Introduction to Legalities in Business PDF

Introduction to Legalities in Business “Let's Law-nch into the World of Company Law!” Learning Objectives Reflect on the meaning of law and business Analyse concept of legal person and describe body of corporates Evaluate why a separate legal entity is needed Explore Corpo...

Introduction to Legalities in Business “Let's Law-nch into the World of Company Law!” Learning Objectives Reflect on the meaning of law and business Analyse concept of legal person and describe body of corporates Evaluate why a separate legal entity is needed Explore Corporate Law and Governance Discuss cases of Corporate Governance Failures Checkpoints Introduction to Law and Legal Person Understanding Corporate Law & Governance Cases of Corporate Governance Failures What is Law? A system of principles and rules of human conduct, being the aggregate of those commandments and principles which are either prescribed or recognized by the governing power in an organized jural society as its will in relation to the conduct of the members of such society, and which it undertakes to maintain and sanction and to use as the criteria of the actions of such members. “Law” is a solemn expression of legislative will. It orders and permits and forbids. It announces rewards and punishments. Its provisions generally relate not to solitary or singular cases, but to what passes in the ordinary course of affairs What is a Business? ALL THESE BUSINESS TRANSACTIONS Involves transactions, such as INVOLVE Opening bank account GIVE AND TAKE Purchase or rent of property Hiring of staff Taking services from vendors like raw material etc Sale of services or goods to customers Receiving money from customers What is a Business? Something is given- Duty- Duty to deliver good/service Something is received- Right- Right to receive money These rights can be exercised or duties can be fulfilled only be real persons. A tree, table planet, place or anything other than a person cannot exercise the right nor can fulfil duties; Thus, business can be carried out only by persons “Natural Person vs. Legal Person” Defining Legal Person A legal person, in the eyes of the law, is an entity that has certain legal rights and obligations, similar to a human being, but isn't necessarily a living person. Just like natural persons, a “Legal Person” also known as juristic person or artificial person, can do all activities related to business in their own name. It is the law which declares if a form of business can be a legal person or not. For the creation of a legal person, the concept of ‘Body Corporate’ was introduced in law. Key Features of Body Corporates Created under a specific law: In India, the Companies Act (for companies) or the Limited Liability Partnership Act (for LLPs) would govern their creation. Perpetual succession: The body corporate can continue to exist even if its members or owners change. Common seal: This acts as a signature for the entity, similar to how an individual might sign a document. Separate legal entity: The body corporate is distinct from its members/owners. This means the owners' personal assets are generally protected from the business's debts or lawsuits (limited liability). Can sue and be sued: The body corporate can take legal action against others or be sued itself. Can you think of real-world examples where you've encountered the concept of a legal person in action? Why do we need a Legal Person? Need for Legal Person Limited Liability This is a major benefit. When a business is a legal person separate from its owners, the owners' personal assets are generally shielded from liability for the business's debts or lawsuits. Imagine a bakery owner gets sued for a customer getting sick. If the bakery is a separate entity (like a corporation), the owner's house or car wouldn't be at risk, only the bakery's assets. Need for Legal Person Continuity A separate legal entity allows the business to continue operating even if ownership changes. Owners may sell their shares, retire, or even pass away. But the business itself can keep running under the same legal structure. Need for Legal Person Raising Capital Businesses as separate entities can raise capital by selling shares (corporations) or attracting investors (LLCs). This allows them to grow and expand beyond the owner's personal funds. Imagine needing a bigger oven for your bakery – a separate entity allows you to seek investment for the new equipment. Need for Legal Person Improved Credibility Operating as a separate legal entity can enhance a business's credibility and professionalism, especially when attracting investors or clients.  The Case of Airbnb - Understanding Legal Entities Airbnb - A Legal Entity In the Airbnb business model, who all are the parties involved in the business and its transactions? What are some potential challenges Airbnb might face as a business? How does Airbnb benefit from being a legal person, especially while navigating through legal business challenges?  Reflections! Airbnb (LLC), Hosts (Natural Persons or LLCs), Guests (Natural Persons) Limited Liability: A Safety Net for Airbnb's Owners Investment and Growth: Airbnb's LLC Advantage Operating Globally: Airbnb's Legal Entity Advantage Checkpoints Introduction to Law and Legal Person🗹 Understanding Corporate Law & Governance Cases of Corporate Governance Failures Corporate Law & Governance What is Corporate Law? Corporate Natural Person Law is- aAllbroad individuals term that covers the entire gamut of laws that are applicable to the Legal Person functioning - All of corporate legal entities entities. that are not individuals The main statute that governs the functioning of corporate entities is the Companies Act, 2013. The main regulator for corporate entities is the Ministry of Corporate Affairs. What is Corporate Governance? ANatural systemPerson - All of rules, individuals practices and processes; Legal Person - All legal entities that are not individuals Responsible for the direction and control of a company ; Involves the balancing of interests of the company’s external and internal stakeholders; All encompassing term that covers internal procedures as well as external disclosures. Importance of Corporate Governance Ensures Natural Person compliance - All with individuals applicable law; Ensures Legal Person transparency; - All legal entities that are not individuals Builds trust; Helps mitigate risk; Ensures protection of capital and investments; Ensures long-term financial viability; Prevents financial loss; Prevents fraud; Protects the interests of society/general public Principles of Corporate Governance Fairness Natural Person - All individuals Legal Person - All legal entities that are not individuals Transparency Risk Management Responsibility Accountability Checkpoints Introduction to Law and Legal Person🗹 🗹 Understanding Corporate Law & Governance Cases of Corporate Governance Failures Corporate Governance Failures Nirav Modi - Forged documents Byju’s - unethical accounting practices; leaking customer data Vijay Mallya - Overburdened with debt Satyam - fraudulent accounting practices BharatPe/Ashneer Grover - Fake invoices  Byju’s Case- Why did Byju’s go into Losses? Corporate Governance Failures at Byju’s Unethical Accounting Practices: Byju's encountered several difficulties, such as aggressive accounting methods, a lack of cash, and loan defaults. The business took out large loans from banks, private equity companies, and venture capitalists, among other lenders, but it was unable to produce enough cash flow to pay off its debts on schedule. It failed to repay a $300 million loan from the Singaporean firm Redwood Global Investments in 2021, and then it reneged on the conditions of a $500 million loan in 2022. Corporate Governance Failures at Byju’s Data Privacy Violations: Allegations surfaced regarding mishandling sensitive user information and breaching privacy regulations through aggressive data mining practices. This not only tarnished Byju's reputation but also triggered legal and regulatory repercussions. Corporate Governance Failures at Byju’s Auditor Resignation and Director Departures: Deloitte, Byju's auditor, resigned due to the startup's failure to provide financials for over a year. Additionally, independent directors representing investors and lenders relinquished their positions, signaling underlying governance issues. Understanding the Satyam Scam Satyam’s Corporate Governance Failures The Natural Person Satyam - All individuals Computer Services scandal was India's largest corporate fraud until 2010. Legal Person - All legal entities that are not individuals The founder and directors of India-based outsourcing company Satyam Computer Services, falsified the accounts, inflated the share price, and stole large sums from the company. Much of this was invested in property. The swindle was discovered in late 2008 when the Hyderabad property market collapsed, leaving a trail back to Satyam. The scandal was brought to light in 2009 when chairman Byrraju Ramalinga Raju confessed that the company's accounts had been falsified. Satyam’s Corporate Governance Failures Natural Person - All individuals Legal Person - All legal entities that are not individuals  Discussion Let’s look at another case and think! Case Study While growth at any cost seemed to be working for Taxi Co., issues started to emerge. NaturalAllegations Person - Allofindividuals tax evasion, bribery, payments that were Legal Person unaccounted - All legal for and entities that are not individuals unchecked expenditure were some of the main issues that plagued Taxi Co. Complaints from customers also started to pile up and Tracy found that every time one problem was solved, three more would emerge. Eventually, allegations of workplace harassment started to emerge as well. Case Study Growing suspicious, Taxi Co.’s investors conducted an investigation into the Natural Person - All individuals allegations and found that the company was also inflating its revenue while downplaying Legal Person its- expenses to show All legal entities a healthy that are not financial position. This was in addition individuals to the other allegations being made against the company. Taxi Co.’s investors were eyeing an IPO when these allegations emerged and realised that they needed to take immediate action to rectify the situation or all of their investment would be lost.  Discussion Reflections! What should Taxi Co.’s Investors do to rectify the situation? Rectifications for Legal Compliance 1. Internal Investigation: Conduct an internal investigation to confirm allegations and comply with legal requirements. Natural Person - All individuals 1. Transparency: Implement clear reporting systems to share financial information openly. Legal Person - All legal entities that are not individuals 1. Accountability: Remove individuals involved in wrongdoing, following legal procedures. 1. Financial Controls: Tighten financial oversight to prevent future mismanagement. 1. Communication: Be transparent with stakeholders about actions taken to regain trust. 1. Regulatory Compliance: Ensure compliance with laws and regulations governing operations. Checkpoints Introduction to Law and Legal Person🗹 🗹 Understanding Corporate Law & Governance Cases of Corporate Governance Failures 🗹 Thank you!