9 Competition law and Business Laws

Prof.(Dr.)Harpreet kaur

Introduction:

Business is the backbone of any economy. It is necessary for any country to have a business environment which is conducive to growth of economy. To provide such a business environment it is necessary that industrial and other policies impacting business provide for enactment of laws for regulation of business. Different laws have been enacted that provide for incorporation of organizations facilitating conduct of business as well as control and regulate different business transactions and provide for compliances required for lawful business transactions.

Learning outcomes:

What laws are included under “Business Law”?

“Business Law” includes all legislations and regulations that govern business transactions in India. Business organizations can be formed or incorporated as companies, traditional partnerships or limited liability partnerships under the Companies Act, 2013, the Partnership Act, 1932 or the Limited Liability Act, 2008 respectively.

The Companies Act, 2013 provides for incorporation of companies and the compliance required for incorporation. The Act also facilitates help to businessmen for providing different types of companies like public, private, One Person Company, limited liability or unlimited liability companies. Any business house depending upon its business type and requirements may select the type of company which it wants to incorporate. The Act also defines subsidiary, small and associated companies. It also provides for mergers and amalgamations for expansion and diversification of business.

The Partnership Act, 1932 provides for making a traditional partnership for the purpose of conducting a business. Partnership is the relation between persons who have agreed to share the profit of a business carried on by all partners or any of them acting for all partners. Partnership is an agreement based on mutual confidence, faith and trust between the partners and traditionally partners in partnership firms have unlimited liability for the liabilities of the firm.

The Limited Liability Partnership Act, 2002 gives flexibility of forming a partnership with limited liability of its partners. Limited Liability Partnership (LLP) is a legal entity separate from partners constituting it. It is a body corporate with perpetual succession. Any individual or a body corporate may be a partner in LLP. Any change in partners does not affect existence, rights and liabilities of LLP. Two or more persons associated for the purpose of carrying a lawful business or profession with the motive of making profit may subscribe their names to the incorporation document of LLP. Every LLP should have at least two designated partners who are individuals for the purposes of compliance of the Act.

The Contract Act, 1872 is the legislation dealing with agreements and contracts. Every business transaction involves a contract. Without an agreement no transaction is possible whether the transaction involves firms, companies, partnerships or any other person.

The Sale of Goods Act, 1930 provides for sale of goods and rights as well as liabilities of both the seller of goods and buyer of goods. A contract of sale of goods is a contract where the seller transfers or agrees to transfer property in goods to the buyer for a price. This is a bilateral contract made for money consideration only and it may be absolute or conditional.

The Negotiable Instruments Act, 1881 provides the modes of making payments for business transactions. Payment can be made through a negotiable instrument which includes promissory notes, bills of exchanges and cheques which can be made payable to order or to bearer.

Issue of securities by the companies is regulated by the regulations made by the Securities and Exchange Board of India under the Securities & Exchange Board of India Act, 1992. The Securities Contracts (Regulation) Act, 1956 prevents undesirable transactions in securities by regulating the business therein. It regulates stock exchanges, contracts and options in securities and listing of securities.

Laws regulating financing of international business transactions include the Foreign Exchange Management Act, 1999, Conservation of Foreign Exchange and Prevention of Smuggling Act, 1974 and Prevention of Money Laundering Act, 2002. The Foreign Exchange Management Act, 1999 is an Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting orderly development and maintenance of foreign exchange in India. The Conservation of Foreign Exchange and Prevention of Smuggling Act, 1974 provides for preventive detention in certain cases for the purposes of conservation and augmentation of foreign exchange and prevention of smuggling activities. The Prevention of Money Laundering Act, 2002 is an Act to prevent money-laundering and to provide for confiscation of property derived from or involved in money laundering.

COMPETITION RELATED ISSUES IN BUSINESS LAW:

The Contract Act, 1872:Every business transaction involves a contract. Without an agreement no transaction is possible whether the transaction involves firms, companies, partnerships or any other person. Competition related issues arise in relation to contracts in restraint of trade as well as tenders bids and auction bids.

a. Agreements in restraint of trade: Section 27 of the Contract Act provides that every agreement which restraints any person from exercising a lawful profession, trade or business of any kind is void to that extent. The true test for determination of validity is whether the restraint whether partial or full, is reasonable and necessary for the protection of the party to be intended to be benefitted. If it is not otherwise injurious to public interest, it will be valid.

Statutory exceptions to this general principle include firstly, when goodwill of a business is sold and the seller agrees with the buyer to refrain from carrying on a similar business within specified local limits for a specified time. Such restriction is held valid if it is reasonable. Secondly, Partnership Act, 1932 allows for certain restrictions to be placed on outgoing partner or all partners in anticipation of dissolution of partnership.

Exceptions created under judicial interpretations include firstly, trade combinations where traders and manufacturers in the same line of manufacturing make agreements to carry on their trade in an organized manner. Their primary purpose is to regulate business but not restrict it. Agreements as to regulation of opening or closing of business in the market, licensing of traders, mode of dealing, control over dealers, prices and output will have to be seen in the light of restraint on trade, business or profession i.e, whether they are anti-competitive or not? Second category of such exceptions is of exclusive dealing agreements. A producer may like to market his goods only through a sole agent or distributor and the distributor agrees not to deal with goods of any other manufacturer or a producer may agree to sell all his output to only one dealer and that dealer in turn promises to buy his requirements only from that producer. These are exclusive dealing agreements. This negative covenant should be ancillary to the positive covenant. If it is so, it will not be a restraint of trade. Third category includes restraints upon employees during employment and after termination of employment. Negative covenants during employment restricting an employee from working elsewhere during the period of employment agreement are valid agreements. Such agreements which are for protection of confidentiality and trade secrets are not one sided or unfair or unreasonable. However, agreement restraining employees from competing with their employers after termination of employment may not be allowed by the courts.

In an early case of Mitchel v Reynolds (1), the question was for determination of validity of a promise of seller of a bakery with the buyer that he would not compete with the buyer. The covenant was limited in time as well as to the area in which bakery had operated. Rule of reason was applied and it was held that long run benefit of enhancing the marketability of the business itself and thereby providing incentive to develop such an enterprise outweighed the temporary and limited loss of competition. Form this case, the Rule of Reason has been applied as a standard for testing the enforceability of covenants in restraint of trade which are ancillary to a legitimate transaction.

Tender Bids and auction bids: In both the cases of tender bids and auction bids, possibility of bid rigging and collusive bidding exists. S. 3 (3) of the Competition Act, 2002 provides for bid rigging and collusion. Bid rigging is a method which has the effect of eliminating or reducing competition for bids or adversely affect or manipulate the process of bidding. S 3(3) incorporates cases where there is presumption of anti-competitive activity. The presumption is applicable to horizontal agreements where agreement is entered into between enterprises or associations of persons or with any other person either engaged in similar or identical trade of goods or services or they have adopted a practice which results directly or indirectly in bid rigging or collusive bidding. It is presumed that such practice will have an appreciable adverse effect on competition.

The Companies Act, 2013:

Competition related provisions fall in context of mergers and amalgamations under the Companies Act and duties of directors of companies.

Mergers and Amalgamations: Section 233 of the Companies Act provides that a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly owned subsidiary company or other class of prescribed companies. Section 234 provides for merger or amalgamation of company with foreign company with the approval of RBI. Section 232 of the Act provides for merger and amalgamation of companies under the scheme of compromise or arrangement. Under these three sections companies will be required to follow the provisions of the Competition Act in terms of notification and approval.

Non- compete Clauses in mergers and amalgamations: Competition concerns also exist in non-competition clauses in mergers and amalgamations and are ancillary to transfer of undertaking. Such clauses sometimes become necessary to enable the parties to establish themselves in new settings and for the purposes of completion of mergers. These clauses involve restrictions on both purchasers and sellers. Non-competition clauses do not necessarily hinder competition but may help to strengthen it. They do not raise anti-competitive concerns if restrictions imposed are reasonable in time and scope. For eg, scope of non-compete clauses can be extended to only those markets where the undertaking was active before its sale or in which it can be regarded as potential competitors on the basis of demonstrable activity(2). Frequency of consumer change of brands and type, time to build clientele, time to be taken for new product to enter into market or consumers to accept new products and the time that will be required for seller of business to enter into market and regain its customers in absence of restrictive clauses are also important factors to be considered (3).

Competition by directors: It has been established since 1891 through judicial opinion that if a director competes with his company or holds some interest in any rival company or is a director in another company, no breach of duty occurs (4). The Companies Act, 2013 allows a director to be a director in ten public companies at any point in time. However, a director can be restrained by the terms of his appointment from competing with the company or from joining any other company whatever may be the business of other company. A whole time director by nature of his full employment is restricted from joining any other company. A director will be accountable if he uses business connection, trade secrets and assets etc of one company for the purposes of the rival company.

The Partnership Act, 1932:

Partners of traditional partnerships are under certain restrictions imposed on them by the Act which are restrictions statutory, reasonable and therefore, not considered as agreements in restraint of trade.

Agreements in restraint of trade in partnership (S. 54, Partnership Act, 1932): This section provides a restriction on carrying on business similar to that of firm in dissolution or anticipation of dissolution. Partners may make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within a specified local limits. Such agreements are held to be valid if the restrictions imposed are reasonable.

Restriction from using firm name or property of firm (S. 53, Partnership Act,1932):

After a firm is dissolved, every partner may restrain any other partner from carrying on a similar business in the firm name or from using any property of the firm for his own benefit, until the affairs of the firm have been completely wound up. This restriction is subject to a contrary contract between the partners and applies to representatives of the partners also. However, where any partner or his representative has bought the goodwill of the firm, his right to use firm’s name will be protected.

Sale of goodwill after dissolution (S. 55, Partnership Act, 1932):

After dissolution of a firm in settling the accounts of the firm, goodwill of the firm is included in the assets and goodwill may be sold either separately or along with other property of the firm. This is subject to contract between the partners. If the goodwill of the firm is sold after dissolution, a partner may carry on business competing with that of the buyer. He may advertise such business but subject to agreement between him and the buyer, he may not use the firm name, represent himself as carrying on the business of the firm or solicit the custom of persons who were dealing with the firm before its dissolution. When the goodwill of the firm is sold, any partner may make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits. Such agreements will be valid if restrictions imposed are reasonable. In case of involuntary assignments like sale of business of insolvent by the receiver, the purchaser cannot restrain the insolvent from soliciting the business of his old customers (5).

Right to compete of Outgoing partner (S.36, Partnership Act, 1932):

An outgoing partner may carry on a business competing with that of the firm and advertise such business. But he is prohibited from using firm’s name, representing that he is carrying on business of firm, or soliciting customers. He may make an agreement with his partners that on leaving the firm, ceasing to partner of the firm, he will not carry on a business similar to that of the firm within a specified period or within specified local limits. Such agreement is valid if restrictions imposed are valid.

The Sale of Goods Act, 1930:

When goods are sold by auction each lot is prima facie deemed to be subject of a separate contract of sale. The bidder makes the offer to buy through his bid and of his bid is accepted the goods are knocked down to him by the auctioneer indicated by fall of his hammer. In all such auctions, possibility of bid rigging is present. In such cases sellers are required to be protected from loss resulting from agreements between buyers designed to stifle competition and bring about sale of goods at a lower price than might have otherwise been obtained. .

The Securities & Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices in Securities) Regulations, 2003:

These Regulations prohibit fraudulent and unfair trade practices in securities. Regulation 4 provides for the prohibition that no person shalldirectly or indirectly buy, sell or otherwise deal in securities in a fraudulent manner, b. use or employ any manipulative or deceptive device or contrivance in connection with issue, purchase or sale of any security listed or proposed to be listed on any recognized stock exchange, or employ an device, scheme or artifice to defraud in connection with dealing in or issue of listed or proposed to be listed securities.

Fraudulent and unfair practices in securities include indulging in acts which create false or misleading appearance of trading in the securities market, dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss; manipulation of price of security, inducing any person to buy securities in order to reach minimum subscription, paying money for inducing a person for inflating, depressing, causing fluctuation in price of any security, publication of false information about securities, security transaction without intention to change ownership of security, selling, dealing or pledging of counterfeit or stolen security, misleading advertise influencing decision of investors, inflated reporting of transactions by intermediaries etc.

Summary: The module introduced important business laws regulating business in India to students. The module also introduced students to important business organizations briefly and made an effort to discuss interface between Competition law and business laws. The Contract Act, The Companies Act, Partnership Act, Limited Liability Partnership Act, the Sale of Goods Act and SEBI (FUTP) Regulations were discussed in brief in the module.

References:

1. Competition Law, Avtar Singh, Eastern Book Company, 2012

2. SM Dugar, Guide to Competition Law, Vol 1, fifth edition, Lexis Nexis, 2010.

3. Bare Act: the Consumer Protection Act, 1986

4. Bare Act : the Competition Act, 2002

5. Business and Corporate Laws, Harpreet Kaur, Lexis Nexis, 2013

6. Business Law, Avtar  Singh, tenth edition, Eastern Book Company, 2013

7. Competition Law in India, Abir Roy & Jayant Kumar, Eastern Law House, 2008