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CA IPCC : Question Paper (with Answers) - BUSINESS LAWS, ETHICS & COMMUNICATION Nov 2013

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DISCLAIMER The Suggested Answers hosted in the website do not constitute the basis for evaluation of the students answers in the examination. The answers are prepared by the Faculty of the Board of Studies with a view to assist the students in their education. While due care is taken in preparation of the answers, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not in anyway responsible for the correctness or otherwise of the answers published herein. The Institute of Chartered Accountants of India PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. Question 1 (a) X agreed to become an assistant for 5 years to Y who was a doctor practicing at Chennai. It was also agreed that during the term of agreement X will not practice on his own account in Chennai. At the end of one year, X left the assistantship of Y and began to practice on his own account. Referring to the provisions of the Indian Contract Act, 1872, decide whether X could be restrained from doing so? (5 Marks) (b) What is meant by Minimum subscription ? State the provisions of the Companies Act, 1956 regarding the refund and deposit of minimum subscription. (c) State with reasons whether the following statements are correct or incorrect: (i) Promotion policies based on individual merits and not purely on the basis of seniority, is discriminatory. (2 Marks) (ii) Small ethical lapses do not result into unethical behavior. (3 Marks) (d) State the qualities which a sustainable innovation organization should possess. (5 Marks) Answer (a) According to the provisions of the Indian Contract Act, 1872, as contained in Section 27 any agreement through which a person is restrained from exercising a lawful profession or trade/business/ is void. But an agreement of service by which a person binds himself during the term of the agreement not to take service with anyone else directly or indirectly to promote any business in direct competition with that of his employer is not in restraint of trade. In such a situation the agreement is valid. According to the given facts, X agreed not to practice on his own account during the term (5 years) of agreement. After one year, X left Y and began to practice on his own account. Therefore, as per the above provisions, X can be restrained by an injunction from practicing on his own account in Chennai. (b) As per the provisions of the Companies Act, 1956, minimum subscription is the amount as stated in the prospectus, which in the opinion of directors must be raised by the issue of share which are offered to the public for subscription. Section 69(3) of the Companies Act, 1956 provides the amount payable on application on each share shall not be less than 5% of the nominal amount of share capital and Part I of Schedule II to the Companies Act stipulates that a declaration should be made in the The Institute of Chartered Accountants of India 26 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 prospectus that if the company does not receive the minimum subscription of 90% within 90 days from the closing of the issue, the company must refund the amount. All moneys received from the applicants for shares shall be deposited and kept deposited in a Scheduled Bank : (1) Until the certificate to commence business is obtained under Section 149; or (2) Where such certificate has already been obtained, until the entire amount payable on application for shares in respect of the minimum subscription has been received by the company and where such amount has not been received by the company within the time on the expiry of 120 days (after the first issue of prospectus), all the moneys received from the applicants for shares are required to be repaid without interest. And if such money is not repaid within 130 days (after the issue of prospectus), the directors, jointly and severally, shall be liable to repay the amount with interest @ d6% p.a. from the expiry of 130 days. (c) (i) INCORRECT: Discrimination is action based on prejudice resulting in unfair treatment of people. To discriminate socially is to make a distinction between people on the basis of class or category without regard to individual merit. Examples of such discrimination include racial, religious or gender-based discrimination. Distinctions between people which are based just on individual merit (such as personal achievements, skill or ability) are generally not considered socially discriminatory. Therefore, seniority alone cannot be the deciding factor in the promotion, if the senior person is not fit for the job. (ii) INCORRECT : It is a known fact that most of the compromises we make in the start are small however, these lead us to large problems. Therefore, Companies need to develop an environment where small ethical lapse are taken seriously so that these do not repeated in future, otherwise toleration of such small lapses could lead to larger problems. Thus ignoring small unethical issues may result into unethical behaviour. (d) A sustainable innovation organisation should have: (i) Vision and strategy for innovation. (ii) Culture supporting innovation (iii) Processes, practices and systems supporting innovation (iv) Top management team leading to innovation. (v) Effective cross-financial teams. (vi) Empowered employees driving innovation. (vii) Finding the right balance between bureaucracy and chaos. The Institute of Chartered Accountants of India PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 27 Question 2 (a) (i) An employee was drawing a salary of Rs. 9,000 per month. He joined his service on January 22nd, 2013 and remained absent from February 10th, 2013 till April 7th, 2013 due to temporary disablement caused by an accident arising out of an in due course of his employment, Examine with reference to the Payment of Bonus Act, 1965, whether he is eligible for bonus for the year 2012-2013. (4 Marks) (ii) Mr. X was serving in Popular Company Limited. After serving for four years X met with an accident and became permanently disabled. X applied to the company for the payment of gratuity. The company refused to pay the gratuity on the ground that X has served only for four years. Decide, whether the contention of the company is valid? (4 Marks) (b) What is meant by Corporate Social Responsibility (CSR)? How corporate social responsibility helps in enhancing the brand image and reputation of a business organization? (4 Marks) (c) State the major advantages of formal communication (4 Marks) Answer (a) (i) In accordance with the provisions of the Payment of Bonus Act, 1965, as contained in Section 2(13), read with Sec. 8 and Sec. 14, every employee of an establishment covered under the Act is entitled to bonus from his employer in an accounting year provided he has worked in that establishment for not less than 30 working days in the year on a salary of less than Rs. 10,000 per month. Under Section 14 of the Act, the days when an employee has been absent due to temporary disablement caused by an accident arising out of and in the course of his employment will be included in calculating the total working days for the purpose of payment of bonus. In the instant case, the salary is falling within the limit as prescribed under the Act. His accident-leave- period shall also be treated as working days for the purpose. Therefore, in the given case since the salary is falling within the limit (i.e. not exceeding Rs. 10,000 per month), the employee is eligible for bonus for the year 2012-2013. The leave period will be treated as working days (i.e. more than 30 working days). Ref: Section 2(13) read with Sec. 8 and Sec. 14 of the Payment of Bonus Act, 1965. (ii) In accordance with the provisions of the Payment of Gratuity Act, 1972, as contained in Section 4(1), Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than 5 years, on his superannuation, or on his retirement or resignation, or on his death or disablement due to accident or disease. The condition of the completion of 5 years continuous service is not essential in case of the termination of employment of any employee due to death or disablement. Disablement means such The Institute of Chartered Accountants of India 28 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 disablement as incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement. Applying the above provisions in the given case, the condition of the completion of 5 years continuous service is not essential and therefore, the contention of company is not valid. X, is therefore, entitled to claim gratuity in the given case. (b) Corporate Social Responsibility (CSR) : CSR is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as local community and society at large. Social responsibility becomes an integral part of the wealth creation process- which if managed properly should enhance the competitiveness of business and maximize the value of wealth creation to society. CSR enhancing Brand Image and Reputation of business organization: CSR helps in enhancing the brand image and reputation because customers are attracted towards brands and companies with good reputations. A company considered socially responsible can benefit both from its enhanced reputation with the public as well as its reputation within the business community, increasing a company s ability to attract capital and trading partners. Proactive CSR Practices would lead to a favourable public image resulting in various positive outcomes like consumer and retailer loyalty, easier acceptance of new products and services, market access and preferential allocation of investment funds. (c) FORMAL COMMUYNCATION : A formal communication is a communication which flows through prescribed channels or hierarchy which all the organizational members communicating with one another are obliged to follow: ADVANTAGES OF FORMAL COMMUNICATION: (i) The formal channels account for most of the effectiveness of communication. Great care has to be taken in sending across any letter or report through the proper formal channel. (ii) Formal channels cover an ever-widening distance as organizations grow. Thorough these , it is easier to reach out to the branches of an organization spread far and wide. (iii) The formal channels, because of their tendency to filter information, keep the higher level managers from getting bogged down. (iv) Formal channels of communication consolidate the organization and satisfy the people in managerial position. Question 3 (a) When a contract may be discharged under the provisions of Indian Contract Act, 1872. Explain in detail. (8 Marks) The Institute of Chartered Accountants of India PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 29 (b) The principle of integrity is a fundamental principle relating to ethics for all accounting and finance professionals. Explain. (4 Marks) (c) Describe the main characteristics of Groups in a business organisation. (4 Marks) Answer (a) DISCHARGE OF A CONTRACT A contract under the provisions of the Indian Contract Act, 1872 may be discharged in any of the following ways : (1) DISCHARGE BY PERFORMANCE: Discharge by performance will take place when there is : (i) Actual performance (parties fulfilling obligations within time and in the manner prescribed), or (ii) Attempted performance (promisor offers to perform but promise refuses to accept it). This is known as tender. (2) DISCHARGE BY MUTUAL AGREEMENT : Discharge also takes place where there is substitution (novation), rescission, alteration and remission. In all these cases old contract need not be performed. A situation of (3) DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE : impossibility may have existed at the time of entering into the contract or it may have transpired subsequently (also known as supervening impossibility). Situations are destruction of the subject matter, incapacity, declaration of war, etc. (4) DISCHARGE BY LAPSE OF TIME : Performance of contract has to be done within certain prescribed time. In other words it should be performed before it is barred by law of limitation. In such a case there is no remedy for the promise. For example where the debt is barred by law of limitation. (5) DISCHARFGE BY OPERATION OF LAW: Where the promisor dies or goes insolvent there is a discharge of contract by operation of law. (6) DISCHARGE BY BREACH OF CONTRACT : Where there is a default by one party from performing his part of contract on due date then there is breach of contract. Breach of contract can be actual breach or anticipatory breach. Where a person repudiates a contract before the stipulated due date, it is anticipatory breach. (7) DISCHARGE BY REMISSION OR SATISFACTION: A promisee may remit the performance of the promise by the promisor. Here there is a discharge. Similarly the promise may accept some other satisfaction. Then again there is a discharge on the ground of accord and satisfaction. (8) Under the provisions of the Indian Contract Act, 1872, as contained in Section 67, when a promise neglects or refuses to afford the promisor reasonable facilities or opportunities for performance, promisor is excused by such neglect or refusal. The Institute of Chartered Accountants of India 30 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (b) The principle of integrity calls upon all accounting and finance professionals to adhere to honesty and state-forwardness while discharging their respective professional duties. The integrity principles calls upon the professionals to fulfil the follow acts : (i) Avoid being involved in activities which would impair the goodwill of the organization. (ii) Communicate adverse as well as favourable information with these concerned. (iii) Refuse any gift or favour which could influence action taken or to be taken. (iv) Refuse to get involved in any activity which would adversely affect the achievements of an organization s objectives. (v) Avoid conflicts and advise related parties on apparent conflicts which could arise in the future. (c) Following are the features of Group in an organization : (1) Group goals- every group establishes its own group goals, which provide motivation for their existence. (2) Group structure- is based on the roles to be performed and member positions. (3) Group Pattern of communication- is the pattern of message flow in a group. (4) Group norms- are the informed rules of interaction in a group. (5) Group climate- is the emotional atmosphere of a group based on : (i) Bonding and trust among members. (ii) Participating spirit (iii) Openness (iv) High performance goals. Question 4 (a) Whether a company can buy-back its own shares? Discuss the legal provisions as regards to the conditions for buy-back contained in the Companies Act, 1956. (8 Marks) (b) Describe the seven social sins listed by Mahatma Gandhi. (4 Marks) (c) The statutory meeting of ABC Limited was held on 20th January, 2012 at the registered office at New Delhi. Draft the minutes of the statutory meeting of the shareholders of the company. (4 Marks) Answer (a) The provisions of the Companies Act, 1956 provide for a company to purchase its own shares or other specified securities subject to certain conditions and regulations. The Institute of Chartered Accountants of India PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 31 CONDITIONS FOR BUY-BACK OF SHARES: The company shall not purchase its own shares or other specified securities unless : 1. The buy-back is authorized by its articles. 2. A special resolution, authorising the buy-back has been passed in general meeting of the Company, except where the buy-back is or less than 10% of the total equity paid-up capital and free reserves of the company; and where such buy-back has been authorised by the board by resolution at its meeting; 3. The buy-back is less than 25% of the total paid-up capital and free reserves of the company, provided that the buy-back of equity shares in any financial year shall not exceed 25% of its paid-up equity capital in that financial year. 4. The ratio of the debt owned by the company is not more than twice the capital and free reserves after such buy-back. Provided that the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies. 5. All the shares of other specified securities for buy-back are fully paid-up. 6. The buy-back of the shares or other specified securities listed on any recognized stock exchange in accordance with the Regulation made by the SEBI in this behalf; 7. The buy-back in respect of shares or other specified securities other than those specified in clause (1) is in accordance with Guidelines as may be prescribed. (Sections 77A(2) and 77A(6): Companies Act, 1956). 8. Every buy-back shall be completed within 12 months from the date of passing the special resolution or a resolution passed by the Board. (b) Mahatma Gandhi, father of India, promoted non-violence, justice and harmony between people of all paths, satyagrah Gandhiji s approach to conflict was to hold firmly to truth. He stressed that people follow ethical principles and listed following seven social sins as below : (i) Politics without principles- deals with the political field. (ii) Wealth without work- deals with the sphere of Economics. (iii) Commerce without morality- related to ides of trusteeship existing between businessman and the society. (iv) Knowledge without character- deals with knowledge/education leading to development of the individual and his character. (v) Pleasure without conscience- emphasized on conscience saying that pleasure without conscience is a sin. (vi) Science without humanity- science without the thought of the welfare of humanity is a sin. The Institute of Chartered Accountants of India 32 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (vii) Worship without sacrifice- worship has no value without sacrifice, it is a sin to worship without sacrifice.. (c) MINUTES OF THE STATUTORY MEETING : Minutes of the proceedings of the statutory meeting ABC Limited held on 20 th January,2012 at 11.00 A.M. at the Registered Office of the company at New Delhi. Members present were : MR. A CHAIRMAN MR. B DIRECTOR MR. C DIRECTOR MR. D DIRECTOR MR. E SECRETARY AND 120 MEMBERS AND 30 PROXIES. The Secretary read the notice convening the meeting. The Chairman welcomed the members and reviewed the activities of the company since its incorporation. The Chairman informed the members that a list of members of the company has been placed on the table for inspection of members. With the permission of the members, the Chairman read the Statutory Report. It was moved that the Statutory Report sent to members with the notice of the meeting be approved. Accordingly, it was resolved that the Statutory Report be and is hereby approved. All the pre-incorporation and provisional contracts were approved by the members of the company. The meeting was ended with a vote of thanks by the members and Chairman declared the meeting closed. Date Secretary Chairman Question 5 (a) State the circumstances on the basis of which a banker can dishonor a cheque under the provisions of Negotiable Instruments Act, 1881. (8 Marks) (b) Explain the meaning of Shelf Prospectus ,. State the law relating to Shelf Prospectus contained in Companies (Amendment) Act, 2000. (4 Marks) (c) Describe the parameters of Competition Law as contained in Competition Act, 2002. The Institute of Chartered Accountants of India PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 33 (4 Marks) Answer (a) DISHONOUR OF CHEQUE- GROUNDS- A banker will be justified or bound to dishonour a cheque in the following cases , viz. : 1. If a cheque is undated . 2. If the cheque is stale, 3. If the instrument is inchoate or not free from reasonable doubt. 4. If the cheque is post-dated and presented for payment before its ostensible date. 5. If the customer s funds in the banker s hands are not properly applicable to the payment of cheque drawn by the former. 6. If the customer has credit with one branch of a bank and he draws a cheque upon another branch of the same bank in which either he has account or his account is overdrawn. 7. If the bankers receive notice of customer s insolvency or lunacy. (i) If the customer countermands the payment of cheque for the banker s duly and authority to pay a cheque ceases. (ii) If a garnishee or other legal order from the Court attaching or otherwise dealing with the money in the hand of the banker, is served on the banker. (iii) If the authority of the banker to honour a cheque of his customer is undermined by the notice of the latter s death. (iv) If notice in respect of closure of the account is served by either party on the other. (v) If it contains material alterations, irregular signature or irregular endorsement. (b) SHELF PROSPECTUS: According to Section 60-A as inserted by the Companies (Amendment) Act, 2000 Shelf Prospectus means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus. The main provisions relating to shelf prospectus are : 1. Any public financial institution, a public sector bank or scheduled bank whose main object is financing, shall file a shelf prospectus with the Registrar of companies. 2. A company filing a shelf prospectus with the Registrar shall not be required to file prospectus afresh at every stage of offer of securities by it within a period of validity of such shelf prospectus. It shall be required to file an information memorandum. On all material facts relating to new charges created, changes in the financial position as have occurred between the first offer of securities, previous offer of The Institute of Chartered Accountants of India 34 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 securities and the succeeding offer of securities within the time prescribed by the Central Government prior to making of a second or subsequent offer of securities under the shelf prospectus. 3. An information memorandum shall be issued to the public along with shelf prospectus filed at the stage of the first offer of securities and such prospectus shall be valid for a period of one year from the date of opening of the first issue of securities under that prospectus. 4. Where an update of information memorandum is filed every time an offer of securities is made, such memorandum together with the shelf prospectus shall constitute the prospectus. (c) PARAMETERS UNDER COMPETITION LAW IN INDIA: 1. PROHIBITION OF CERTAIN AGREEMENTS, which are considered to be anticompetitive in nature. Such agreements namely tie in arrangements, exclusive dealings (supply and distribution), refusal to deal and resale price maintenance shall be presumed as anti-competitive if they cause or likely to cause an appreciable adverse effect on competition within India. 2. ABUSE OF DOMINANT POSITION by imposing unfair or discriminatory conditions or limiting and restricting production of goods or service or indulging in practices resulting in denial of market excess or through in any other mode. 3. REGULATION OF COMBINATIONS: The Act regulates the combinations which cause or likely to cause an appreciable adverse affect on competition within the relevant market in India. Such combinations are considered void under the Act. Question 6 (a) What is the importance of registered office of a company? State the procedure for shifting the registered office of a company from one State to another State contained in the Companies Act, 1956. (8 Marks) (b) Your company has achieved extraordinary performance during the year 2012-13 in the field of Healthcare by winning an export promotion award for exceeding the target of exports by 20%, launched 10 new life saving drugs and increases net profit by 30%. Draft a Press Release incorporating all these details. (4 Marks) (c) State whether the following statements are correct or incorrect: (i) (4 Marks) Agency cannot be created without consideration. (ii) In contract of guarantee there are three contracts. (iii) Memorandum of Association is the Charter of the company. (iv) A special resolution is one to pass, where the votes cast in favour must be twice the votes cast against it. The Institute of Chartered Accountants of India PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 35 Answer (a) IMPORTANCE OF REGISTERED OFFICE OF A COMPANY : 1. Every company must have registered office where : (a) Necessary documents may be served upon or deposited, (b) Notices, letters, etc. may be issued, (c) Inspection may be had, and (d) Communication may be made. The domicile and the nationality of a company is determined by the place of its registered office. This is also important for determining the jurisdiction of the Court. 2. A company must have a registered office as from the day on which it commences business, or as from the 30th day after the date of its incorporation whichever is earlier, 3. Notice of the situation of the registered office and of every change therein must be sent to the Registrar (otherwise than through a statement as to the address of the registered office in the annual report) within 30 days of the date of incorporation of the date of change. PROCEDURE FOR SHIFTING THE REGISTERED OFFICE FROM ONE STATE TO ANOTHER STATE:(Section 17: Companies Act, 1956): A company may shift its registered office from one State to another State by following the provisions of the Companies Act, 1956, which are as follows: 1. Resolution of the Board of Directors- this is the first step towards shifting of registered office from one State to another State. 2. The Company may by a special resolution, alter the provisions of its memorandum so as to shift the place of its registered office from one state to another state. 3. The change needs confirmation of the Company Law Board- The change shall not take effect unless and until it is confirmed by the CLB on a petition filed by the company. 4. Notice to affected parties: Before confirming the change, the CLB shall ensure that sufficient notice has been given to every person whose interest will be affected by the change and that the consent of creditors of the company has been obtained or their debts or claims have been discharged or secured. 5. The company cannot do such change/shifting of registered office unless the Regional Director confirms it. 6. To obtain confirmation, the company has to apply in the prescribed form. The Institute of Chartered Accountants of India 36 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 7. The confirmation must be communicated to the company within 4 weeks from the date of receipt of the application. 8. The CLB shall cause notice of the petition for confirmation of the change to be served on the Registrar. The Registrar shall also be given a reasonable opportunity to appear before the CLB and state his objections and suggestions, if any, with respect to the confirmation of the alteration. Certified copy of the confirmation along with the attested copy of the Memorandum of Association must be filed with the ROC for registration within 3 months from the date of confirmation. 9. Within one month of filing, the ROC shall certify registration, which shall be the conclusive evidence that all the requirements with respect to alteration and confirmation have been complied with. (b) PRESS RELEASE : HEALTHCARE PHARMACEUTICAL INDUSTRIED LTD. ANOTHER YEAR OF STARLING PERFORMANCE Press Note......./2013. Dated......... Place......... Healthcare Pharmaceutical Industries Ltd., the most trusted brand, turned out another startling performance during the year 2012-2013 exceeding all its previous achievements and touching new heights of growth. - The export of the company registered a healthy growth of 22% over the year and won export promotion award. previous - It launched 10 new life saving drugs including 2 very effective drugs against heart failure and liver disorders, developed by its own R & D Department. - The net profit of the company went up by 30%. The company is now looking forward to the year 2013-14 for making new grounds and breaking all its previous records. Sd/- A.K. BAJAJ PUBLIC RELATIONS OFFICER. (c) (i) Incorrect. (ii) Correct. (iii) Correct. (iv) Incorrect. The Institute of Chartered Accountants of India PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 37 Question 7 Answer any four of the following (a) State the establishments which are exempted from the operations of Employees Provident Funds and Miscellaneous Provisions Act, 1952. (4 Marks) (b) Distinguish between pre-incorporation contracts and provisional-contracts under the Companies Act, 1956. (4 Marks) (c) A, a shareholder, of a company, appointed B, as a proxy, to attend the general meeting of the shareholders. Later on, a, himself, attended the meeting and voted on a resolution. Decide, whether A can do So? (4 Marks) (d) Communication is the life blood of a business organization. In this reference state the factors which have increased the importance of communication in the present business world. (4 Marks) (e) Describe any four benefits which may be obtained by paying attention to business ethics.(4 Marks) Answer (a) The EPF & MP Act, 1952 does not apply to : (Sec. 16 ) 1. Any establishment registered under Co-operative Societies Act, 1912, or under any other law relating to co-operative societies in any state, employing less than 50 persons and working without the aid of power; or 2. Any other establishment belonging to or under the control of the Central Government or a State Government and whose employees are entitled to the benefit of contributory provident fund or old age pension in accordance with any scheme or rule framed by the Central Government or the Statement Government governing such benefits; or 3. Any other establishment set up under any Central, Provincial or State Act and whose employees are entitled to the benefits of contributory provident fund or old age pension in accordance with any scheme or rule framed under the Act governing such benefits; or 4. Any other establishment exempted by the Central Government through notification in the Official Gazette after taking into consideration the financial position of the establishment or other circumstances of the case, and any newly set up establishment, until the expiry of 3 years from the date on which the establishment is, or has been set up. (b) Following are the points are distinction between Pre-incorporation contracts and Provisional-contracts: (i) MEANING: Pre-incorporation contracts are those contracts, which are entered into, by the persons proposing to float a company for prospective company before it has The Institute of Chartered Accountants of India 38 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 come into existence. Contracts which are entered into by a company after obtaining the certificate of incorporation but before getting the certificate to commence business are known as provisional contracts. (ii) LIABILITIES: The company which is not in existence, is not bound by the preincorporation contracts unless the company adopts the same after incorporation. There can be no ratification in case of pre-incorporation contracts. Provisional contracts are the contracts entered into by a company after its incorporation and before the company is entitled to commence business. These contracts shall be binding upon the company from the date on which the company is entitled to commence business. (iii) ENFORCEMENT: Contracts entered into by a company after its incorporation and before it is entitled to commence business are provisional only and are not binding on the company until the trading certificate is issued. (Sec. 149(4): Companies Act, 1956. The expressional provisional denotes that the contract should be read subject to an implied term that it shall not be binding until the company becomes entitled to commence business and has obtained a certificate to commence business. Consequently, should the company go into liquidation without commencing business, such contracts cannot be enforced at all. (c) A proxy is a person, being a representative of a shareholder, is authorised to attend the meetings of the shareholder of a company. Such proxy is entitled to vote. But as per the provisions of the Companies Act, 1956, a shareholder who has appointed a proxy, has paramount right to revoke the proxy s authority by attending and voting himself at the meeting. The shareholder s attending the meeting and voting thereat leads to revocation of the proxy. Therefore, in the present case although A has appointed B as a proxy to attend the meeting of the shareholders of a company and vote there at, he (A) has right to revoke the proxy by attending himself the meeting of the shareholders and may vote thereat on a resolution. Therefore, A is very much within his right to revoke the proxy and caste vote in the meeting. (d) Undoubtedly, communication is so fundamental that without it no organisation can exist and function effectively towards achieving its objects. It helps to bind the employees together, enabling them to react to an influence each other. No manager can effectively work unless he is able to communicate. It is, therefore, apt to call communication the life blood of an organisation . Following factors have increased its importance : 1. Growth in the size and multiple locations of organization: Most of the organisation are growing larger and larger in size. The people working in these organisation are spread over in different countries. Keeping in touch, sending directions across and The Institute of Chartered Accountants of India PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 39 getting feedback is possible only when communication lines are kept working effectively. 2. Growth of trade unions: Over the last so many decades trade unions are growing and becoming strong. No management can be successful without taking the trade unions into confidence. Effective communication will create relationship between management and the workers. 3. Growing importance of human relations: Workers in an organisation are not like a machine. They have their hopes and aspirations. Communication helps in integration and in maintaining human being relationships. This may only be achieved through effective communication. 4. Public relations: Every organisation has social responsibility, towards customers, Government, suppliers and the public at large. Communication with them is only way an organisation can project a positive image itself. 5. Advancement in behavioural science: Modern management is deeply influenced by existing discoveries made in behavioural science like psychology, sociology etc. All these throw light on subtle aspects of human nature and help in developing a positive attitude towards life and building up meaningful relationships. This is only possible through communication. 6. Technological advancement: The world is changing fast owing to scientific and technological advancements. These affect deeply to the methods of work and the composition of groups. In such situation proper communication between superiors and subordinates becomes necessary. (e) 1. IMPROVED SOCIETY: In the recent past ruthless exploitation of children and workers, trust control over the market, termination of employees based on personalities and other factors had affected society and a demand arose to place a high value on ethics, fairness and equal rights resulting in framing of anti-trust laws, establishment of governmental agencies and recognition of labour unions. 2. EASIER CHANGE MANAGEMENT: Attention to business ethics is also critical during times of fundamental change. The apparent dilemma may be whether to be non profit or for profit. In such situations often there is no clear moral compass to guide leaders about what is right or wrong. Continuing attention to ethics in the workplace sensitizes leaders and staff for maintaining consistency in their actions. 3. STRONG TEAM WORK AND GREATER PRODUCTIVITY: Strong team work and greater productivity : Ongoing attention and dialogues regarding ethical values in the workplace builds openness, integrity and a sense of community which leads to, among the employees, a strong alignment between their values and those of the organization resulting in strong motivation and better performance. The Institute of Chartered Accountants of India 40 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 4. ENHANCED EMPLOYEE GROWTH: Attention to ethics in the workplace helps employees face the reality- both good and bad in the organization and gain the confidence of dealing with complex work situations. 5. ETHICAL PROGRAMMES HELP GUARANTEE THAT PERSONNEL POLICIES ARE LEGAL: E A major objective of personnel policies is to ensure ethical treatment of employees. In matters of hiring, evaluating, disciplining, firing etc. An employer can be sued for breach of contract for failure to comply with any promise. The gap between corporate culture and actual practice has significant legal and ethical implications. Attention to ethics ensure highly ethical policies and procedure in the work place. Ethics management programmes are useful in managing diversity. Such programmes require the recognition and application of diverse values and perspectives which are the basis of a sound ethics management programme. Most organizations feel that the cost of mechanisms to ensure ethical programme may be more helpful in minimizing the cost of litigations. 6. Ethical programmes help to detect ethical issues and violations early, so that criminal acts of omission may be avoided. 7. Ethical values help to manage values associated with quality management strategic planning and diversity management. 8. ETHICS HELP TO PROMOTE A STRONG PUBLIC IMAGE: An organization that pays attention to its ethics can portray a strong and positive image to the public. People see such organizations as valuing people more than profit and striving to operate with the integrity and honour. The Institute of Chartered Accountants of India

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