Legal Environment: Meaning, and Acts Influencing the Legal Environment of Business

What is Legal Environment in Business?

The legal environment in business is a code of conduct that defines the boundaries of business within a legal jurisdiction. The law has been meant to mean different things at different periods.

Acts Influencing the Legal Environment of Business

These are the following acts influencing the legal environment of business:

  1. Indian Contract Act, 1872
  2. Sale of Goods Act, 1930
  3. Indian Partnership Act, 1932
  4. Companies Act, 2013

Indian Contract Act, 1872

This act is applicable to entire India, except Jammu and Kashmir. This act ensures that the rights and duties arising out of a contract are honoured and that legal remedies are available to the parties bound by the contract. It defines a contract and an agreement, as follows:

Contract: An agreement between two or more persons/parties subject to certain terms and conditions for legal consideration.

Thus, Contract = Agreement + Enforceability

Example: ‘A’ offers to sell his house to ‘B’ for a specified amount. ‘B’ accepts to purchase the house. Here, ‘A’ offers an agreement. When ‘B’ accepts the offer, it becomes a contract.

Agreement: An offer that must satisfy the following three conditions:

  • There must be at least two parties.
  • There must be an offer (proposal) from one party to another.
  • There must be an acceptance from the other party/person.

Thus, Agreement = Offer + Acceptance

Sale of Goods Act, 1930

This act enforces the contracts relating to the sale of goods. It also applies to the entire India, except the State of Jammu and Kashmir. The contract for the sale of goods is subject to the law relating to the Indian Contract Act. Its features include as follows:

  • Transfer of ownership
  • Delivery of moveable goods
  • Rights and duties of both the buyers and the sellers
  • Measures against breach of contract
  • Terms and conditions under the contract for sale

To become effective a contract of sale, there must be a buyer and a seller. The buyer purchases or grees to purchase goods from the seller, who sells or agrees to sell them. Goods must be moveable or transferrable from the seller to the buyer. Transfer of immovable property is not regulated under this act.

Price is a necessary factor for all transactions of sale. If there is no price, then the transfer of goods is not a sale. The price normally means money, which can be paid fully in cash or partly paid/ partly promised to be paid in the future.

Indian Partnership Act, 1932

According to this act, a relationship between two or more individuals where they agree to split the profits of a business is called a partnership. The business may either be run by them directly or by one/more person(s) acting on their behalf. This act is also applicable to the whole of India, except Jammu and Kashmir.

The partners must be the age of majority as per the law, of sound mind and qualified for contracting. They can be an individual, firms, a Hindu Undivided Family (HUF), a company, or trustees. The maximum number of partners in a firm should be 20.

Features of Partnership

The essential features of partnership are as follows:

  1. Agreement: This defines the relationship between partners. If the only proprietor of a firm dies, then although his/her heirs inherit the firm, they do not become partners. This is because there is no agreement between them.

  2. Business: This may include every trade, occupation, or professions that are continued with a profit motive.

  3. Duties of a partner: A partner conducts the business of the firm in good faith, renders true accounts, indemnifies for loss caused due to fraud, indemnifies the firm for wilful neglect of a partner and conducts duties carried out by the contract.

  4. Rights of a partner: A partner can participate in the conduct and management of the business, express the viewpoints in business matters, access all the records and account books of the firm, share the profits, and earn interest on advance payments. In case he incurs any expenses or losses on behalf of the firm, then he has the right to be indemnified by the firm against that amount.

Companies Act, 2013

This act defines the incorporation, dissolution and running of companies in India. It was enforced on September 12, 2013 and includes a few amendments to the previous Companies Act, 1956. The new act has fewer sections 470 than the previous act 658. It empowers shareholders and focuses on corporate governance.

Features of Companies Act, 2013

The features of companies act, 2013 are as follows:

  1. Class action suits for shareholders: This is done to make shareholders and other stakeholders more informed about their rights.

  2. More power for shareholders: Now, approvals from shareholders are required for various key transactions.

  3. Women empowerment: At least one Director on the Board (for a specific class of companies) should be a woman.

  4. Corporate Social Responsibility (CSR): A certain class of companies must spend a specific amount of money each year on CSR activities.

  5. National Company Law Tribunal: The National Company Law Tribunal and the National Company Law Appellate Tribunal replace the Company Law Board and Board for Industrial and Financial Reconstruction.

  6. Fast track mergers: The procedure for mergers and acquisitions for a certain class of companies has been simplified and fast-tracked.

  7. Cross-border mergers: Now a foreign company can merge with an Indian company and vice versa with prior permission of the RBI.

  8. Prohibition on forward dealings and insider trading: Directors and key managers are forbidden from purchasing call and put options of shares of the company, if they have access to price-sensitive information.

  9. Increase in number of shareholders: The maximum number of shareholders in a private company is now 200 (from 50).

  10. One-Person Company (OPC): A new form of private company called one- person company can be formed under the new act. It may have only one director and one shareholder.

FAQ Related to Legal Environment

What is Legal Environment in Business?

The legal environment in business is a code of conduct that defines the boundaries of business within a legal jurisdiction

Which Acts Influencing the Legal Environment of Business?

These are the followings acts influencing the legal environment of business:
1. Indian Contract Act, 1872
2. Sale of Goods Act, 1930
3. Indian Partnership Act, 1932
4. Companies Act, 2013.

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