Tag: Intellectual Property Rights

Management Notes

Types and Registration of Prospectus

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It means a formal document that a Public Company issues to invite offers from public for subscribing its shares. It includes all the material information related to shares that a Company offers to the public. Furthermore, it usually help the investors to take investment decisions.

The company provides prospectus with capital raising intention. Prospectus helps the investors to make a well-informed decision because of the prospectus all the required information of the securities which are offered to the public for sale.

Whenever the company issues the prospectus, the company must file it with the regulator. The prospectus includes the details of the company’s business, financial statements.

  • To notify the public of the issue.
  • To put the company on record with regards to the terms of the issue and allotment process.
  • To establish accountability on the part of the directors and promoters of the company.

Types of prospectus

According to Companies Act 2013, there are four types of prospectus.

Deemed Prospectus: Deemed prospectus has mentioned under Companies Act, 2013 Section 25 (1). When a company allows or agrees to allot any securities of the company, the document is considered as a deemed prospectus via which the offer is made to investors. Any document which offers the sale of securities to the public is deemed to be a prospectus by implication of law.

Shelf prospectus: Shelf prospectus is stated under section 31 of the Companies Act, 2013. Shelf prospectus is issued when a company or any public financial institution offers one or more securities to the public. A company shall provide a validity period of the prospectus, which should not be more than one year. The validity period starts with the commencement of the first offer. There is no need for a prospectus on further offers. The organization must provide an information memorandum when filing the shelf prospectus.

Red Herring Prospectus: Red herring prospectus does not contain all information about the prices of securities offered and the number of securities to be issued. According to the act, the firm should issue this prospectus to the registrar at least three before the opening of the offer and subscription list.

Abridged Prospectus: Abridged prospectus is a memorandum, containing all salient features of the prospectus as specified by SEBI. This type of prospectus includes all the information in brief, which gives a summary to the investor to make further decisions. A company cannot issue an application form for the purchase of securities unless an abridged prospectus accompanies such a form.

Registration of Prospectus

(1) No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless, on or before the date of its publication, there has been delivered to the Registrar for registration a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his agent authorized in writing, and having endorsed thereon or attached thereto:

(a) Any consent to the issue of the prospectus required by section 58 from any person as an expert; and

(b) In the case of a prospectus issued generally, also:

(i) a copy of every contract required by clause 16 of Schedule II to be specified in the prospectus, or, in the case of a contract not reduced into writing, a memorandum giving full particulars thereof ; and

(ii) Where the persons making any report required by Part II of that Schedule have made therein, or have, without giving the reasons, indicated therein, any such adjustments as are mentioned in clause 32 of that Schedule, a written statement signed by those persons setting out the adjustments and giving the reasons therefor.

(2) Every prospectus to which sub-section (1) applies shall, on the face of it,

(a) State that a copy has been delivered for registration as required by this section ; and

(b) Specify any documents required by this section to be endorsed on or attached to the copy so delivered, or refer to statements included in the prospectus which specify those documents.

(3) The Registrar shall not register a prospectus unless the requirements of sections 55, 56, 57 and 58 and sub-sections (1) and (2) of this section have been complied with and the prospectus is accompanied by the consent in writing of the person, if any, named therein as the auditor, legal adviser, attorney, solicitor, banker or broker of the company or intended company, to act in that capacity.

(4) No prospectus shall be issued more than ninety days after the date on which a copy thereof is delivered for registration, and if a prospectus is so issued, it shall be deemed to be a prospectus a copy of which has not been delivered under this section to the Registrar.

(5) If a prospectus is issued without a copy thereof being delivered under this section to the Registrar or without the copy so delivered having endorsed thereon or attached thereto the required consent or documents, the company, and every person who is knowingly a party to the issue of the prospectus, shall be punishable with fine which may extend to fifty thousand rupees.

Management Notes

Doctrine of Lifting the veil of corporate entity

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The Companies Act, 2013 clarifies that a company is a separate entity distinct from its members. But practically, it is an association of persons who are the beneficial owners of the company and its corporate assets. This fiction is created by a veil termed the corporate veil.

Here, lifting the corporate veil under the Companies Act, 2013 means ignoring that a company is a separate legal entity and has a corporate personality. Lifting of corporate veil as per Companies Act, 2013 ignores the separate identity of the company and looks back at the true owners who are in control of the company.

The separate personality is a regulatory advantage, and it must be used for a lawful purpose only. Whenever and wherever a fraudulent use is made of the legal establishment, the individuals will not be permitted to hide behind the curtain of corporate personality.

The concerned authority will break this company’s shell and sue the individuals who have committed such an offence. This lifting of the curtain is called lifting the corporate veil under the Companies Act, 2013.

Corporate Veil:

A legal concept that separates the personality of a corporation from the personalities of its shareholders, and protects them from being personally liable for the company’s debts and other obligations.

Lifting Of Corporate Veil:

At times it may happen that the corporate personality of the company is used to commit frauds and improper or illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent, the façade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as ‘lifting of corporate veil’.

It refers to the situation where a shareholder is held liable for its corporation’s debts despite the rule of limited liability and/or separate personality. The veil doctrine is invoked when shareholders blur the distinction between the corporation and the shareholders. A company or corporation can only act through human agents that compose it. As a result, there are two main ways through which a company becomes liable in company or corporate law: firstly through direct liability (for direct infringement) and secondly through secondary liability (for acts of its human agents acting in the course of their employment).

There are two existing theories for the lifting of the corporate veil. The first is the “alter-ego” or other self-theory and the other is the “instrumentality” theory.

The alter-ego theory considers if there is in distinctive nature of the boundaries between the corporation and its shareholders.

The instrumentality theory on the other hand examines the use of a corporation by its owners in ways that benefit the owner rather than the corporation. It is up to the court to decide on which theory to apply or make a combination of the two doctrines.

The basis on which Corporate Veil is Lifted under Companies Act,2013

Misstatement in Prospectus

In a case where the company’s prospectus is misrepresented, the company and every director, promoter, and every other individual, who authorized such issue of prospectus shall be liable to compensate the loss to every person who subscribed for shares on the faith of misstatement.

Also, these individuals may be punished with a jail term for duration of not less than six months. This duration may be extended to ten years. The concerned company and person shall also be liable to a fine that shall not be less than the sum involved in the fraud but may extend to three times the amount involved in the fraud.

Misdescription of Name

As per the Companies Rule, 2014, a company shall have its name printed on every official document, including (hundis, promissory notes, BOE, and such other documents) as may be mentioned.

Thus, where a company’s officer signs on behalf of the company any contract, BOE, Hundi, promissory note or Cheque or order for money, that individual shall be liable to the holder if the name of the company is not properly mentioned.

Fraudulent conduct

In case of winding up of a company, it comes out that any business has been carried on with intent to cheat the creditors or any other individual, or for any illicit purpose, if the Tribunal thinks it proper so to do, be directed in person liable without limitation to obligation for all or any debts or other obligations of the company.

Liability under the fraudulent conduct may be imposed if it is proved that the company’s business has been carried on misguiding the creditors.

Ultra-Vires Acts

Directors and other officers of a company will be held liable for all those acts they have performed on the company’s behalf if the same is ultra vires the company.

Failure to return the application Money

In case of Public Issue, if minimum subscription, as per the prospectus, has not been received within thirty days of the issue of prospectus or such other period as may be mentioned, the application money shall be returned within fifteen days from the closure of the issue.

However, suppose any the application money is not so repaid within such specified time. In that case, the directors/officers of the company shall jointly and severally be liable to pay that money with 15% per annum.

Additionally, the defaulter company and its officer shall be liable for a penalty of 1000rs/day during which such default continues or Rs. 100000, whichever is less.

Under other Statues:

Apart from the Companies Act, 2013, the directors & other officers of the company may be held personally accountable under the provisions of other statutes. For Instance, under the Income-tax Act, 1962, where any private company is wound-up and if tax arrears in respect of any income of any previous year cannot be recovered, every individual who was director of that company during the relevant preceding year shall be jointly and severally accountable for payment of tax.

Under Judicial Interpretation

While initially the court, based on the principle of the separate entity as well as a district corporate persona, refused to lift the veil of corporate governance, However, due to the rise of corporations and the ever-growing conflict between corporations and their different stakeholders, courts have taken a more pragmatic strategy and have lifted the veil of corporate governance.

It isn’t easy to record every court decision in which the veil was lifted. However, there are various circumstances where the veil of corporate character can be taken off, and the people who are behind the corporate entities could be found out and punished.

  • Improper conduct and Prevention of Fraud.
  • Formation of the Subsidiary company to act as Agent.
  • Economic offence
  • Revenue Protection
  • The company used it for illegal purposes.
  • Company ignoring welfare legislations.
  • Company acting a mere fraud.
Management Notes

Book Building Procedure for Issue of Shares

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Book building is a price discovery mechanism that is used in the stock markets while pricing securities for the first time. When shares are being offered for sale in an IPO, it can either be done at a fixed price. However, if the company is not sure about the exact price at which to market its shares, it can decide a price range instead of an exact figure. This process of discovering the price by providing the investors with a price range and then asking them to bid on it is called the book building process. It is considered to be one of the most efficient mechanisms of pricing securities in the primary market. This is the preferred method which is recommended by all major stock exchanges and as a result is followed in all major developed countries in the world.

Book Building Process:

  • Appointment of Investment Banker:

The first step starts with appointing the lead investment banker. The lead investment banker conducts due diligence. They propose the size of the capital issue that must be conducted by the company. Then they also propose a price band for the shares to be sold. If the management agrees with the propositions of the investment banker, the prospectus is issued with the price range as suggested by the investment banker. The lower end of the price range is known as the floor price whereas the higher end is known as the ceiling price. The final price at which securities are indeed offered for sale after the entire book building process is called the cut-off price.

  • Collecting Bids:

Investors in the market are requested to bid to buy the shares. They are requested to bid the number of shares that they are willing to buy at varying price levels. These bids along with the application money are supposed to be submitted to the investment bankers. It must be noted that it is not a single investment banker who is engaged in the collection of bids. Rather, the lead investment banker can appoint sub-agents to tap into their network especially for receiving the bids from a larger group of individuals.

  • Price Discovery:

Once all the bids have been aggregated by the lead investment banker, they begin the process of price discovery. The final price chosen in simply the weighted average of all the bids that have been received by the investment banker. This price is declared as the cut-off price. For any issue which has received substantial publicity and which is being anticipated by the public, the ceiling price is usually the cut-off price.

  • Publicizing:

In the interest of transparency, stock exchanges all over the world require that companies make public the details of the bids that were received by them. It is the lead investment banker’s duty to run advertisements containing the details of the bids received for the purchase of shares for a given period of time (let’s say a week). The regulators in many markets are also entitled to physically verify the bid applications if they wish to.

  • Settlement:

The application amount received from the various bidders has to be adjusted and shares have to be allotted. For instance, if a bidder has bid a lower price than the cut-off price then a call letter has to be sent asking for the balance money to be paid. On the other hand, if a bidder has bid a higher price than the cut-off, a refund cheque needs to be processed for them. The settlement process ensures that only the cut-off amount is collected from the investors in lieu of the shares sold to them.

Partial Book Building

Partial book building is another variation of the book building process. In this process, instead of inviting bids from the general population, investment bankers invite bids from certain leading institutions. Based on their bids, a weighted average of the prices is created and cut-off price is decided. This cut-off price is then offered to the retail investors as a fixed price. Therefore, the bidding only happens at an institutional level and not at a retail level.

This is also an efficient mechanism to discover prices. Also the cost and complications involved in conducting a partial book building are substantially low.

First of all, the book building process brings flexibility to the pricing of IPO’s. Prior to the introduction of book building, a lot of IPO’s were either underpriced or overpriced. This created problems because if the issue was underpriced, the company was losing possible capital. On the other hand, if the issue was overpriced it would not be fully subscribed. In fact, if it was subscribed below a given percentage, the issue of securities had to be cancelled and the substantial costs incurred over the issue would simply have to be written off. With the introduction of book building process, such events no longer happen and the primary market functions more efficiently.

Other Subtypes of Book Building

The following are subtypes of book building:

  • Accelerated Book Building

The companies can use an accelerated book-building process to acquire quick capital market. That can be the case when a company cannot finance its short-term project via debt financing. So, the issuing company contacts several investment banks that can act as underwriters the evening before the intended placement. Under this process, the offer period is open only for a day or two days, and you have no time for marketing for an issue. So, instead, the underwriter overnight contacts their networks and details the current topic to institutional investors. If this investor finds this issue interesting, then allotment happens overnight.

  • Partial Book Building

As the partial book building says, that issue book is built partially, where the investment banker only invites bids from the selected investors. Based on their bids, they take the weighted average of the prices to finalize the cut-off price. Then other investors, such as retail investors, take this cut-off price as a fixed price. So, the bidding happens with a selected group of investors under the partial book-building process.

Advantages of Book Building

  • The most efficient way to price the share in the IPO market.
  • The share price is finalized by investors’ aggregate demand, not by the fixed price set by the company management.

Disadvantages of Book Building

  • High costs are involved in the book-building process compared to the fixed-price mechanism.
  • The period is also more in the book booking process than the fixed-price mechanism.
Management Notes

Subscription of Shares, Minimum Subscription, Over-Subscription

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Subscription of shares refers to the process where investors apply for shares issued by a company. When a company offers shares to the public through an Initial Public Offering (IPO) or other methods, investors submit applications to purchase them. Based on demand, the company may receive full, over, or under-subscription. Full subscription means the exact number of shares offered is applied for, over-subscription occurs when demand exceeds supply, and under-subscription happens when applications are fewer than the issued shares. Companies allocate shares based on predefined criteria, ensuring fair distribution among investors while adhering to regulatory guidelines.

Minimum Subscription of Shares:

The minimum subscription of shares refers to the minimum number of shares that a company must sell to raise a certain amount of capital to proceed with an issue, whether through an Initial Public Offering (IPO), Follow-on Public Offering (FPO), or any other public offering. This minimum subscription amount is typically defined in the prospectus and is a regulatory requirement, ensuring that the company has sufficient investor interest to justify proceeding with the issue.

In India, for instance, the minimum subscription requirement for public offerings is usually 90% of the total issue size. If the company fails to achieve this minimum subscription level, the issue is considered unsuccessful, and the funds collected (if any) must be refunded to the investors. This safeguard protects investors from getting involved in companies that may lack sufficient investor confidence or face difficulties in raising the required capital.

The concept of minimum subscription ensures that the company has a strong foundation of capital to fund its operations or expansion. It also prevents situations where the company might not have enough funds to cover operational or project expenses, thus providing a level of financial security.

Moreover, achieving minimum subscription enhances the credibility of the company in the eyes of investors and regulators, as it demonstrates market confidence in its business model and financial stability.

Over-Subscription of Shares:

Over-subscription occurs when the demand for shares in an initial public offering (IPO) or any other public share issue exceeds the number of shares offered by the company. This situation indicates high investor interest in the company’s shares, often due to favorable market conditions, strong company performance, or investor confidence in the business’s future prospects.

When an issue is over-subscribed, investors apply for more shares than what is available. For example, if a company issues 1,00,000 shares, and investors apply for 2,00,000 shares, the issue is considered over-subscribed by 100%. This scenario usually results in the company having to make decisions on how to allocate shares fairly among investors.

In cases of over-subscription, companies may use various methods to allocate shares, such as:

  1. Pro-rata Basis: Shares are allocated in proportion to the number of shares applied for by each investor. If an investor applied for 100 shares and the issue was over-subscribed by 2:1, they would receive only 50 shares.

  2. Lottery System: In some cases, especially when demand far exceeds supply, a lottery system is used to randomly allocate shares to applicants.

  3. First-Come, First-Served: Shares may be allotted based on the order in which applications are received, with early applications being given priority.

Bangalore University B.com Notes

Company Law and Administration Bangalore University B.com 3rd Semester NEP Notes

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Unit 1 Indian Companies Act 2013 [Book]
Introduction to Company Law, Evolution VIEW VIEW
Nature of Joint Stock Company VIEW VIEW
Overview of Companies Act 2013, Objectives, Significance of Companies Act 2013 VIEW
Body Corporate Meaning, Features VIEW
Classification of Companies VIEW
Distinction between Private Company and Public Company VIEW
Doctrine of Lifting the veil of Corporate entity VIEW
CSR Meaning, Scope VIEW
Provisions for CSR Activities under Schedule VII of the Companies Act 2013 VIEW

 

Unit 2 Formation of a New Company [Book]
Stages in Formation of a company as per Companies Act 2013 VIEW
Documents required for the formation of company VIEW
Memorandum of Association Meaning, Definition, Purpose and Content of Memorandum of Association VIEW
Articles of Association: Meaning, Definition, Contents and Alteration of Articles of Association VIEW
Distinction between Memorandum of Association and Articles of Association VIEW
Doctrine of Ultravires VIEW
Doctrine of Constructive notice and Doctrine of Indoor Management VIEW
Prospectus Meaning, Definition, Contents VIEW
Types and Registration of Prospectus VIEW
Statement in lieu VIEW
Misstatement in prospectus and its consequences VIEW

 

Unit 3 Capital Structure and Accounts of Companies [Book]
Share Capital Meaning, Definition VIEW
Types of Share Capital VIEW VIEW
Rules Regarding Issue of Shares VIEW
Distinction between Preference shares and equity shares VIEW
Debenture Meaning, Definition, Types VIEW
Rules Regarding Issue of Debenture VIEW VIEW VIEW
Distinction between Share and Debenture VIEW
Accounts of companies: Statutory books and Financial Statements VIEW

 

Unit 4 Administrative and Managerial role of a Company [Book]
Overview of Administrative and Managerial role, Key Managerial Personnel: VIEW
Director Meaning, Definition, Director Identification Number, Position, Rights VIEW
Director Liabilities VIEW
Director Duties, Power VIEW
Director Qualification, Disqualification VIEW
Director Appointment, Removal and Resignation of director VIEW
Meaning and role of Managing Director VIEW
Whole Time Directors VIEW
C-suite Executives, CEO, CFO, COO, CTO, CKO, CRO and CIO VIEW
Resident Director, Independent Director VIEW
Women Director VIEW
Company Secretary Meaning, Definition, Appointment of Company Secretary, Functions of CS, Duties and Responsibilities VIEW
VIEW
Audit Committee: Meaning and Functions of Audit Committee VIEW
VIEW

 

Unit 5 Corporate Meeting [Book]
Introduction to Corporate Meeting Meaning, Definitions and Types VIEW
VIEW
Proceedings under Section 118 of the Companies Act 2013 VIEW
Requisite of Valid Meeting:
Notice VIEW VIEW
Agenda VIEW
Chairman VIEW VIEW
Quorum VIEW
Proxy VIEW
Resolutions VIEW
Minutes VIEW
Postal Ballot, E- voting VIEW
Video Conferencing VIEW
Board of Directors (BODs) Meaning, Definitions, Board Meeting, Committee Meeting VIEW
Meeting of Board of Directors (BODs) VIEW
Winding Up of Company Meaning, Definition and Modes of Winding up VIEW
Official Liquidator Meaning, Powers and Duties VIEW
Consequences of Winding up of a Company VIEW
Bangalore University B.com Notes

Corporate Accounting Bangalore University B.com 3rd Semester NEP Notes

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Unit 1 Issue of Shares [Book]
Shares Introduction, Meaning, features VIEW
Types of shares VIEW
Issue of shares VIEW VIEW
Subscription of shares, Minimum subscription, Over subscription VIEW
Pro-Rata allotment of Shares VIEW
Book Building procedure for issue of shares VIEW
Problems related to Journal entries on issue of shares at par, premium and discount VIEW
Unit 2 Underwriting of Shares [Book]
Introduction, Meaning and Need for underwriting VIEW
Advantages of Underwriting VIEW
SEBI Regulations regarding Underwriting VIEW
Underwriting Agreement VIEW
Underwriting Commission VIEW
Underwriter, Functions of Underwriter VIEW
Types of Underwriting VIEW
Marked and Unmarked Applications VIEW
Problems on determination of Liability of Underwriters VIEW
Underwriting Process VIEW
Unit 3 Valuation of Goodwill [Book]
Meaning, Circumstances, Factors of Valuation of Goodwill VIEW
Methods of Valuation of Goodwill:
Average Profit Method of Valuation of Goodwill VIEW
Super Profit Method of Valuation of Goodwill VIEW
Capitalization of Super Profit average Profit Method of Valuation of Goodwill VIEW
Annuity Method of Valuation of Goodwill VIEW
Capitalization of Profit Method VIEW
Annuity Method VIEW
Brand Meaning and features VIEW VIEW
Factors influencing value of brand VIEW
Circumstances of valuation of brand VIEW
Intellectual Property Rights (IPR): Meaning and features VIEW
Factors influencing value of IPR VIEW
Circumstances of valuation of IPR VIEW
Patents Meaning and features VIEW VIEW
Factors influencing value of patents VIEW
Circumstances of valuation of patent VIEW
Unit 4 Valuation of Shares [Book]
Meaning, Need for Valuation of Shares VIEW
Factors Affecting Valuation of Shares VIEW
Methods of Valuation:
Intrinsic Value Method of Shares VIEW
Yield Method of Shares VIEW
Earning Capacity Method of Shares VIEW
Fair Value of shares VIEW
Rights Issue VIEW
Valuation of Rights Issue VIEW
Valuation of Share Warrant VIEW
Unit 5 Company Final Accounts [Book]
Statutory Provisions regarding preparation of Company Final Accounts VIEW
Treatment of Special Items VIEW
Tax deducted at source VIEW
Advance payment of Tax VIEW
Provision for Tax VIEW
Depreciation VIEW
Interest on debentures VIEW
Dividends VIEW
Rules regarding payment of dividends VIEW
Transfer to Reserves VIEW
Preparation of Profit and Loss Account and Balance Sheet in vertical form VIEW
Management Notes

Indemnified and Surety

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The term “Indemnified“ refers to a person or party who is protected or compensated against a loss or damage by another party, known as the indemnifier. The concept of indemnification is rooted in Section 124 of the Indian Contract Act, 1872, which defines a Contract of Indemnity as a contract in which one party promises to save the other from loss caused by the conduct of the promisor or any third party.

The indemnified party is essentially the one who is at risk of suffering a loss and is seeking protection through a legal agreement. Once a valid indemnity contract is executed, the indemnified is legally entitled to claim compensation from the indemnifier if any specified loss arises.

Role of the Indemnified:

In any indemnity agreement, the indemnified plays a passive role in the sense that they are not responsible for causing the loss but are rather exposed to it due to certain actions, liabilities, or transactions. For instance, in a contract where a company indemnifies an employee against legal actions arising out of official duties, the employee becomes the indemnified.

Rights of the Indemnified:

The indemnified has the right to:

  • Recover damages or losses covered under the contract of indemnity.

  • Claim legal expenses incurred while defending a claim, provided the expenses were incurred in good faith.

  • Be protected against future anticipated losses, especially if the liability is certain and imminent, though Indian courts generally recognize this only after actual loss.

These rights help ensure that the indemnified party does not suffer financial harm due to risks that are contractually transferred to the indemnifier.

Examples of Indemnified Party:

  1. A tenant indemnified by the landlord against third-party claims.

  2. An insurance policyholder being indemnified by the insurance company for damage to property.

  3. A business partner indemnified against legal liabilities arising from company decisions.

Surety:

Surety is a person who gives a guarantee for the performance, debt, or conduct of another person, known as the principal debtor, to a third party, called the creditor. The concept of surety is covered under Section 126 of the Indian Contract Act, 1872, which defines a Contract of Guarantee as a contract to perform the promise or discharge the liability of a third person in case of their default.

The surety promises to be answerable if the principal debtor fails to meet their obligations. This creates a tripartite agreement among the creditor, principal debtor, and surety. The surety’s liability is secondary, meaning it arises only when the principal debtor defaults.

Nature of the Surety’s Liability:

The surety’s liability is generally co-extensive with that of the principal debtor (Section 128), unless otherwise stated in the contract. This means that the creditor can directly approach the surety for payment, even without first proceeding against the principal debtor. However, if the debtor fulfills the obligation, the surety’s role ends.

Rights of the Surety:

Once the surety discharges the debt or obligation of the principal debtor, he acquires certain rights:

  1. Right of Subrogation: The surety steps into the shoes of the creditor and can recover the amount from the principal debtor.

  2. Right to Indemnity: The surety has a right to be indemnified by the principal debtor for any payment lawfully made under the guarantee.

  3. Right to Contribution: In case of multiple sureties, one surety who pays more than their share can recover the excess from co-sureties.

Examples of Surety:

  • A parent acting as a guarantor for their child’s education loan.

  • A person guaranteeing repayment of a business loan for a friend.

  • An individual assuring a landlord that the tenant will pay rent on time.

Management Notes

Rights and Duties of Bailor and Bailee, Pawnor and Pawnee

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Bailment involves the delivery of goods by one person (the bailor) to another (the bailee) for a specific purpose under a contract, where the goods are to be returned or otherwise disposed of upon completion of the purpose. Both parties have legal rights and duties toward each other.

Rights of the Bailor:

  • Right to Enforcement of Bailee’s Duties

The bailor has the right to expect that the bailee will perform all contractual obligations, including taking care of the goods and returning them as agreed. If the bailee fails in their duty (such as through negligence or unauthorized use), the bailor can take legal action for damages or compensation. This ensures the bailor’s interest in the goods is protected throughout the period of bailment.

  • Right to Claim Damages

If the bailee fails to take reasonable care of the goods and they are lost or damaged due to negligence, the bailor has the right to claim compensation. This right is essential for protecting the value of goods entrusted to the bailee and holds them accountable for their conduct during the bailment.

  • Right to Terminate Bailment

The bailor has the right to terminate the bailment if the bailee acts inconsistently with the contract. For example, if the bailee misuses the goods or refuses to return them, the bailor may revoke the agreement and demand immediate return of the goods. This safeguards the bailor’s legal ownership and control.

  • Right to Receive Accretion (Section 163)

If any natural increase or profit arises from the bailed goods (like offspring of animals), the bailor has the right to claim such accretion. The bailee is not entitled to keep or sell these additions and must return them with the original goods upon completion of bailment.

  • Right to Recover Goods

The bailor can demand the return of goods once the bailment period ends or the purpose is accomplished. If the bailee fails or refuses to return the goods, the bailor has the legal right to recover them through a court of law. This ensures the bailor’s rightful ownership is not jeopardized.

Duties of the Bailor:

  • Duty to Disclose Faults (Section 150)

The bailor must inform the bailee of any known defects in the goods that may cause harm or affect usage. If the bailor fails to disclose such faults, and the bailee suffers loss or injury, the bailor is liable. This duty ensures transparency and safety during bailment, particularly when goods are dangerous or defective.

  • Duty to Bear Expenses (Gratuitous Bailment)

In a gratuitous (free) bailment, the bailor must bear all necessary expenses incurred by the bailee in caring for and preserving the goods. This includes storage, maintenance, or handling costs unless otherwise agreed. It prevents the bailee from facing financial burden when they are not being compensated for the bailment.

  • Duty to Accept Goods Back

The bailor has a duty to accept the goods once the purpose is completed or the time expires. If the bailor refuses to take the goods back, they may be liable for compensation to the bailee for any loss or additional costs incurred in storing or handling the goods beyond the bailment period.

  • Duty to Indemnify Loss due to Defects

If the bailee suffers any loss due to hidden faults in the goods that the bailor was aware of but did not disclose, the bailor must indemnify the bailee. This duty arises under Section 150 and protects the bailee from damages not caused by their own conduct or negligence.

  • Duty to Compensate Bailee for Loss Due to Premature Termination

In gratuitous bailment, if the bailor ends the contract before the agreed time or before the purpose is fulfilled, and the bailee suffers loss due to this, the bailor must compensate the bailee. This prevents unfair financial harm when the bailee has acted in good faith.

Rights of the Bailee

  • Right to Compensation (Section 158)

The bailee is entitled to be reimbursed for any necessary expenses incurred in maintaining the goods, especially in gratuitous bailments. This right prevents financial loss to the bailee who takes care of the goods without reward and ensures fair treatment for fulfilling the bailor’s request.

  • Right of Lien (Section 170–171)

The bailee has a particular lien, meaning they can retain the goods until dues or lawful charges are paid. If the bailee is in the business of receiving goods and no payment is made, they can legally keep the goods until the charges are cleared. It is a protective right in commercial bailments.

  • Right to Sue for Compensation

If the bailor causes loss to the bailee (e.g., by giving faulty goods without warning), the bailee can sue the bailor for damages. This right ensures that the bailee is not unfairly burdened due to the bailor’s negligence or non-disclosure of risks related to the goods.

  • Right to Deliver Goods to Joint Bailors

If goods are jointly bailed by multiple people, the bailee has the right to deliver them to any one of the joint bailors unless specifically instructed otherwise. This prevents confusion or legal issues when returning the goods and provides legal security to the bailee.

  • Right to Recover Loss Due to Bailor’s Refusal

If the bailor refuses to accept the goods back after the bailment ends, and the bailee suffers loss due to continued possession or care of the goods, the bailee has the right to recover such losses from the bailor. This protects the bailee’s interest when their obligation has been fulfilled.

Pledge

Pledge is a special type of bailment where goods are delivered as security for payment of a debt or performance of a promise. The person who delivers the goods is called the pawnor, and the person who receives them is called the pawnee.

Rights of the Pawnee:

  • Right of Retention (Section 173)

The pawnee has the right to retain the pledged goods until the full repayment of the debt, interest, and any necessary expenses incurred in the preservation of goods. This right serves as a legal security to the pawnee for the recovery of dues and is valid even in the absence of a written agreement.

  • Right to Recover Extraordinary Expenses (Section 175)

If the pawnee incurs extraordinary or necessary expenses to preserve the pledged goods (e.g., special storage or maintenance costs), they are entitled to recover such costs from the pawnor. However, the pawnee cannot retain the goods for these expenses alone—they must file a suit if unpaid.

  • Right to Sell the Goods (Section 176)

If the pawnor defaults in payment or performance, the pawnee has the right to sell the goods after giving reasonable notice to the pawnor. The sale must be done fairly. The proceeds are adjusted toward the debt, and any surplus is returned to the pawnor. If the proceeds fall short, the pawnee can sue for the balance.

  • Right to Sue for Debt and Retain Goods

The pawnee may choose to sue for recovery of the debt and still retain possession of the pledged goods. They are not bound to sell the goods. This dual remedy strengthens the pawnee’s legal position and gives them flexibility in enforcing the pledge.

  • Right Against Third Party Interference

The pawnee has the right to be protected from third-party claims or interference in the possession of pledged goods. As a bailee, the pawnee enjoys legal protection under the Indian Contract Act and can sue anyone who unlawfully takes or harms the goods in their custody.

Duties of the Pawnee:

  • Duty to Take Reasonable Care (Section 151)

The pawnee must take reasonable care of the pledged goods, just like a prudent person would take of their own goods. If the goods are damaged or lost due to negligence, the pawnee is liable to compensate the pawnor. This duty ensures the goods remain protected while in custody.

  • Duty Not to Use Goods

The pawnee is not allowed to use the pledged goods unless the pawnor has given express or implied permission. Unauthorized use is a violation of the pledge agreement and may result in legal consequences, including termination of the contract or compensation for misuse.

  • Duty to Return Goods

Once the debt is repaid or the promise is performed, the pawnee is legally obligated to return the pledged goods to the pawnor. If the pawnee fails or refuses to return them, they may be liable for damages or even face legal proceedings for wrongful detention.

  • Duty to Return Accretion (Section 163)

If the pledged goods generate profit or accretion during the pledge (e.g., dividends on pledged shares or offspring of pledged animals), the pawnee must return such increase to the pawnor along with the original goods. This ensures that ownership-related benefits remain with the pawnor.

  • Duty to Sell Goods Fairly (If Exercising Right to Sell)

If the pawnee exercises the right to sell the pledged goods due to the pawnor’s default, the sale must be conducted fairly, and the surplus proceeds (if any) must be returned to the pawnor. Any unfair sale or failure to inform can lead to compensation claims.

Rights of the Pawnor:

  • Right to Redeem Goods (Section 177)

The pawnor has the right to redeem the goods pledged at any time before the pawnee sells them. This right continues even after default, provided the pawnee has not yet sold the goods. The pawnor must repay the full debt and any additional lawful expenses to reclaim the goods.

  • Right to Receive Surplus from Sale

If the pawnee sells the goods upon default and receives more than the owed amount, the pawnor has the right to claim the surplus amount. The pawnee cannot unjustly enrich themselves through the sale; they are legally bound to return the balance to the pawnor after adjusting dues.

  • Right to Notice Before Sale

The pawnor is entitled to reasonable notice before the pawnee sells the goods due to default. If the pawnee fails to give such notice, the sale can be declared void, and the pawnor may claim compensation or reclaim the goods, depending on the circumstances.

  • Right to Compensation for Unauthorized Use

If the pawnee uses the goods without permission or causes damage through negligence, the pawnor has the right to claim compensation. This right holds the pawnee accountable and ensures the safety of the goods in the absence of the owner.

  • Right to Recover Goods Upon Repayment

Upon full repayment of the debt and expenses, the pawnor has the absolute right to recover the pledged goods. This includes any increase or profit derived from them. If the pawnee refuses, the pawnor can initiate legal proceedings for recovery and damages.

Management Notes

Rights and Duties of indemnifier

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Under Section 124 of the Indian Contract Act, 1872, a contract of indemnity involves a promise by one party (indemnifier) to compensate the other (indemnified) for loss. The indemnifier assumes responsibility in case of certain events that cause damage or loss to the indemnified.

Rights of the Indemnifier:

  • Right to Control the Defence

When the indemnified faces a legal suit or proceedings, the indemnifier has the right to control the defence. This includes appointing lawyers, making strategic decisions, or choosing whether to settle the dispute. This right ensures that the indemnifier, who is ultimately liable to pay, can avoid unnecessary or inflated claims and control litigation expenses to protect their financial interest.

  • Right to Access Legal Proceedings

The indemnifier is entitled to receive full information about legal proceedings, facts, and circumstances involving the indemnified. This includes the right to inspect legal documents, monitor case status, and be informed of actions taken. This access allows the indemnifier to assess liability, ensure transparency, and possibly intervene in a timely manner to limit loss or offer reasonable settlements to mitigate financial damage.

  • Right to Subrogation

Once the indemnifier pays for the loss or damages on behalf of the indemnified, he attains the right of subrogation. This means the indemnifier steps into the shoes of the indemnified and can recover the amount from third parties responsible for the loss. Subrogation helps the indemnifier claim legal redress, damages, or refunds and prevents unjust enrichment of the indemnified.

  • Right to Proof of Loss

The indemnifier has the right to demand credible proof or evidence of the loss before compensating the indemnified. This ensures that the indemnifier is not held liable for false, exaggerated, or fraudulent claims. The indemnified must demonstrate that the loss falls within the agreed terms of indemnity. This right is a protective measure to prevent misuse of indemnity arrangements.

  • Right to Be Informed of Settlements

If the indemnified chooses to settle a claim or dispute without court intervention, the indemnifier has the right to be informed beforehand. Since the indemnifier may be responsible for the settlement amount, prior knowledge and consent help them evaluate the fairness of the settlement. This prevents the indemnified from entering unfavorable or excessive settlements without the indemnifier’s approval.

  • Right to Reimbursement on Misuse

If the indemnifier pays for a loss based on false information or fraud by the indemnified, he retains the right to recover that amount. This right protects the indemnifier from being financially liable for dishonest conduct by the other party. Courts uphold this right to ensure indemnity is used only in good faith and within the legal scope of the original contract.

  • Right to Define Scope of Indemnity

The indemnifier has the right to specify the extent, conditions, and limitations of indemnity at the time of entering the contract. This means the indemnifier can include clauses to exclude certain types of losses (like indirect damages, penalties, or third-party actions) or set a financial cap. Clearly defining scope protects the indemnifier from open-ended or unlimited liability in the future.

Duties of the Indemnifier

  • Duty to Compensate for Actual Loss

The primary duty of the indemnifier is to compensate the indemnified for any actual loss or damage suffered due to the acts covered under the contract. This includes financial loss, legal costs, or damages awarded by the court. The indemnifier is legally bound to fulfill this duty once the indemnified proves that the loss falls under the indemnity clause.

  • Duty to Act in Good Faith

The indemnifier must act honestly and in good faith while discharging obligations under the contract. This includes cooperating with the indemnified, not withholding critical information, and not taking unfair advantage of the indemnity arrangement. Good faith is fundamental to all contracts, and its breach may result in loss of trust or legal consequences.

  • Duty to Honour Terms of Contract

The indemnifier has a legal obligation to perform according to the specific terms agreed in the contract of indemnity. This includes honoring the agreed limit of liability, covering specified events, and respecting timelines. Failure to perform as per the contract may amount to breach, making the indemnifier liable for damages or penalties.

  • Duty to Pay Reasonable Legal Costs

When indemnity covers legal actions, the indemnifier must bear reasonable costs of litigation, including lawyer’s fees and court charges, if these are incurred in good faith. The indemnified should not suffer additional legal burden when acting within the terms of the contract. Courts may enforce this duty even if the indemnity amount does not explicitly mention legal costs.

  • Duty Not to Interfere Unreasonably

Although the indemnifier may have the right to control proceedings, they must not interfere unreasonably or act in a way that harms the indemnified’s legal interests. For example, pressuring the indemnified to accept an unfair settlement may be considered a breach of duty. The indemnifier must balance control with the indemnified’s rights and interests.

  • Duty to Indemnify Promptly

It is the indemnifier’s duty to compensate the indemnified within a reasonable time after the loss has occurred and been substantiated. Unnecessary delay in payment can lead to financial hardship for the indemnified and may invite legal action or interest on delayed compensation. Prompt action is seen as a sign of good faith and professionalism.

  • Duty to Uphold Confidentiality

In situations where indemnity is linked to sensitive information, such as in professional services or commercial contracts, the indemnifier must maintain confidentiality. Sharing or misusing such information may not only breach the contract but also legal provisions under privacy or trade secret laws. Upholding confidentiality protects the integrity of the business or relationship.

Management Notes

Director General of Employment and Training

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The organization primarily looks after the operation of employment exchanges, industrial training institutes, vocational guidance programme and some other institutions. The activities of the directorate are essentially governed by the policies, standards and procedures set by the central directorate general, employment and training. Other activities of the organization include employment market information, vocational rehabilitation centers, and training of handicapped groups such as women and physically handicapped. The training wing of the department also looks after the implementation of the apprentices act, 1961. Generally, the directorate functions independently of the organizing of labour commissioner.

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