(1/3) Two’s Company, Three’s a Crowd - A Guide to Setting Up Your Own Company

Welcome to Broken Legalese, a blog that seeks to explain legal concepts of everyday relevance to people untrained in the law in as simple and straightforward a manner as possible. That’s the position of the law, minus unnecessary case names and avoidably complex words like “notwithstanding”, “encumbrance”, and “arbitrability”.

A couple of weeks ago, an acquaintance of mine from a non-law background came to me and told me that she was prepared to offer a very substantial sum of money to help set up a company that she wanted to start, but didn’t know how to. I wish I could tell you that my good conscience and sense of altruism prevailed, and that instead of taking her up on her very generous offer, I told her how to do it herself. I really wish I could. 

Instead, what prevailed was my borderline unhealthy desire to watch Netflix and stuff my face with junk food all day. As a result, I did not take her up on her offer. I also did not sit her down and tell her how to do it herself. This article may or may not be considered my atonement. 

It’s very, very easy to incorporate your own company. You can do it from the comfort of your own room, in fact! And no, you do NOT in fact need to engage the services of a lawyer/law student acquaintance to get it done either! Confused? Read on. 

Step 1: Understanding the terms involved

Just as with the previous posts, it’s critical to understand the terms that are involved in your brief foray into company law before you begin the process of setting up your own company.

1. Company: To put it simply, a company is a new legal entity that is created in order to run a business. A company is basically just another mode for you to do business aside from conducting that business in your own name. Among other reasons, it’s important to have a company of your own because of separate legal personality (which we’ll discuss shortly) and to simplify a lot of the filings you’d have to do otherwise. Think of running a business like travelling down a river. Sure, you can swim, but it’s so much easier if you have a boat. 
2. Separate Legal Personality: To better understand what exactly the term Separate Legal Personality means, let me give you an example. Let’s say you and your friend are walking down the road, when your friend suddenly gets into an argument with a passerby. Things escalate quicker than they should, and what started out as a mere shouting match has suddenly turned into a full on slug fest. You stay out of the fight, but your friend and the other person are at complete loggerheads, throwing punches up, down, left, right, and centre. Things get uglier, and the cops get involved. They can take your friend and the other person to the police station, but can they arrest you as well? Obviously they can’t, for the simple reason that it wasn’t you but someone else that got into the fight; in other words, your friend is a separate legal personality from you. How is this relevant for a company? Much like your friend, a company is a separate legal personality from you, so you as an individual are considered separate from the company - it’s debts, owables, obligations, and others are all its own, and not yours, even if you were the person who was involved in incurring them. This is super important for a company because in case your company doesn’t do well, creditors can’t come after your property to recover a loan they gave the company (there are rare exceptions to this, but that’s outside the scope of this article).
3. Memorandum of Association (MoA): A Memorandum of Association is the document that gives the name of the company, the number of shares the company has, its Directors (we’ll be looking at Directors also shortly), and other basic information about the company. For understanding purposes, you can think of the MoA as the birth certificate of the company.
4. Articles of Association (AoA): The Articles of Association of a company is the document that gives (among others) information about the functioning of the company, i.e., regulations that govern the operation of the company, definition of its purpose, as well as the procedure for appointment of directors. For understanding purposes, you can think of the AoA as the User Manual of the company.

Apart from these terms, we’ll also be looking at Directors, Promoters, Equity, and Preference Shares in context in the next part.

So just how does a company function?

Starting a company often requires more resources than are available with any single individual, which is why the money can’t always come from one person. The people who pool in money to form a company are called ‘investors’. ‘Promoters’ start the company. There are two main types of companies in terms of shareholding – private companies and public companies. Private companies are the ones where the shareholding is restricted and confined to certain individuals only, whereas public companies are ones where the shareholding is open to the general public. The Walt Disney Company (India) Private Limited is a good example of a private company, whereas Reliance Ltd. is an example of a public company. This is because while Disney shares aren’t tradable by the general public, the shares of Reliance can be held by anyone and actively traded – your friends, your teachers, the security guards in your school – there is literally no bar to who can trade in these shares (there are certain cases where people are barred from trading in the stock market, but we won’t be dealing with these.)

To better understand the functioning of a company, let’s assume I want to start a company to teach legal reasoning for CLAT, and call it StandAlone Educational Services. Because I intend to limit my company’s liability, I necessarily have to put the term ‘Ltd.’ at the end of my company’s name. My company is therefore incorporated as StandAlone Educational Services Ltd., and I am its promoter.

Now, starting a successful coaching institute involves a considerable investment – I’ll need premises, whiteboards, stationary, furniture, several employees, a marketing team, lawyers to get the permits and all, and a bunch of other running expenses. It’s very rare that someone actually has enough money to be able to afford this entire investment on their own, which is why the concept of shares was invested.

Each share is essentially a small fraction of the company. What I would do then is offer shares in my company to other people, by which they could own a fraction of the company. In return, they give me money, which I use to run the company and meet its expenses and (ultimately) turn a profit. I decide to divide my company into 1000 shares of Rs. 10 each. This means that people can purchase as many shares as they want, as long as they’re willing to pay me the price. Let’s now say you decide to buy 50 such shares, in the hopes that it’ll ultimately turn a healthy profit. You pay me Rs. 500, which I use to run the company. You, meanwhile, now own 50 out of 1000, or 0.5% of my company. The shares that you own are called Equity Shares, signifying that you own a part of the company. This could potentially yield high returns for you, if the company does well, but at the same time is a risky investment, because if the company doesn’t do well, you’d lose your money.

Because I’m not the sole owner of the company, the decisions of the company can’t be taken by me alone. Therefore, the shareholders of the company take part in meetings and decide company policy. They also form a Board of Directors who make most of the important decisions as to how the company is to be run and the policies and business strategies that it should adopt.

Let’s say you as an investor want to invest in my company, but you don’t want to have a part to play in the running of the company. You just want to invest money and turn a profit. In that case, you could also invest in what are called Preference Shares of the company - these are a safer investment than equity shares, the trade off being that since they do not have any linked voting rights in the company, they get paid an assured dividend in return for their investment.

Now that I’ve sold enough shares in my company to finance it, I start running my company. As time goes by, my company grows and grows, and becomes much bigger than the tiny little classroom I started out in. Because the company turns a healthy profit every year, the Board of Directors sanctions a certain portion of the profits to be given to the shareholders, since it IS their company after all. These profits that are given to the shareholders are called the ‘Dividend’ of the company.

With every year, my profits grow, as a result of which my dividends also increase steadily. People are now more willing to invest in my company, because they realize they could potentially gain huge profits from my company. As a result, there are a lot of people that want my shares, and only 1000 in the market. Basic economics tells us that as the demand for a particular thing goes up, unless supply also goes up proportionately, the prices will shoot up as well. Therefore, the shares in StandAlone – which once sold for Rs. 10 each – are now selling at Rs. 1000. This money, however, doesn’t reach the company itself. This transaction is merely a sale of the fraction of the company that the seller owned to the buyer in return for money. It’s not unlike how a wholesaler buys a product from the manufacturer at a certain price and sells it at a markup - none of the profits from any subsequent sale of the product make their way back to the manufacturer, but are independent transactions between third parties.

In order to keep this article at a readable length, this will be published in parts. This is part 1 of 3, and I’ll add the subsequent parts as and when time permit. In the meantime, feel free to write to me if you have any questions on the subject! :)

David, Goliath, and a Slingshot called COPRA – A Guide to Filing Consumer Cases in India

Welcome to Broken Legalese, a blog that seeks to explain legal concepts of everyday relevance to people untrained in the law in as simple and straightforward a manner as possible. That’s the position of the law, minus unnecessary case names and avoidably complex words like “notwithstanding”, “encumbrance”, and “arbitrability”.

We’ve all been there – hair-fall inducing frustration, unhelpful customer care phone calls that last over half an hour – the feeling of anger towards companies for bad service is all too natural. But thanks to the Consumer Protection Act, 1986, the ‘fight for justice’ is not the David v. Goliath battle it seems like.

The Consumer Protection Act (COPRA) aims – as its name suggests – to do just that: protect consumers against deficiencies in service perpetrated by service providers or manufacturers, and give them a means of resolving their grievances on their own,  without needing “expert legal advice”. If you have a grievance against any company, and don’t know how to get justice, then you’ve come to the right place. No, you don’t need a lawyer for this, and it’s surprisingly easier than it sounds.

Step 1: Understanding terms involved in Consumer Protection Law

As with any area of law, a lot of terms used rarely have the meaning we associate with them when used in everyday parlance.

1.     Jurisdiction – When you want to file any case – be it a consumer case, or a court case, or any other case, it is necessary to approach the right authority or Court. A natural question to ask at this point is “But aren’t all Courts made to protect all citizens? Why should I approach a specific Court?” The answer to this is simple (and borrowed from the very well-made movie, OMG: Oh My God!) – is you have a problem with the electricity supply to your house, you will first approach the complaints division of your electricity supplier, and then if you still aren’t satisfied, their manager, and escalate it further if needed. You won’t approach the CEO directly, right? For very similar reasons, it is very important to determine the correct authority to file your consumer case, or else it’ll get thrown out before you can even make your case.

There are two main types of jurisdiction that are important to determining where you file your Consumer Complaint:

·       Pecuniary Jurisdiction – there are 3 main levels of Consumer Courts, and you’d approach a different level based on the value of the amount you’re claiming in your complaint. (The word “pecuniary” means “to do with money”). I’ve made a table below to make it easier for you to pinpoint which level to approach (don’t worry, the rest of this article applies to all three types, and isn’t restricted to just the District Level):

Value of Claim	Level of Consumer Court to Approach
Upto Rs. 20 lakh	District Consumer Disputes Redressal Forum
Above Rs. 20 lakh, upto Rs. 1 crore	State Consumer Disputes Redressal Commission
Rs. 1 crore and above	National Consumer Disputes Redressal Commission

·       Territorial Jurisdiction – As their names suggest, there are a large number of District and State Consumer Forums/Commissions. It’s also important to pinpoint which of these Courts you should approach to ensure your complaint is admitted. (Again by way of analogy, if someone picks your pocket in Mumbai, then filing a police case in Bangalore is an exercise in futility, right?)

The COPRA gives a certain degree of flexibility to the consumer when deciding where complaints should be admitted. When deciding which level of court to approach, you have the choice of approaching the Court situated where:

Ø  The person or company that you’re filing against resides, carries on (part or whole of their) business, or has a branch office.

Ø  If you’re filing against multiple parties, then the place above that applies to any one of the parties (you’d need the permission of the Court first though, if that place doesn’t apply to the other parties).

Ø  The place where the cause of action (i.e., the reason you’re claiming in the first place) arose.

TLDR: When you file a consumer complaint, you should file in the appropriate place, and in the correct forum.

2.     Consumer – There’s a long and complicated definition of Consumer in COPRA, so to summarise, you’re a consumer if you fulfil both of the criteria below:

·       You buy any (legally permitted) goods or services for money or in exchange for something else, such as doing something in return (even if the money doesn’t necessarily match the value of the goods), regardless of whether you’ve paid the money in full yet or not.

·       You aren’t buying the goods or services for a commercial purpose.

Apart from the consumer themselves, the following persons can also file a consumer complaint for a cause of action (discussed shortly) not affecting them:

·       Any person who is a beneficiary of the goods/services

·       Legal representatives of consumers

·       Legal heirs of the deceased consumer

·       Spouse of the consumer

3.     Service – Once again, the definition of service in COPRA is long and winded. To simplify, a service has the meaning you’d colloquially accord to it, with two important exceptions:

·       Services rendered under a contract of personal service (which is very different from a contract for personal service, by the way) aren’t something you can claim for under COPRA. A contract of personal service is one where the skill of the person rendering the service becomes relevant. A great example of a contract of personal service is contracting with an artist to paint a portrait of yourself – here you can’t claim under COPRA if you’re unhappy with the way the portrait turns out.

As for why these contracts are excluded from COPRA – they’re very subjective. Just because you’re not happy with how the portrait turned out doesn’t mean the artist has been deficient in their service. It’s a matter of opinion (and needing to clean your mirrors better).

·       Services given for free can’t be claimed under COPRA. This reasoning is simple. You haven’t given anything for it, so how can you claim a deficiency in service?

4.     Goods – The definition of Goods as used in COPRA is actually the same as that under the Sale of Goods Act. To make a long story short, a good is exactly what we think it is. Any physical object that isn’t immovable can be a good, with the exception of money. It’s also worth noting that intellectual property rights such as patents and copyrights are considered to be ‘goods’.

Step 2: Identify your cause of action, valuation of your suit, and the correct forum to file in

A ‘cause of action’ is basically the grounds you have to claim against the manufacturer or service provider under COPRA. For example, if you bought a soda can from a company and the soda can turned out to have a spider in it (it’s happened before!), then your cause of action would be negligence on part of the manufacturer that resulted in you falling sick and the deficiency in service that caused you stress and anxiety and all the related feelings associated with the partial consumption of a decomposed arthropod.

At this point you should also know that your chances of success in a suit will depend on the nexus (relation) of your cause of action to the deficiency in service of the service provider or manufacturer. For example, while you would almost definitely succeed in the spider in your soda example we looked at above, you may not be as successful if you were claiming against a telecom company for bad signal which prevented you from booking your Uber in time and you missing a flight because of it.

The valuation of your suit is basically the net value of everything you’re claiming from the manufacturer or service provider. For the spider in your soda example, here’s an example of how you could value your claim (all numbers are random here)

Heading	Amount Claimed (INR)
Value of soda	25
Reimbursement of medical expenses associated with the spider in the soda	5,000
Compensation for mental agony and stress	5,000
Value of Suit	10,025.00

This calculation helps you ascertain the value of your suit, which is used in deciding the pecuniary jurisdiction of your suit.

The next step is to determine the correct forum to file in. Refer back to the jurisdiction discussion we had above, and determine which level of consumer court to file in and which territorial jurisdiction you should use. Once you’ve determined the appropriate consumer court, proceed to the next step.

IMPORTANT: Make sure you file your complaint within 2 years of the cause of action arising. In case you have a legitimate reason for a longer delay than that, you can specify it in the complaint when you file, and the delay can be condoned by the consumer court.

Step 3: Draft your complaint

Drafting your complaint is perhaps the most important step in the entire COPRA resolution process. A properly drafted complaint can make the difference between winning and losing a consumer case (or any case for that matter). There’s a format to be followed, which I’ll make available elsewhere on the Internet shortly. Follow the format and the tips in the document, and you’ll have a great complaint ready in a matter of hours!

NOTE 1: Before you reach this stage, try and have some documented proof of you trying to get relief from the other party directly first, to show that you’ve made a good faith effort of your own and failed before opting for consumer courts. For example, an email thread or telephone records would work excellently in this scenario.

NOTE 2: Make sure you have all proof handy before starting this stage, because you’ll need to attach everything relevant with your complaint.

Step 4: Paying the necessary court fees and filing your complaint

When you file your complaint, make sure you’ve printed one copy of your complaint on green legal paper (available at many stationary stores) and signed properly. Apart from this, you also have to pay the required court fees, which you can pay at a post office by getting a crossed Indian Postal Order, or through a crossed Demand Draft from any nationalised bank, payable at the place where the court you are approaching is situated. The fees payable at the time of filing vary based on the pecuniary value of your claim, and are summarised for you below:

Value of Claim (INR)	Amount Payable as Fees (INR)
Upto 1 lakh	100
1 lakh to 5 lakh	200
5 lakh to 10 lakh	400
10 lakh to 20 lakh	500
20 lakh to 50 lakh	2000
50 lakh to 1 crore	4000
Over 1 crore	5000

Apart from the one copy you’ll need on green legal paper, you’ll have to print another set of copies (2 more if you’re filing in the District or State Commissions, and 3 more if in the National Commission) on normal paper, plus another copy for each additional party you’re claiming against. You’ll also have to attach copies of all the documents and annexures you’re using as part of your complaint with each additional copy of the complaint.

You can either file your complaint by post (use Registered Post with Acknowledgment of Delivery services) or file it in person at the respective forum you’re approaching.

Before I wrap this article up, here are a couple of FAQs on consumer complaints and COPRA that I haven’t addressed in this article already:

Q. Can I file against a doctor, hospital, or a lawyer if I’m unhappy with their service?

A. In what is possibly the most spectacular example of self- preservation to ever hit the Indian legal system, lawyers are excluded from COPRA, so unfortunately you cannot file a consumer complaint against a lawyer if you’re unhappy with their services.

However, you CAN file against your doctor or hospital if there’s a deficiency in their services, so not to worry.

Q. I bought a product from an e-commerce website like Amazon or Flipkart, and I want to claim for a deficiency in this product. What is the territorial jurisdiction I should use in my complaint?

A. Your best bet is to file either at the place where the seller (not Amazon or Flipkart) is based, or the place where you were when you made the e-commerce transaction.

Q. Can I file against a hotel or an airline or similar industry if their staff are rude or inefficient?

A. Unfortunately, no you can’t. You can only file a consumer complaint in cases where you can prove some actual damage to, and as disappointing as it may be, mere rudeness isn’t grounds for a consumer complaint unless some actual monetary damage also occurred to you as a result of it.

Q. How do I value the “mental agony” part of my claim?

A. There’s no set value when it comes to mental agony in claims. You can choose to not claim at all, and you can choose to claim a massively disproportionate amount of damages as well. But try to be reasonable, because claiming too much could make you look like you’re filing just because you’re hoping to get lucky, and there’s no guarantee you’d even get the amount you’ve asked for (which is subject to the discretion of the consumer court).

Q. The terms and conditions of the contract I have with the service provider/manufacturer say that I can only claim in the ordinary court, and nowhere else. What do I do if I don’t want to approach the ordinary court?

A. Exclusions of the jurisdiction (for a discussion on jurisdiction, see the previous article on filing income tax) of the consumer courts by terms and conditions of manufacturers or service providers aren’t binding on you as a consumer. So even if the T&Cs you “agreed to” say you can’t file in a consumer court, that’s fine. You can still file anyway.

And that’s it! You’ve successfully filed your consumer complaint! From this point forth, the consumer court you approach will keep you apprised of developments in your case and dates for hearings. I said it already but I’ll say it again – you do not need a lawyer to appear for your hearings. It’s a very consumer friendly process and it’s perfectly simple to argue on your own behalf. For any other suggestions, questions, or clarifications, feel free to get in touch via the comments section below.

Good luck!