or through any officer authorized in thisbehalf. The controller or any person authorized by him, shall have accessto any computer system, data or any other material connected with suchsystem if he has reasonable cause to suspect that contravention of theprovision of the Act or the rules or regulation is being committed.Duties of Certifying Authorities (Section 30)1. This section provides that every Certifying Authority shall follow certain

procedures in respect of digital signature as given below:a. make use of hardware, and procedures that a secure from intrusion and

misuse;b. provide a reasonable level of reliability in its services which are reasonably

suited to the performance of intended functions;c. adhere to security procedures to ensure that the secrecy and privacy of

the digital signatures are assured;d. observe such other standards as may be specified by regulations;2. Every Certifying Authority shall also ensure that every person employed

by him complies with provisions of the Act, or rules, regulations or ordersmade there under;

3. A Certifying Authority must display its license at a conspicuous place ofthe premises in which it carries on its business and a Certifying Authoritywhose license is suspended or revoked shall immediately surrender thelicense to the Controller;

4. Section 34 further provides that every Certifying Authority shall discloseits digital signature certificate which contains the public keycorresponding to the private key used by that Certifying Authority andother relevant facts.



5.2.8 Digital signature certification (Section 35 - 39)

Section 35 lays down the procedure for issuance of a digital signatureCertificate. It provides that an application for such certificate shall bemade in the prescribed form and shall be prescribed by the CentralGovernment, and different fees may be prescribed for different classesof applicants. The section also provides that no Digital SignatureCertificate shall be granted unless the Certifying Authority is satisfiedthat -a. the applicant holds the private key corresponding to the public key to

be listed in the Digital signature Certificate;b. the applicant holds a private key, which is capable of creating a digital

signature;c. the public key to be listed in the certificate can be used to verify a digital

signature affixed by the private key held by the applicant.However, no application shall be rejected unless the applicant has beengiven a reasonable opportunity of showing cause against the proposedrejection.While issuing a Digital Signature Certificate the Certifying Authority shouldcertify that it has complied with provisions of the Act, the rules andregulations made there under and also with other conditions mentionedin the Digital Signature Certificate.Suspension of the Digital Signature CertificateThe certifying Authority may suspend such certificate it if is of the opinionthat such a step needs to be taken in public interest. Such certificateshall not be suspended for a period exceeding 15 days unless thesubscriber has been given an opportunity of being heard. Section 38provides for the revocation of Digital Signature Certificates under certaincircumstances. Such revocation shall not be done unless the subscriberhas been given an opportunity of being heard in the matter. Uponrevocation or suspension. The Certifying Authority shall publish the noticeof suspension of a Digital Signature Certificate

5.2.9 Duties of subscribers (Section 40 - 42)

1. On acceptance of the Digital Signature Certificate the subscriber shallgenerate a key paid using a secure system.A subscriber shall be deemed to have accepted a Digital SignatureCertificate if he publishes or authorities the publication of such signatureto one more persons or otherwise demonstrates his approval of theDigital Signature Certificate. By so accepting the certificate, thesubscriber certifies to the public the following.

a. that he holds the private key corresponding to the public key listed in theDigital Signature Certificate; and

b. that all the information contained in the certificate as well as materialrelevant to them are true.



2. The subscriber shall exercise all reasonable care to retain control of hisprivate key corresponding to the public key. If such private key hasbeen compromised (i.e. endangered or exposed), the subscriber mustimmediately communicate the fact to the Certifying Authority.

Otherwise, the subscriber shall be liable till he has informed the CertifyingAuthority that the private key has been compromised.

5.2.10 Penalties and Adjudication (Sections 43 - 47)

The Act provides for awarding compensation or damages for certaintypes of computer frauds. It also provides for the appointment ofAdjudicating Officer for holding an inquiry in relation to certain computercrimes and for awarding compensation.Types of penaltiesPenalty for damage to computer, computer system or network: Section43 deals with penalty for damage to computer, computer system, etc. byany of the following methods:a. securing access to the computer, computer system or computer network;b. downloading or extracting any data, computer database of information

from such computer system or those stored in any removable storagemedium;

c. introducing any computer contaminant or computer virus into anycomputer system or network;

d. damaging any computer, computer system or network or any computerdata database or programme;

e. disrupting any computer, computer system or network;f. denying access to any person authorised to access any computer,

computer system or networ;g. providing assistance to any person to access any computer, computer

system or network in contravention of any person by tampering with ormanipulating any computer, computer system or network;

h. Explanation - For the purposes of this section,i. computer contaminant means any set of computer instructions that are

designed -a. to modify, destroy, record, transmit data or programme residing within a

computer, computer system or computer network; orb. by any means to usurp the normal operation of the computer, computer

system, or computer network;ii. ‘computer database’ means a representation of information, knowledge,

facts, concepts or instructions in text, image, audio, video that are beingprepared or have been prepared in a formalized manner or have beenproduced by a computer, computer system or computer network andare intended for use in a computer, computer network;

iii. ‘computer virus’ means any computer instruction, information, data or



programme that destroys, damages, degrades or adversely affects theperformance of a computer resource or attaches itself to anothercomputer resource and operates when a programme, data or instructionis executed or some other even takes place in that computer resource;

iv. ‘damage’ means to destroy, alter, delete, add, modify or rearrange anycomputer resource by any means.

Section 46 confers the power of adjudicate contravention under the Actto an officer not below than the rank of a Director to the Government ofIndia or an equivalent officer of a State Government. Such appointmentshall be made by the Central Government. In order to be eligible forappointment as an adjudicating officer, a person must possess adequateexperience in the field of Information Technology and such legal or judicialexperience as may be prescribed by the Central Government. Theadjudicating officer so appointed shall be responsible for holding an inquiryin the prescribed manner after giving reasonable opportunity of beingheard and thereafter, imposing penalty where required.Section 47 provides that while deciding upon the quantum ofcompensation, the adjudicating officer shall have due regard to the amountof gain of unfair advantage and the amount of loss caused to any personas well as the respective nature of the default.

5.2.11 Cyber regulations appellate tribunalThe ‘Cyber Regulations Appellate Tribunal‘ have appellate powers inrespect of orders passed by any adjudicating officer. Civil courts havebeen barred from entertaining any suit or proceedings in respect of anymatter which an adjudicating officer to Tribunal is empowered to handle.Section 48 provides for establishment of one or more appellate Tribunalsto be known as Cyber Regulations Appellate Tribunals. It shall consistof one person only (called the Presiding Officer of the Tribunal) whoshall be appointed by notification by the Central Government. Such aperson must be qualified to be a judge of a High Court or is or has beena member of the Indian Legal Service in the post in Grade I of that servicefor at least there years. The Presiding Officer shall hold office for a termof five years or up to a maximum age limit of 65 years, whichever isearlier.Section 52 provides for the salary and allowances and other terms andconditions of service of the presiding officer.Section 53 provides that in the situation of any vacancy occurring in theoffice of the Presiding Officer of Cyber Regulations Tribunal. The CentralGovernment shall appoint another person in accordance with theprovisions of this Act.Resignation and removal of the Presiding Officer (Section 54)The Presiding officer shall, unless he is permitted by the CentralGovernment to relinquish his office sooner, continue to hold office untilthe expiry of three months from the date of receipt of such notice or untila person duly appointed as his successor enters upon his office or untilthe expiry of his term of office, whichever is the earliest.



No order appointing any presiding officers shall be called in questionmerely on the ground of any defect in the Constitution of the Tribunal.The Central Government shall provide such officer for the functioning ofthe Cyber Regulations Appellate Tribunal. It empowers the CentralGovernment to frame rules relating to salaries, allowances and otherconditions of service of such officers and employees.Appeal to Cyber Regulations Appellate TribunalAn appeal may be made by an aggrieved person against an order madeby an adjudicating officer to the Cyber Appellate Tribunal. The appealmust be within forty five days from the date on which the order is received.The Cyber Appellate Tribunal may entertain an appeal after the expiry ofthe said period of forty five days if it is satisfied that there was sufficientcause for not filing it within that period. However, no appeal shall beentertained if the original order was passed with the consent of both parties.The Tribunal after giving both the parties an opportunity of being heardshall pass the order as it thinks fit.Powers and procedure of the Appellate TribunalSection 58 provides for the procedure and powers of the Cyber AppellateTribunal. The Tribunal shall also have the powers of the Civil Courtunder the Code of Civil Procedure 1908.Some of the powers specified are in respect of the following matters. a. summoning and enforcing the attendance of any person and examining

him on oath; b. requiring production of documents and other electronic records; c. receiving evidence on affidavits; d. reviewing its decisions; e. issuing commissions for examination of witness, etc.The appellant may either appear in person or may be represented by alegal practitioner to present his case before the Tribunal.Section 60 provides for period of limitation for admission of appealsfrom the aggrieved persons to the Cyber Appellate TribunalSection 61 provides that no court shall have jurisdiction to entertain anysuit or proceeding in respect of any matter which an adjudicating officerhas jurisdiction to determine.Appeal to High Court (Section 62)This section provides for an appeal to the High Court by an aggrievedperson from the decision of the Cyber Appellate Tribunal. The appealshall be made within sixty days from the date on which the tribunal’sdecision is communicated. The appeal shall be on any question of law orfact arising out of the order.Compounding of contraventionSection 63 This section provides that any contravention under the Actmay be compounded by the controller or adjudication officer, either before



or after the institution of the adjudication proceedings subject to suchconditions as he may impose. It is also provided that such sum shall not,in any case, exceed the maximum amount of the penalty which may beimposed under this Act for the contravention so compounded. However,these provisions shall not apply to a person who commits the same orsimilar contravention within a period of three years from the date on whichthe first contravention, committed by him, was compounded.Recovery of PenaltySection 64 provides for recovery of penalty as arrears of land revenueand for suspension of the license or Digital Signature Certificate till thepenalty is paid.

5.2.12 Offences

Tampering with computer source documents (Section 65): This sectionprovides for punishment with imprisonment up to three years or with afine which may extend to Rs. 2 lakhs or with imprisonment up to 3 years,or with both.Hacking with computer system (Section 66) : ‘Hacking’ is a term usedto describe the act of destroying or deleting or altering any informationresiding in a computer resource or diminishing its value or utility, or affectingit injuriously in spite of knowing that such action is likely to cause wrongfulloss or damage to the public or that person. Section 66 provides that aperson who commits hacking shall be punished with a fine upto Rs. 2lakhs or with imprisonment upto 3 years, or with both.Publishing of information which is obscene in electronic form: Section 67provides for punishment to whoever transmits or publishes or causes tobe published or transmitted, any material which is obscene in electronicform with imprisonment for a term which may extended to five years andwith fine which may extended to five years and with fine which mayextended to Rs.1 lakh on first conviction. In the event of second orsubsequent conviction the imprisonment would be for a term which mayextend to ten years and fine which may extend to Rs.2 lakhs.Power of the Controller1. Section 68 provides the controller may give directions to certifying

authority or an employee of such authority to take such measures orcease carrying on such activities as specified in the order, so as toensure compliance with this law. If any person fails to comply, he shallbe liable to imprisonment upto 3 years or five upto Rs. 2 lakhs, or both.

2. Section 69 empowers the controller, if he is satisfied that it is necessaryor expedient so to do in the interest of sovereignty and integrity of India.Security of the state, friendly relation with foreign states or public order,to intercept any information transmitted through any computer system orcomputer network.

3. Section 70 empowers the appropriate Government to declare bynotification any computer, computer system or computer network to be



protected system. Any unauthorized access of such systems will bepunishable with imprisonment which may extend to ten years or withfine.

Penalty for Misrepresentation (Section 71)This Section provides that any person found misrepresenting orsuppressing any material fact from the controller or the certifying authorityshall be punished with imprisonment for a term which may extend to twoyears or with fine which may extend Rs. 1 lakh or with both.Penalty for publishing False Digital signature certificateSection 73 This section provides punishment for publishing aDigital Signature certificate false in material particulars or otherwisemaking it available to any person with imprisonment for a term which mayextend to two years or with find which may extend to Rs. 1 lakh or withboth.Penalty for Fraudulent Publication (Section 74) This Section provides for punishment with imprisonment for a term whichmay extend to two years or with fine which may extend to Rs. 1 lakh orwith both to a person whoever knowingly publishes for fraudulent purposeany Digital Signature certificate.Act Apply for Offence Committed Outside IndiaSection 75 provides for punishment for commission of any offence orcontravention by a person outside India irrespective of his nationality ifthe act of conduct constituting the offence or contravention involves acomputer, computer system or computer network located in India.Confiscation (Section 76)This Section provides for confiscation of any computer, computer system,floppies, compact disks, tape drives or any other accessories relatedthereto in respect of contravention of any provision the Act, rules,regulations or orders made there under.It is also provided that where it is established to the satisfaction of thecourt adjudicating of the confiscation that the person in whose possession,power or control of any such computer, computer system, floppies,compact disks, tape drives or any other accessories relating thereto isfound is not responsible for the contravention of the provisions of thisAct, rule, orders or regulations made there under, the court may insteadof making an order for confiscation of such computer, computer system,floppies, compact disks, tape drives or any other accessories relatedthereto, make such other order authorised by this Act against the personcontravening the provisions of this Act, orders or regulations made thereunder as it may think fit.Section 77 further provides that penalty and confiscation provided underthis act shall not interfere with other punishment provided under any otherlaw for the time being in force.



Section 78 provides for power to investigate the officers under the Actby a police officer not below the rant of Deputy Superintendent of Police.Network service providers not to be liable in certain casesSection 79 provides that the Network Service Providers shall be liablefor any third party information or data made available by him if he provesthat the offence was committed without his knowledge or consent.Explanation - For the purpose of this selection -a. ‘network service provider’ means an intermediary;b. ‘third party information’ means any information dealt with by a network

service provider in his capacity as an intermediary.5.2.13 Power of Government

Section 87 of the Act confers on the Central Government the power tomake rules by notifying in the Official Gazette and the electronic gazette,in respect of certain matter, some of which are:• the manner in which any matter may be authenticated by a Digital

signature;• the manner and format in which electronic records shall be filed or issued;• the type of Digital signature, manner and format in which it may be affixed;• the security procedure for the purpose of creating same electronic record

and secure Digital signature;• the qualifications, experience and terms and conditions of service of

controller , Deputy controllers and Assistant controllers;• the requirements, manner and form in which application is to be made

for license to issue Digital Signature Certificate;• the period of validity of the license the qualifications, experience of an

adjudicating officer, as well as other officers;• the salary, allowances and terms and conditions of service of the Presiding

Officer, etc.Every notification made by the Central Government shall be laid, as soonas possible after it is made, before each House of Parliament, while it isin session, for a total period of thirty days. This period maybe comprisedin one session or in two or more successive sessions. If before the expiryof the session immediately following the above period, both Houses agreein making any modification, the rule will thereafter have effect only in themodified form. Similarly if both Houses agree that the rule should not bemade, the notification shall have no effect, thereafter.

Power of the State Government to make RulesThe State Government may be notification in the Official Gazette, makerules to carry out the provisions of this Act, Such rules may provide forall or any of the following matters:• The electronic form in which filing, issue, grant receipt or payment shall

be effected in respect of use of electronic records and Digital signaturesin Government and its agencies.



• The manner and format in which such electronic records shall be filed orissued and the fee of charges in connection of the same.

• Any other matter required to be provided by rules by the StateGovernment. Every such rule shall be laid before each House of theState Legislature.

5.2.14Cyber Regulations Advisory Committee

The Cyber Regulations Advisory Committee shall be constituted by theCentral Government. It shall consist of a chair person and such memberof official and non-official members as the Central Government shall deemfit. Such members shall have special knowledge of the subject matter orthe interest principally affected. The committee shall advise the CentralGovernment on any rules or any other purpose connected with the Act,and the controller in framing regulations under this Act.Power of Controller to Make RegulationsThe controller has been given powers under Section 89 to make regula-tions consistent with the Act and the related rules so as carry out thepurpose of this act. However, he may do so after consultation with theCyber Regulations Advisory Committee and with the previous approvalof the Central Government on any rules or any other purpose connectedwith the Act, and the Controller in framing regulations under this Act.

• the particulars relating to maintenance subject to which the controllermay recognise any of every Certifying Authority

• the conditions and restrictions subject to which the controller mayrecognise any foreign Certifying Authority;

• the terms and conditions subject to which a licence may be granted;• other standard to be observed by a Certifying Authority;• the manner in which the Certifying Authority may make the disclosure

under Section 34;• the particulars of statement to be submitted along with an application for

the issue of a Digital Signature Certificate;• the manner in which the subscriber should communicate the compromise

of private key to the Certifying Authority.The procedure for passing the resolution is the same as given in section87 in respect of notifying rules by the Central Government.Power of police Officer and Other Officers to Enter, search, etc.Section 80 provides that notwithstanding anything contained in the codeof Criminal Procedure, 1973, any police officer, not below the rank of aDeputy Superintendent of Police, or any other officer of the Central orState Government, if so authorised by the Central Government, may eitherany public place and search and arrest without warrant any person foundtherein who is reasonably suspected of having committed or of committingor is about to commit any offence under this Act. For this, purpose,‘public place’ would include a public conveyance, any hotel, any shop orany other place accessible to the public.



The section further provides that where any person is arrested by anofficer other than a police officer, such officer shall immediately send thearrested person to a magistrate having jurisdiction or to the officer incharge of a police station.Liability of Companies (Section 85)Where a company commits any offence under this Act or any rule thereunder, every person who, at the time of the contravention, was in changeof and was responsible for the conduct of the business of the companyshall be guilty of the contravention. However, he shall not be liable topunishment if he proves that the contravention took place without hisknowledge or that he exercised all due diligence to prevent thecontravention.Further, Where a contravention has been committed by a company, andit is proved that the contravention took place with the connivance orconsent of or due to any negligence on the part of any director, manager,secretary or other officer of the company, such officer shall be deemedto be guilty and shall be liable to be proceeded against and punishedaccordingly. For the purpose of this section, ‘company’ includes a firmor other association of persons and ‘director’ in relation to a firm meansa partner in the firm.An appraisal of the I.T.Act 2000The Information Technology Act will go a long way in facilitating andregulating electronic commerce. It has provided a legal framework forsmooth conduct of e-commerce. It has tackled the following legal issuesassociated with-commerce.a. requirement of writing.b. requirement of a document.c. requirement of a signature and d. requirement of legal recognition for

electronic messages, records and documents to be admitted in evidencein a court of law.

However the Act, has not addressed the following grey areas:i) protection for domain names ii) infringement of copyright laws iii)

jurisdiction aspect of electronic contracts (viz. Jurisdiction of Courtsand tax authorities) (iv) taxation of goods and services trades through e-commerce and (v) stamp duty aspect of electronic contracts. TheCentral Government introduced in the winter session of the Parliament aBill styled “Digital Copy Right Bill 2000” with a view to protecting thecopyright of subscribers who have obtained Digital Signature Certificatefrom the certifying authorities.

Changes made in other ActsSection 91 to 94 of the Information Technology Act, 2000 relate to variousamendments effected in other Acts as detailed below:91. Amendment of Act 45 of 1860

The Indian Penal Code shall be amended in the manner specified in theFirst Schedule to this Act.



92. Amendment of Act 1 of 1872The Indian Evidence Act, 1872 shall be amended in the manner specifiedin the Second Schedule to this Act.

93. Amendment of Act 18 of 1891The Banker‘s book Evidence Act, 1891 shall be amended in the mannerspecified in the Third Schedule to this Act.

94. Amendment of Act 2 of 1934 The Reserve Bank of India, 1934 shall be amended in the mannerspecified in the Fourth Schedule to this Act.

Schedule - I (Section 90)Amendments to the Indian penal code (45 of 1860) 1. After Section 29, the following section shall be inserted, namely; ’29 A.

Electronic recordThe words ‘electronic record’ shall have the meaning assigned to themin clause (t) of sub-section (1) of section 2 of the Information TechnologyAct, 2000.

2. In Section 167, for the words, ‘such public servant, charged with thepreparation or translation of any document, frames or translates thatdocument’, the words ‘such public, charged with the preparation ortranslation of any document or electronic record, frames, prepares ortranslates that document or electronic record’ shall be substituted.

3. In Section 172, for the words ‘produce a document in a Court of Justice’the words ‘produce a document or an electronic record in a Court ofJustice’ shall be substituted.

4. In section 173, for the words ‘to produce a document in a Court ofJustice’ the words ‘to produce a document or electronic record in aCourt of Justice’ shall be substituted.

5. In Section 175, for the word ‘document’ at both the places where itoccurs, the words ‘document or electronic record’ shall be substituted

6. In section 192, for the words ‘make any false entry in any book orrecord, or makes any document containing a false statement’, the words‘makes any false entry in any book or record, or electronic record ormakes any document or electronic record containing a false statement’shall be substituted.

7. In section 204, for the word, ‘document’ at both the places where itoccurs, the words ‘document or electronic record’ shall be substituted.

8. In section 463, for the words, ‘whoever makes any false documents orpart of a document with intent to cause damage or injury’, the words‘whoever makes any false documents or false electronic record or partof a document or electronic record, with intent to cause damage or injury’shall be substituted.



9. In section 464 – a for the portion beginning with the words “A person issaid to make a false document’ and ending with the words. “By reasonof deception practiced upon him. He does not know he contents of thedocuments or the nature of the alteration” the following shall besubstituted, namely:“A person is said to make a false document or false electronic recordFirst who dishonestly or fradulently -

a. makes, signs, seals or executes a document or part of a document;b. makes or transmits any electronic record or part of any electronic record;c. affixes any Digital signature on any electronic record;d. makes any mark denoting the execution of a document or the authenticity

of the Digital signature with the intention of causing it to be believed thatsuch document or part of document, electronic record of Digital signaturewas made, signed, sealed, executed, transmitted or affixed by or by theauthority of a person by whom or by whose authority he knows that itwas not made, signed, sealed, executed or affixedorSecondly - who without lawful authority, dishonestly or fraudulently, bycancellation or otherwise, alters a document or an electronic record inany material part thereof, after it has been made, executed or affixedwith digital signature either by himself or by any other person, whethersuch person be living or dead at the time of such alterationorThirdly - Who dishonestly or fraudulently causes any person to sign,seal, execute or alter a document or an electronic record or to affix hisDigital signature on any electronic record knowing that such person byreason of unsoundness of mind or intoxication cannot, or that by reasonof deception practised upon him, he does not know the contents of thedocument or electronic record or the nature of the alteration.

b) after Explanation 2, the following Explanation shall be inserted at theend, namely -“Explanation 3 : For the purposes of this section, the expression, “affixingDigital signature” shall have the meaning assigned to it in clause (d) ofsub-section (1) of section 2 of the Information Technology Act, 2000”.

10. In Section 466 -a) for the words “whoever forges a document” the words, “whoever forges

a document or an electronic record” shall be substituted.b) the following explanation shall be inserted at the end, namely -

“Explanation : For the purpose of this section, ‘register’ includes anylist, data or record of any entries maintained in the electronic form asdefined in clause (r) of sub section (1) of section 2 of the InformationTechnology Act, 2000”.



11. In section 468, for the words ‘document forged’ the words, ‘documentor electronic record forged’ shall be substituted.

12. In section 469, for the words, ‘intending that the document forged’ thewords intending that the document or electronic record forged ‘ shall besubstituted.

13. In section 470, for the word ‘document’ in both the places where itoccurs, the words ‘document or electronic record’ shall be substituted.

15. In Section 474, for the portion beginning with the words, ‘whoever hasin his possession any document’ and ending with the words, “if thedocument is one of the description mentioned in section 466 of this Code,the following shall be substituted, namely -‘whoever has in his possession any document or electronic record,knowing the same to be forged and intending that the same shallfraudulently or dishonestly be sued as a genuine, shall if the document orelectronic record is one of the description mentioned in section 466 ofthis Code.

16. In Section 476, for the words ‘any document’ the words ‘any documentor electronic record’ shall be substituted.

17. In Section 477A, for the words, ‘book, paper, writing’ at both the placeswhere they occur, the words, ‘book, electronic, record, paper, writing’shall be substituted.

Schedule II (Section 92)Amendments to the Indian evidence act, 1872

1. In Section3 –a. in the definition of ‘Evidence’ for the words, ‘all documents produced

for the inspection of the court’ the words, ‘all documents includingelectronic records produced for the inspection of the Court’ shall besubstituted.

b. after the definition of “India”, the following shall be inserted, namely -‘the expressions ‘Certifying Authority’, Digital signature’, ‘DigitalSignature Certificate’, ‘electronic form’, ‘electronic records’,‘information’, ‘secure electronic record’, ‘secure Digital signature’, and‘subscriber’ shall have the meanings respectively assigned to them in theinformation Technology act, 1999.2. In Section 17, for the words, ‘oral or documentary’ the words ‘oral or

documentary or contained in electronic form’ shall be substituted.3. After section 22, the following section shall be inserted, namely -“22A.

When oral admission as to contents of electronic records are relevantOral admissions as to the contents of electronic records are not relevant,unless the genuine less of the electronic record produced is in question”.

4. In section 34, for the words, “Entries in the books of account’ the words“Entries in the books of account, including those maintained in an electronicform shall be substituted.



5. In section 35, for the word ‘record’ in both the places where it occurs,the words ‘record or an electronic record’ shall be substituted.

6. For section 39, the following section shall be substituted, namely; 39.Whatevidence to be given when statement forms part of a conversion,document, electronic, record, book or series of letters or papers.When any statement of which evidence is given forms part of a longerstatement, or of a conversation or part of an isolated document, or iscontained in document which forms part of a book, or is contained inpart of electronic record or of a connected series of letters of papers,evidence shall be given of so much and no more of the statement,conversation, document, electronic record book or series of letters orpapers as the Court considers necessary in that particular case to the fullunderstanding of the nature and effect the statement, and of thecircumstances under which it was made’.

7. After section 47, the following section shall be inserted, namely “47A.Opinion as to digital signature when relevant.When the court has to form an opinion as to the Digital signature of anyperson, the opinion of the Certifying Authority which has issued the Digitalsignature Certificate is a relevant fact.

8. In section 59, for the words ‘contents of documents’ the words, ‘contentsof documents or electronic records’ shall be substituted.

9. After section 65, the following sections shall be inserted, namely “65A.Special provision as to evidence relating to electronic record .Thecontents of electronic records may be proved in accordance with theprovisions of Section 65 B.

65B. Admissibility of electronic records. 1. Notwithstanding anything contained in this Act, any information contained

in an electronic record which is printed on a paper, stored, recorded orcopied in optical or magnetic media produced by a computer (hereinafterreferred to as the computer output) shall be deemed to be also adocument, if the conditions mentioned in this section are satisfied inrelation to the information and computer in question and shall beadmissible in any proceedings, without further proof or production ofthe original, as evidence of any contents of the original or of any factstated therein of which direct evidence would be admissible.

2. The conditions referred to in sub-section (1) in respect of a computeroutput shall be the following, namely - a. the computer output containingthe information was produced by the computer during the period overwhich the computer was used regularly to store or process informationfor the purposes of any activities regularly carried on over that period bythe person having lawful control over the use of the computer;

a. during the said period, information of the kind contained in the electronicrecord or of the kind from which the information so contained is derivedwas regularly fed into the computer in the ordinary course of the saidactivities;



b. throughout the material part of the said period, the computer was operatingproperly or, if not, then in respect of any period in which it was notoperating properly or was out of operation during that part of the period,was not such as to affect the electronic record or the accuracy of itscontents; and

c. the information contained in the electronic record reproduces or is derivedfrom such information fed into the computer in the ordinary course ofthe said activities.

3. Whereover any period, the function of storing or processing informationfor the purposes of any activities regularly carried on over that the periodas mentioned in clause (a) of sub-section (2) was regularly performedby the computer, whether -

a. by a combination of computers operating over that period;or

b. by different computers operating in succession over that period;or

c. by different combinations of computers operating in succession over thatperiod;or

d. in any other manner involving the successive operation over that period,in whatever order, of one or more computers and one or morecombinations of computers, all the computers used for that purpose duringthat period shall be treated for the purposes of this section as constitutinga single computer, and references in this section to a computer shall beconstrued accordingly.

4. In any proceedings where it is desired to give a statement in evidence byvirtue of this section, a certificate doing any of the following things, that isto say.

a. identifying the electronic record containing the statement and describingthe manner in which it was produced.

b. giving such particulars of any device involved in the production of thatelectronic record as may be appropriate for the purpose of showingthat the electronic record was produced by a computer,

c. dealing with any of the matters to which the conditions mentioned in sub-section (2) relates. and purporting to be signed by a person occupying aresponsible official position in relation to the operation of the relevantdevice or the management of the relevant activities (whichever isappropriate) shall be evidence of the matter stated in the certificate, andfor the purposes of this sub-section it shall be sufficient for a matter to bestated to the best of the knowledge and belief of the person stating it.

5. For the purposes of this section –a information shall be taken to besupplied to a computer if it is supplied thereto in any appropriate formand whether it is so supplied directly or (with or without humanintervention) by means of any appropriate equipment;



b. whether in the course of activities carried on by any official, informationis supplied with a view to its being stored or processed for the purposesof those activities by a computer operated otherwise than in the courseof those activities, that information, if duly supplied to that computer,shall be taken to be supplied to it in the course of those activities;

c. a computer output shall be taken to have been produced by a computerwhether it was produced by it directly or (with or without humanintervention) by means of any appropriate equipment.Explanation: For the purposes of this section any reference toinformation being derived from other information shall be a reference toits being derived there from by calculation, comparison or any otherproceSecs.

10. After section 67, the following section shall be inserted, namely -“67A.Proof as to Digital signature.Except in the case of a secure Digital signature, if the Digital signature ofany subscriber is alleged to have been affixed to an electronic record thefact that such Digital signature is the Digital signature of the subscribermust be proved”.

11. After section 73, the following section shall be inserted, namely -73A.Proof as to verification of Digital signatureIn order to ascertain whether a Digital signature is that of the person bywhom it purports to have been affixed, the court may direct –

a. that person or the controller or the Certifying Authority to produce theDigital Signature Certificate.

b. any other person to apply the public key listed in the Digital SignatureCertificate and verify the Digital signature purported to have been affixedby that person”.Explanation: For the purposes of this section, ‘controller’ means thecontroller appointed under sub-section (1) of section 17 of the InformationTechnology Act 2000.

12. After section 81, the following section shall be inserted, namely -“81A.Presumption as to Gazettes in electronic forms.The court shall presume the genuineness of every electronic recordpurporting to be the Official Gazette, or purporting to be electronic recorddirected by any law to be kept by any person, if such electronic recordis kept substantially in the form required by law and is produced fromproper custody”.

13. After Section 85, the following sections shall be inserted, namely -85A.Presumption as to electronic agreements.The court shall presume that every electronic record purporting to be anagreement containing the Digital signatures of the parties was to concludedby affixing the Digital signature of the parties.



85B. Presumption as to electronic records and Digital signatures.1. In any proceedings involving a secure electronic record, the court shall

presume unless contrary is proved, that the secure electronic record hasnot been altered since the specific point of time to which the secure statusrelates.

2. In any proceedings, involving secure Digital signature, the court shallpresume unless the contrary is proved that -

a. the secure Digital signature is affixed by subscriber with the intention ofsigning or approving the electronic record;

b. except in the case of a secure electronic record or a secure Digital signature,nothing in this section shall create any presumption relating to authenticityand integrity of the electronic record or any digital signature.

85C. Presumption as to Digital signature certificates

The court shall presume, unless contrary is proved, that the informationlisted in a Digital Signature Certificate is correct, except for informationspecified as subscriber information which has not been verified, if the cer-tificate was accepted by the subscriber”.

14. After section 88, the following shall be inserted, namely:“85A. Presumption as to electronic messages

The court may presume that an electronic message forwarded by the origi-nator through an electronic mail server to the addressee to whom the mes-sage purports to be addressed corresponds with the message as fed intohis computer for transmission; but the court shall not make any presump-tion as to the person by whom such message was sent.

Explanation : For the purpose of this section, the expressions “addressee”and “originator” shall have the same meanings respectively assigned to themin clauses (b) and (za) of sub-section (1) of section 2 of the InformationTechnology Act, 2000.

15. After section 90, the following section shall be inserted, namely -“90A. Presumptions as to electronic records five years old

Where any electronic record, purporting or proved to be five years old, isproduced from any custody which the Court in the particular case considersproper, the Court may presume that the Digital signature which purportsto be the Digital signature of any particular person was so affixed by himor any person authorized by him in this behalf.Explanation : Electronic records are said to be in proper custody if theyare in the place in which, and under the care of the person with whom, theynaturally be; but no custody is improper if it is proved to have had alegitimate origin, or the circumstances of the particular case are such as torender such an origin probable.This explanation applies also to Sec. 81A.



16. For section 131, the following section shall be substituted, namely131. Production of documents or electronic records which anotherperson, having possession, could refuse to produce. No one shall be compelled to produce documents in his possession orelectronic records under his control, which any other person would beentitled to refuse to produce if they were in his possession or controlunless such last mentioned person consents to their production”.

Schedule III (Section 93)Amendments to the bankers’ books evidence act, 1891

1. In section 2 -a) for clause (3), the following clause shall be substituted, namely3) “bankers’ books” include ledgers, day-books, cash-books, accountbooks and all other books used in the ordinary business of a bank whetherkept in the written form or as print outs of date stored in floppy, disc,tape or any other form of electro-magnetic storage device;b) For clause (8) the following clause shall be substituted, namely8. “certified copy” means when the books of a bank -

a) are maintained in written form, a copy of any entry in such books togetherwith a certificate written at the foot of such copy that it is true copy ofsuch entry, that such entry is contained in one of the ordinary books ofthe bank and was made in the usual and ordinary course of business andthat such book is still in the custody of the bank, and where the copywas obtained by a mechanical or other process which in itself ensuredthe accuracy of the copy, a further certificate to that effect, but wherethe book from which such copy was prepared has been destroyed inthe usual course of the bank’s business after the date on which the copyhad been so prepared, a further certificate to that effect, each suchcertificate being dated and subscribed by the principal accountant ofmanager of the bank with his name and official title; and

b) consist of printouts of data stored in a floppy, disc, tape, or any otherelectro-magnetic date storage device, a printout of such entry or a copyof such printout together with such statements certified in accordancewith the provisions of section 2A.

2. After section 2, the following section shall be inserted, namely -“2A. conditions in the printoutA printout of entry or a copy of printout referred to in sub-section (8) ofsection 2 shall be accompanied by the following namely -

a) a certificate to the effect that is a printout of such entry or a copy of suchprintout by the principal accountant or branch manager; and

b) a certificate by a person in charge of computer system containing a briefdescription of the computer system and the particulars of -

c) the safeguards adopted by the system to ensure that date is entered orany other operation performed only by authorised persons;



d) the safeguard adopted to prevent and detect unauthorised change of datae) the safeguards available to retrieve data that is lost due to systemic failure

or any other reasons;f) the manner in which data is transferred from the system to removable media

like floppies, discs, tapes or other electro-magnetic data storage devices;g) the mode of verification in order to ensure that data has been accurately

transferred to such removable media;h) the mode of identification of such data storage devices;i) the arrangements for the storage and custody of such storage devices;j) the safeguards to prevent and detect any tampering with the system; andk) any other factor which will vouch for the integrity and accuracy of the system.

c) a further certificate from the person in charge of the computer system tothe effect that to the best of his knowledge and belief, such computer systemoperated properly at the material time, he was provided with all the relevantdata and the printout in question represents correctly, or is appropriatelyderived from, be relevant data”.

Schedule IV (Section 94)Amendment to the Reserve Bank of India act, 1934In the Reserve Bank of India Act, 1934, in section 58, in sub-section (2),after clause (p), the following clauses shall be inserted, namely -“(pp) theregulation of fund transfer through electronic means between the banks orbetween the banks and other financial institutions referred to in clause (c)of section 45-1, including the laying down of the conditions subject to whichbanks and other financial institutions shall participate in such fund transfers,the manner of such fund transfers and the rights and obligations of theparticipants in such fund transfer”.Have you understood ?I-Objective questions :1. Information Act was passed in ___________

a.2001 b.2000 c. 2001 d.19992. Person who is intended by the originator to receive the electronic record

but does not include any intermediary is called the ________________a. addressor b. acceptor c. addressee d. assignee

3. Authentication of any electronic record by a subscriber by means of anelectronic method or procedure in accordance with the provisions of section3 is known as _______________a. electronic record b. digital signaturec. electronic record d. function

4. ____________________ is a term used to describe the act of destroyingor deleting or altering any information residing in a computer resource ordiminishing its value or utility, or affecting it injuriously in spite of knowingthat such action is likely to cause wrongful loss or damage to the public orthat person.



a. tampering b. hacking c. flashing d. publication5. _________________ means a representation of information,

knowledge, facts concepts or instructions which are being prepared orhave been prepared in a formal manner.a. data b. information c. knowledge d. sources

Answers1.b 2.c 3.b 4.b 5. a

II-Short Answers questions : 6. What are the objectives of the Information Technology Act, 2000? 7. Define Secure System 8. Explain Electronic Governance 9. What are the duties of certifying authorities under the I.T.Act 2000?III- Long Answer questions :10. Explain the provisions of the I.T.Act 2000 relating to attribution, receipt

and dispatch of electronic records.11. What are the different types of penalties for damages to computer,

computer systems or network under the I.T.Act 2000 ?SummaryThe digital technology era make effort to facilitate the human life as muchas possible in transaction of their daily busineSecs. Now a days businessinvolves computers more to create, transmit and store and retrieve andspeedier to communicate. The people are well known about the riskand challenges involved in the electronic form of business, they are sometimes reluctant to conduct business or conclude and transaction in theelectronic from due to lack of appropriate legal framework. As we seethe basic hurdles to facilitate electronic commerce and electronicgovernance, we need the legal governance for the electronic writing anddigital signature for legal recognition. This urgency makes the necessityfor legal authentication for the busineSecs. The Information TechnologyAct 2000 solves the basic functions of these challenges of electronictransactions. This facilitates e-commerce as a successful entity.

MBA / Distance Mode / DBA 1607 / April 2007 / 3000 Copies

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