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Void and Voidable Contracts
  • By: Adv. Jayatinn B. Laalwani
  • Date: 16 Apr 2020
  • Commmercial Contracts
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A contract is considered to be an agreement between two or more individuals or entities. It is like a promise between parties which serves as legal protection in a prospective business deal. A Contract is defined under section 2(h) of the Indian Contract Act 1872, which read as, “An agreement enforceable by law is a contract.” Enforceable here means capable of being enforced (execute) in a Court of Law. The parties to a contract have a legal right before the Court. Any person who is of majority age, sound mind and is not disqualified from contracting by any law is considered to be the person competent of making a contract under the Indian Contract Act 1872.

The Contracts can be valid, void or voidable. The valid contracts are those contracts which are enforceable in the Court. It has all the essential elements which are required in the contract. The Void contracts are those contracts which are not enforceable before the Court of Law. It means that the parties cannot seek any remedy from the Court on the terms that are mentioned in an agreement which has been made by the parties. A contract becomes void once it ceases to be enforceable before the Court. The Voidable contracts are those contracts which are enforceable before the Court of Law at the option of one or more of the parties thereto, but not at the option of the other party.

 

Essential elements of a Contract

To make a contract valid, it must fulfil all the essential elements of a contract.

Following are essential elements of a valid contract:

  • There must be an offer by one party and acceptance by the other party.
  • There must be an intention to create a legal relationship between the parties.
  • The parties must have the capacity to enter into a contract, i.e. they must be competent.
  • There must be a lawful object and a lawful consideration.
  • Both the parties must give their free consent to the contract.
  • There must be a certainty and also the possibility of performing the contract.
  • All the legal formalities must be fulfilled by the parties.

 

Void Contract

Void contracts are those contracts which are valid at one point of time, that is, at the time of making the contract it is valid but subsequently becomes void. For Instance, if a person named ‘X’ agrees to pay Rs. 5,00,000 to a person named ‘Y’ after 5 years against a loan of Rs. 4,50,000. If ‘X’ dies of a natural cause in 3 years, then the contract is no longer valid, and it becomes void as there is non-enforceability of the agreed terms. Following are some of the circumstances under which a contract can become void:

  • If the terms of the contracts were contingent on certain circumstances which would not take place in that specified period of time.
  • If new law comes into existence and the performance of such contract may result in violating the new law.
  • If due to some external circumstances, it becomes impossible to perform the contract.
  • If one party to the contract fails to disclose important information or has provided inaccurate information at the time of making such a contract.
  • If fulfilling the contract will result in an unlawful object.
  • If both the parties to an agreement are under a mistake as to a matter of fact which is essential to the agreement.

 

Voidable Contract

Voidable contracts are those contracts which are enforceable before the Court of Law at the option of one or more of the parties whose consent was not free. One of the essential elements of a valid contract is free consent. If the consent is caused by any coercion, undue influence, fraud, misrepresentation and mistake, then it is not considered as a free consent. Coercion is defined as an act of committing or threatening to commit, any act which has been forbidden by the Indian Penal Code. It also deals with the unlawful detaining or threatening to detain, any property with the intention of causing the party to enter into an agreement. Undue influence takes place, where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other. This position is used to obtain an unfair advantage over the other party. Fraud includes an act committed by one party with an intention to deceive another party or to induce the party to enter into a contract. In Misrepresentation, the party does not intend to deceive the other party but gains an advantage by misleading the other party.

In case, if the consent is obtained by any means of coercion, undue influence, fraud and misrepresentation then such a contract is considered as voidable at the option of the party whose consent was so caused. For Instance, if a person named ‘P’ agrees to pay Rs. 50,000 to a person named ‘R’ for an antique chair. This contract is valid. However, the person ‘R’ was under the undue influence of ‘P’ at the time of giving consent to such an agreement. Hence, the contract stands valid from the point of view of ‘P’, and it is voidable from the point of view of ‘R’.  Here, in this case, the ‘R’ has an option to choose either to accept the terms of the contract or to repudiate. If he chooses to accept the terms of the contract, the contract becomes valid. However, if he chooses to repudiate the contract, then it becomes a voidable contract.

 

Case Law

Lal man Shukla Vs. Gauri Dutt

1913 11 All LJ 489

Facts of the case

Defendant’s nephew was absconded from the house and to find him, and the defendant sent all her servants to different parts to trace her nephew. Lal Man Shukla, the plaintiff in the case and one of the servants of the defendant, was able to trace the nephew and brought him back to the defendant. In the meantime, the defendant, Gauri Dutt, announced that whoever will bring back her nephew will be awarded a price of Rs.501. However, Lal Man Shukla was unaware of the reward when he traced the nephew. On the other hand, when the servant asked the defendant about the reward, she refused to give it. A case was then filed by Lal Man Shukla against Gauri Dutt for not performing the main event of the contract.

Issues of the Case:

  1. Does it become a contract?
  2. Is he reliable to get money from Gauri Dutta or not?

Facts of the Case:

The court held that the defendant is not liable to pay to the plaintiff as the essentials of a valid contract according to the Indian Contract Act, 1872 is incomplete, that is Acceptance and Offer. To a valid contract to take place an offer as well as acceptance is necessary. In this scenario, an offer was made, but it was not accepted by anyone. Therefore, the court further stated that as essential elements to a contract are missing, it is not a valid contract.

 

Conclusion

There are many contracts which are void-ab-initio which means that such an agreement is void right from the beginning, i.e. from the formation of such agreement. Whereas there are many contracts which were valid at the time of formation, but now it has no legal value, and such contracts are known as void contracts. In a voidable contract, one party has a right to accept or rescind the contract. Hence, it is to be noted that all the essential elements of a valid contract must be fulfilled to enjoy a legal right before the Court of law.

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Demerger

By: Adv. Jayatinn B Laalwani Commmercial Contracts 12 Dec 2019

A demerger is a process to separate one or more units and to form a new company. A demerger is a corporate reorganization in the case when a business breaks down, either to function on their own or to liquidate or to be sold.  The term ‘demerger’ is not defined under the Companies Act, 2013. However, the explanation to section 230 (1) of the Companies Act, 2013, prescribes arrangement as including a reorganization of the company’s shares capital by the consolidation of shares of different classes or by the division of shares of different levels or by both of these methods.

A demerger under the National Company Law Tribunal (Tribunal) process involves detailed steps with their associated timelines. A demerger is complete only after the Tribunal sanctions the draft scheme, and such order is filed with the registrar of companies. In the case of listed companies, specific additional steps such as intimation to stock exchange are required to be undertaken.

 

Types

 

Partial Demerger

Partial demerger results when a part of a company is separated and transferred to a new company formed with the same shareholders allotted shares in the new company in the same proportion as held by them in the demerged company.

Demerger under a scheme of arrangement with approval by the Court

In order to affect a demerger, there must be a provision for demerger in the Memorandum of understanding of the company. The scheme of such an arrangement has to be submitted in the High Court where the head office of the principle, as well as the resulting company, is registered.

Demerger by agreement between promoters

This is a demerger that takes place by agreement between promoters. In such a demerger, the principle company may spin off its specific undertakings to the resulting new company. All the property, liabilities and issues of the principle company, transferred to this resulting company immediately before the demerger becomes the issues of the resulting company.

Demerger Under Scheme Of Arrangement

On the basis of the powers a company has in its Memorandum, it can carry out division or split of its entity in the same manner as it could accomplish amalgamation through a scheme of arrangement under the provisions of the Companies Act.

 Demerger Under Voluntary Winding Up

The original company which has split into several companies after division could be wound up voluntarily pursuant to the provisions of the Companies Act.

 

Spin-Off & Split-Off

 

Spin-off: In the case of the spin-off, this is a kind of dispossession strategy where the company is separated from the parent company, or it gets divided from its firm. When the companies get a spin-off, the parent company and the distribution company act separately as a corporate entity. It can be regarded as the formation of an independent company through the distribution of new shares which are existing or can be divided from the parent company.

The primary purpose of this type of divestiture is to attract the investments from outside, as after the process of demerger the business unit gets separated. It is presumed that after the spin-off the companies, they will play a meaningful role.

Split up: In this type, when a company splits into a different and independent company, the parent company ceases to exist. When the company splits into separate entities, the shares held by the parent company are exchanged for the shares in the formation of a new company. The shares are distributed depending on the situation as the parent company owns them.

The purpose of adopting this strategy is if the government mandates to curb the monopoly practices of the company, which has a various business line and the management of the company is unable to control them. The business entity can separate to focus on the core business activity.

 

Process For Demerger

 

The following are the significant steps involved in the process of the demerger of a company:

Preparation of the Scheme of Arrangement

In the process of demerger, the essential document is the scheme of arrangement in which the company binds all stakeholders. A scheme of arrangement deals with aspects such as transfer of debts, transfer of employees, the assets and liabilities of the company, the share swap ratio if applicable and many more. This scheme of arrangement is usually proposed by the directors or the liquidator of the company. It is necessary that the scheme of arrangement shall be accepted by all related stakeholders, shareholders, creditors and the employees.

 

Application in Court

An application should be made to the high court in order to complete the process of a demerger. Moreover, to commence the process of demerger, an application must be filed under form 33 along with the affidavit of promoters. Also, the following documents are mandatory:

  • Article of Association and memorandum of the parent company.
  • Audited Balance Sheets (latest)
  • List of Creditors and Shareholders
  • Board Resolution approving the Scheme of arrangement
  • Draft of an arrangement scheme.
  • Draft related to notice of Meeting, replacement or substitute and Explanatory Statements.

 

Obtaining a court’s order for holding a meeting of Members or Creditors

The court examines the fairness of the scheme submitted and subsequently issues a summons. The court has to ensure that the scheme is capable of being implemented.

Issuance of Notice

The authorized individuals must issue a notice twenty-one days prior to the date of the meeting along with the proposed arrangement scheme and proxy forms to the interested parties. This notice would be published in the newspaper that is well circulated through Form 38 to the parties who are interested.

Meetings

A meeting should be conducted as per the guidelines by the court, and the results of the meetings should be recorded. The votes in support or against the motion should also be mentioned in the report. The report in form 39 must be submitted by the chairperson of the meeting within the appropriate time approved by the Court of law.

Petition and Sanction of the Court

A petition has to be submitted to the court for authorizing the demerger. It has to be sanctioned by three-fourth of members/creditors to file an appeal. Once the Court hears the objections, it verifies the applicability of the scheme submitted and later issues an order. The Court would then pass an order approving the demerger in the same newspaper in which the notice of the meeting was advertised.

 

Examples Of Demerger

 

  • Balaji Telefilms: The board of directors of Balaji Telefilms have approved the demerger between the Balaji Telefilms and Balaji Motion Pictures Limited (BMPL).

 

  • Reliance Communications: Reliance Telecom Ltd, a wholly-owned subsidiary of Reliance Communications, will demerge its operations in five circles back into Reliance Communication. The aim of the merge is to combine all Reliance Communication wireless business under one unit.                     

 

Judgement

 

Aditya Birla Telecom Limited vs DCIT

Facts

The taxpayer in the above case is a fully owned subsidiary of Idea Cellular Limited. As per the demerger scheme, all the assets and liabilities of the taxpayer, in this case, were transferred to Idea Cellular Limited without taking anything into consideration before transferring the assets. When the taxpayers evaluated the investments in Indus, and the difference after the evaluation was complete had arisen, the same was transferred to the business restructuring reserve.

The assessing officer held that the demerger was not a good step which was taken under section 50(b) of the income tax act 1961 and that it was just calculated for a short period of capital gain and that the evaluation in the Indus was bound to happen as the part of a full consideration in relation to this case. The taxpayer argued that in case the sale consideration did not exist and that the timely profits can be gained from the value of products so that the seller can tax such a transfer.

The assessing officer then held that no demerger shall arise according to the act and that the taxpayer shall not be eligible for an exemption from paying tax which may arise out of the capital gains under section 47 of the income tax act 1961.

Held

Under the scheme, the taxpayer had transferred all the assets and liabilities without looking into consideration, and the same was approved without any changes or amendments by the Gujarat and the Bombay high court. The tribunal has laid down that in the above case the decision was not fair and the matter was not looked into properly and that consideration in the above case does not fall within a particular provision of the act. Hence, there are no capital gains on transfer under the scheme of demerger, in the absence of consideration.

 

Conclusion

 

A demerger is a step taken by companies to boost the value of shareholders in the long run, but the demerged company must fulfil the objective and should maintain a clear perspective of the business to operate separately. The aim of the demerger should be apparent, and the implementation should be conducted by keeping in mind the benefits of all the stakeholders. The concept of the demerger is proved to be a great success in many companies when implemented with extensive planning.

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National Company Law Tribunal

By: Adv. Jayatinn B Laalwani Commmercial Contracts 19 Sep 2019

On 01 June 2016, the Ministry of Corporate Affairs has issued three notifications for setting and developing the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). Now, MCA after the constitution of NCLT and NCLAT has come up with the notification of rules, the procedure for filing the application, petition or appeal on 21 July 2016.

The Government establishes the Tribunals under section 8 of the Companies Act, 2013 with effect from 01 June 2016. They have also established the Debt Recovery Tribunal to deal with all insolvency cases speedily.

In the first phase, eleven benches have been set up. The Principal Bench is located at New Delhi and regional benches at New Delhi, Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Jaipur, Hyderabad, Kolkata and Mumbai. Any company that wants to continue against its debtors can approach NCLT for Winding Up, Liquidation to recover their dues or Strike Off.

'The Corporate Insolvency Resolution Process (CIRP)’ can be initiated by making an application to the NCLT by the Financial Creditors under Section 7 of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "IBC") or by Operational Creditors under Section 9 and by the Corporate Debtor himself under Section 10.

Significance of NCLT and NCLAT

It is a semi-legal specialist institution formed by the suggestion provided by the Eradi Committee to promote the amicable settlement amongst corporate matters. It is formed by the notification provided in the official gazette and with an intent to reduce the burden on the traditional court of law. NCLT helps to set off corporate claims, declare the corporate rights, undo the wrong done further deciding the punishment and penalties for the person held liable for the violation of the provision of Companies Act, 2013 and matters incidental to. NCLT is an institutional version of courtroom specifically dealing in matters relating to companies/ corporate entity for filtering the futile claims in providing a conclusion to request coming up to the authority smoothly without unnecessary delays. NCLT is the product of the Eradi Committee which filtered or eliminated all the lacunas of the previous institutions established previously. NCLAT, on the other hand, is a type of audit institution on the decisions provided by NCLT. It is an appellate tribunal handling appeals of in cases filed with the NCLT, by the aggrieved by the decision was given, then to file an appeal against the same. Further, if any person is aggrieved by the decision given by the NCLAT, then he/she may refer the matter to the High Court or Supreme Court.

National Company Law Tribunal powers

NCLT, as a new institution, has been given a few additional powers that were attributed to the previous authorities, all the powers had to be read as additional to previous powers and not in isolation. 

Following are the powers of NCLT:

Class Action SuitA class action suit is to be filed in National Company Law Tribunal when suit consisting of claims are standard for more than one person or people at large. This new pattern of filing a complaint against the company was new method making it is more accessible to people located in different areas, for claims like this an agent is appointed to deal with the matter that had been filed in NCLT.

Registration of Companies: A new stringent scrutinizing committee has been formed to scrutinize the document and other incidental requirements for registering a company under the guidelines issued by the NCLT. It also has been allotted with the powers of wiping out the registration of the company/ companies. A new method of de-registration has supplemented the powers given by the law to authorities.

Order for the Investigation: NCLT now can order a special investigation under the certain order established by the law in this behalf, an order for investigation of the companies result in in-depth checking of the transaction, company affairs and any other matter incidental to company or stated in the investigation order.

Conversion of Company from Public Ltd. to Private Ltd.: A prior approval from NCLT is to be taken for the process of changing status from public to private ltd company, Nclt may after receiving the application for such change of status provide direction to reduce the deviation or providing the precautionary measure for avoiding the violation of provisions of Companies Act, 2013.

The stages of Resolution Process are as below;

  1. Notice Publication - The RP publishes a notice in newspapers to call for filing claims against the Corporate Debtor by a stipulated time.
  2. Processing of Claim - After RP receives the claims, it will check the same from the records of the Corporate Debtor.
  3. Memorandum - After the claims have been verified, the RP prepares the Memorandum which contains all information of Assets and Liabilities of the Corporate Debtor. Moreover, that Memorandum will be sent to all Financial Creditors of the Corporate Debtor, whose claims have been accepted.
  4. Meetings of Committee of Creditors - After sending the Memorandum, a meeting of Committee of Creditors will decide whether the information mentioned in the Memorandum has been correctly prepared or not. The Committee of Creditors will include the financial creditors of the Corporate Debtor.
  5. Resolution Plan - The RP after the formation of the Memorandum will invite the resolution plans for the debtor by an advertisement in the newspaper.
  6. Rejection or Acceptance of Resolution Plan - After receiving the plan of the resolution, the RP will conduct a meeting of Committee of Creditors to check the plan which will result in acceptation or rejection, and after that, the plan is submitted before NCLT for final approval.
  7. Extension - The duration for the completion of the CIRP is 180 days, and if the Committee Of Creditors (COC) does not accept the Resolution Plan within 180 days then they can extend the duration for not less than 90 days.

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The IndiGo Promotors Feud

By: admin Commmercial Contracts 31 Jul 2019

Facts relating to the feud

  1. Rakesh Gangwal owns 37% shares of IndiGo as compared to co-promotor Rahul Bhatia, who along with his affiliates, owns 38%.
  2. The ongoing feud between the promoters of Indigo has taken a serious turn as one of the promoters seeks SEBI’s intervention in this matter. 
  3. Mr Gangwal has flagged serious corporate governance lapses at IndiGo, in his letter addressed to the SEBI.
  4. The Shareholder Agreement is the root cause of conflict between the promoters. 
  5. This Agreement between the promoters grants Mr Bhatia certain unusual controlling rights that are allocated and exercised through the IGE Group(an affiliate owned by Mr Bhatia). 
  6. Mr Gangwal alleges that this is the main cause as to why governance matters have taken such a back seat at IndiGo. 
  7. Mr Gangwal has requested SEBI to probe into and ask the Company to make necessary changes to the unusual controlling rights available to the IGE Group.

Issues raised:

  1. Those mentioned above unusual controlling rights permit the IGE Group, a minority shareholder, significant influence over the decisions of IndiGo.
  2. Mr Bhatia organised for different companies to enter into various Related Party Transactions (RPT) with IndiGo.  An RPT is a business arrangement between two entities who share a pre-existing relationship. It is not uncommon for companies to seek the services of parties they are acquainted with. Such transactions are completely legal but hold the potential to create a conflict of interest. Hence, these RPT’s should only exist if they are in the best interest of the Company.
  3. Under these questionable RPT’s various fundamental governance norms and laws are not being adhered to as they are not approved by the Audit Committee
  4. Board decisions and resolutions on critical matters were being implemented at IndiGo without basic governance protocols and laws being followed. 
  5. Mr Gangwal has accused IGE group of taking away the authority vested by SEBI to the Nomination and Remuneration Committee NRC} for identifying persons who may be appointed in senior management. This was done through a Board resolution that gave the IGE Group the right to select these candidates.
  6. IndiGo has since its inception had an ‘independent director’ as its Chairman. However, the provision in the Articles of Association stating "The Chairman of the Board shall be appointed on the nomination of the IGE Group" can take away the independence of the Chairman completely.
  7. The Company has not appointed an independent woman director, a requisite that SEBI gave time to the Company since May 2018 to comply with.

SEBI’s Intervention

  1. The government wants SEBI to intervene and inspect the role of all the board members and every entity associated with the two main promoters: Rakesh Gangwal and Rahul Bhatia, and to take strict actions for all the wrongdoings.
  2. SEBI has been probing into this matter since the feud between the two promoters have surfaced as there was an indication of violations relating to corporate governance, disclosure regulations, fair market trade and insider trading rules.
  3. In relation with the above scrutiny, the SEBI has summoned IndiGo’s company secretary Sanjay Gupta.
  4. SEBI is also investigating into whether the InterGlobe Aviation Chief Executive Officer- Ronojoy Dutta, downplayed the tussle between the promoters.
  5. SEBI has sought details from IndiGo’s parent company, InterGlobe Aviation in relation with alleged lapses. The Company had to reply to the letter composed by Mr Gangwal, comprising of the above-mentioned issues, by 19th July 2019.
  6. The Company has submitted its response to the letter by Mr Gangwal and the responses provided by the company are merely defending the decisions taken by Mr Bhatia and the IGE Group. Mr Bhatia has claimed that his rivals are hiding behind ‘sources’ and spreading a ‘false narrative’ about this dispute.
  7. Both SEBI and the Ministry of Corporate Affairs (MCA) have directed IndiGo to submit crucial documents, including the EY report on questionable RPT that had been commissioned by IndiGo Chairman in January. 
  8. In addition to the above documents, SEBI has also sought the shareholders' agreement. The regulator is examining whether the company had received shareholder approval for the unusual controlling rights that Mr Bhatia enjoys over the airline, including the right to name its managing director, CEO and president.  

Settlement in the process?

The promoters have reached a truce of some sorts. The Board of directors have decided to amend the Articles of Association to expand the size of the company’s board to 10 from the current 6 and will include an independent woman director, as a measure to address some of the concerns raised by Gangwal. However, despite this amendment, there is still a long way to go for a settlement.
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More about Joint Venture

By: admin Commmercial Contracts 30 Jul 2019

A Joint Venture is an alliance where two or more business parties form a partnership to share their intellectual property, markets, knowledge, assets and profit. It is different from amalgamation and merger because there is no transfer of ownership in a Joint Venture. Some large companies decide to form a joint venture with a smaller business.

A Joint Venture (JV) is defined as a business entity created by two or more parties, characterized by shared ownership, shared governance and shared returns and risks. Companies typically follow the system of the joint venture for several reasons to access a new market, to gain scale efficiencies by combining assets and operations; emerging markets; to share the risk for significant investments or projects; or to access skills and capabilities of the companies.

When two or more persons, along with individuals come together to form a partnership temporarily for carrying out a particular project, such collaboration is known as a joint venture. The parties of the JV are known as "Co-venturers". A significant advantage of a JV is that it helps to grow the business faster, increase its productivity and generate an ample amount of profit.

Advantages of a Joint Venture:

  1. introduction  to new markets and distribution networks 
  2. increased capacity
  3. sharing of risks and costs (i.e. liability) with a partner who has access to more significant resources, including specialized staff, technology, and finance
  4. flexibility in the business.

For example, a Joint Venture has a limited lifespan and can only cover a part of the whole business of the parties. Thus it limits the commitment and the business exposure for both parties. The advantages of the joint venture may exceed the disadvantages; however; one should keep in mind that faith and risk play a vital role in the success of the business.

Disadvantages of a Joint Venture:

Restricted Flexibility: Flexibility is essential in some projects whereas sometimes it requires full concentration, and thus the concurrent work may become difficult. Such participant focuses more on the JV product, and the individual businesses suffer a lot.

Claims and Assets: It is essential to mention the assets and involvement of the participants in the joint venture agreement to prevent allegations of the other parties so that no issue and legal trouble arises in future.

Equal involvement of all parties is severe: The share of the profit is ideal, but it is impossible to maintain a contribution. For instance, if Company A is planning the process of production, Company B is given the duty of production and Company C is responsible for planning and implementing market strategies. Company A will not be active in the process of production and promotion, resulting in pressure on Company B and C; this can affect the individual business of the parties.

Dissolution of the Joint venture:

  1. The JV is not a permanent structure. It can get dissolved when:
  2. Aims of JV are met
  3. Objectives of the JV not achieved 
  4. If both or either of the parties develop new goals
  5. If both or either of the parties no longer agree with JV goals.
  6. If the time agreed for JV business has expired
  7. If legal or financial issues arise.
  8. If the market conditions evolved and changed then the JV is no longer appropriate or relevant
  9. If one party acquires the business of other

Types of the Joint Venture

To set up a JV depends on what the business is trying to achieve. Most common types of JV are:

Limited Co-operation: If one company agrees to collaborate with the other business in a limited way, it can be said as the limited co-operation in the business.  For example, a small business entrepreneur wants to sell his new exciting product through the network of distribution of the larger company. The two partners agree a contract setting out the terms and conditions of how this would work under the limited co-operation.

The Separate Business: If an individual set up a joint venture business separately, to handle a specific contract. To start a joint venture company is very flexible. The partners own shares individually in the company and agree on how they should manage them.

Business Partnerships: Sometimes, a limited company may not be the right choice. Instead, one can form a business partnership or a limited liability partnership. One can even merge the two businesses to form a joint venture.

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About Amalgamation In India

By: admin Commmercial Contracts 24 Apr 2019

Amalgamation is the blending of one or more companies into a new entity. When two or more companies come together to form a new company or when they decide to absorb or blend any one company by the other then the amalgamation takes place. An amalgamation of the company is different from the process of a merger. It is because neither of connecting companies survives as a legal entity at the end; a new entity is formed to house and consolidate the assets and liabilities of both companies.

Amalgamation is the process carried out between two or more companies who are engaged in the same line of activity and the operations. The companies can also combine for diversification of the activities or expansion of services.

The main reason for amalgamating of companies is to acquire cash resources, to eliminate competition, do tax savings, to operate economies of large scale, to increase the value of shareholders, to reduce the degree of risk by diversification and to achieve growth and gain financially.

Amalgamation is like the merger that tries to minimize the risk of the assets and liabilities and maximize advantages as well as the shareholders' interests, and the business of the companies. No adjustments are made to book value. All assets of the transferor company become of the transferee company.

After the amalgamation, the business of the transferor company is carried on. Shareholders of the transferor company who holds a minimum of 90% face value of equity shares become shareholders of the transferee company.

When another acquires one company and shareholders of the transferor company discontinue to have a share as per decided proportion in the equity of the amalgamated company, an amalgamation like purchase occurs when conditions for amalgamation like merger are not met.


The procedure of an Amalgamation is as follows:
  • - The terms and condition of amalgamation are always finalized by the board of directors of the Companies.
  • - Approval is given by the respective High Court when the amalgamation scheme is prepared and submitted.
  • - Approval of the shareholders of the companies is obtained.
  • - Approval of SEBI is obtained.
  • - A new company is formed and issues shares to the shareholders of the transferor company.
  • - The transferor company is liquidated and all the assets, liabilities are taken over by the transferee company.
The main purpose of amalgamation is to achieve benefit which arises, with the combination of the two entities jointly. 

Various other objectives of Amalgamation are as follows:
- To obtain the economies of scale
- To reduce competition
- To gain Goodwill and reputation 
- To reduce the risk through diversification
- To improve managerial effectiveness.
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