Corporate Law Jargons - Part 1 Flashcards
(25 cards)
Indemnification
One party’s obligation to compensate another for cost and damages
Novation
Replacing one party in a contract with another party. Replacing one contractual obligation with another.
Subrogation
Subrogation means:
> One person (or party) steps into the shoes of another to exercise their legal rights.
It usually happens when someone pays a debt or compensates for a loss on behalf of another, and then gets the right to recover that amount from the responsible party.
Common Use: Insurance Law
The concept is widely used in insurance law.
✅ Example:
- Mr. A’s car is hit by Mr. B’s car.
- Mr. A’s insurance company pays ₹2 lakhs to repair the damage.
- Now, the insurance company can recover ₹2 lakhs from Mr. B — because Mr. B was at fault.
Here, the insurance company is subrogated to Mr. A’s rights.
It steps into Mr. A’s shoes and sues the wrongdoer (Mr. B).
Estoppel
Preventing a party from asserting a claim or facts that contradicts what they previously stated or agreed by law
Recapitalization
Recapitalization is a restructuring of a company’s capital structure — that is, changing the mix of debt and equity — to improve financial stability, raise funds, defend against takeovers, or reduce risk.
> In simple terms:
Recapitalization = Changing how a company is financed (debt vs. equity).
Example (Debt-to-Equity Recap):
Suppose a startup owes ₹10 crore to a group of investors. Instead of repayment in cash, the company issues equity shares worth ₹10 crore, reducing debt and increasing equity.
This helps:
Clean up the balance sheet,
Reduce interest costs,
Attract new investors.
Recapitalization is a strategic financial tool that helps companies improve their balance sheet, raise capital, or change control dynamics.
In India, it involves close compliance with the Companies Act, SEBI regulations, and, where applicable, the IBC and RBI rules.
Derivative Action
Meaning of “Derivative Action” (in Simple English):
A derivative action is a lawsuit filed by a shareholder on behalf of the company, usually against directors or officers, for wrongdoing that harmed the company.
It’s called “derivative” because the right to sue doesn’t belong to the shareholder personally, but to the company itself. The shareholder is acting on the company’s behalf because the company (often controlled by the wrongdoers) is not taking action.
Why is it Needed?
Sometimes, the management or board of directors may:
Commit fraud
Misuse company funds
Breach their duties
Enter into unfair transactions
And the company doesn’t sue them because:
The wrongdoers are still in control, or
The board refuses to act
In such cases, a minority shareholder may step in and initiate a derivative suit to protect the company’s interest.
Example:
Suppose:
You are a 10% shareholder in a company.
The Managing Director sells the company’s valuable land to his own relative at a very low price.
The Board is ignoring your complaint.
The company suffers a loss — but is not filing a case.
You can go to the court and file a derivative action, asking the court to:
Cancel the fraudulent sale,
Recover the loss,
Direct the MD to compensate the company.
You’re not claiming damages for yourself, but asking the court to protect the company.
Legal Basis in India:
While India does not have a codified section titled “derivative action,” it is recognized under common law and invoked through principles of corporate governance.
It overlaps with remedies under:
Section 241–242 of Companies Act, 2013 (oppression and mismanagement), and
Section 245 (Class Action), in some cases.
Indian courts, especially the NCLT, recognize derivative actions when the company is under the control of wrongdoers and minority shareholders have no other remedy.
Key Conditions:
- The action is for the benefit of the company, not personal grievance.
- There is fraud, breach of fiduciary duty, or gross misconduct.
- The majority cannot be trusted to act in good faith.
Summary:
> A derivative action is when a shareholder files a case for and on behalf of the company, usually to hold directors accountable for misconduct or fraud when the company itself fails to act.
Let me know if you’d like a case law reference, or a template notice for initiating a derivative action under Indian corporate law.
Right of First Refusal (ROFR)
A contractual right giving an entity the opportunity to enter a business transaction with a person or company before anyone else can, often used in joint ventures and shareholding agreements.
. Replevin
A legal action to recover personal property wrongfully taken or detained, allowing the rightful owner to reclaim goods before final judgment.
Pari Passu
Latin for “on equal footing,” used to describe obligations or claims that are treated equally in terms of priority, especially in bankruptcy or debt restructuring.
Affirmative Covenant
An affirmative covenant is a promise to do something.
It is a binding obligation in a contract, agreement, or deed that requires a party to take specific positive actions — rather than merely refraining from doing something (which would be a negative or restrictive covenant).
Simple Definition:
> Affirmative Covenant = A legal promise to act or perform a duty.
Examples to Understand:
✅ In a Loan Agreement:
A borrower may agree to:
Maintain proper accounting books.
Pay taxes on time.
Submit financial statements quarterly.
These are affirmative covenants — they require action to be taken.
✅ In a Lease Agreement:
A tenant may be required to:
Keep the premises clean.
Carry out regular maintenance.
Insure the property.
These are affirmative covenants in favour of the landlord.
✅ In Corporate or Shareholders’ Agreements:
A company may agree to:
Hold board meetings regularly.
Maintain statutory compliances.
Get shareholder approval before taking major decisions.
These ensure good governance and are affirmative duties imposed under contract.
Convertible Note –
A convertible note is a short-term debt instrument used by startups to raise money, which converts into equity (shares) at a later date, usually during a future funding round.
It starts as a loan but does not get repaid in cash. Instead, it is converted into shares (typically at a discount or with other benefits) when the company raises its next round of funding.
🎯 Purpose:
Used in early-stage fundraising, especially when:
The company’s valuation is uncertain,
The investor is willing to wait for equity,
Speed and simplicity are preferred over full share subscription agreements.
Restrictive Covenant
A restrictive covenant is a contractual promise not to do something.
It restricts a party’s actions in a specific way — either during the term of the contract or even after its termination — to protect legitimate interests such as business goodwill, trade secrets, or competitive advantage.
> In simple terms:
Restrictive covenant = “I promise I won’t do this” (e.g., I won’t compete, I won’t disclose, I won’t poach your employees).
Anticipatory Breach
Anticipatory breach occurs when one party clearly refuses to perform the contract before the due date.
The non-breaching party can terminate the contract and claim damages under Section 39 of the Indian Contract Act, 1872.
Drag-Along Rights
Drag-along rights are contractual rights that allow a majority shareholder (or a group of selling shareholders) to force the minority shareholders to join in the sale of a company on the same terms and conditions.
> In simple terms:
“If I sell my shares, you must sell yours too — so the buyer can acquire 100%.”
These rights are commonly included in shareholders’ agreements, term sheets, or investment documents, especially in startups and private companies.
Lex Loci Contractus
Lex Loci Contractus is a Latin term meaning “the law of the place where the contract was made.”
In conflict of laws (private international law), it refers to the legal system that governs the validity, interpretation, and enforcement of a contract, based on where the contract was executed.
> In simple terms:
“If a contract is made in Location X, then the laws of Location X apply — unless agreed otherwise.”
Stare Decisis
Stare decisis is a Latin phrase meaning “to stand by things decided.”
It is the legal doctrine that says:
> Courts must follow the precedents set by previous decisions — especially those of higher courts — in similar cases.
This principle ensures consistency, predictability, and stability in the legal system.
Cross-Default Clause
A cross-default clause is a contractual provision that says:
> If a party defaults on one agreement, it will be treated as a default under other related agreements as well.
It acts as a trigger clause, allowing a lender or counterparty to declare a default and take action, even if the specific agreement hasn’t been directly breached — as long as a linked or referenced contract has been.
📌 Simple Explanation:
> “If you default somewhere else, I’ll treat it as a default here too.”
While there is no specific provision in Indian statutes, these clauses are valid and enforceable under the Indian Contract Act, 1872 if:
They are expressly drafted,
Reasonable and not unconscionable, and
Consistent with RBI, SEBI, or IBC regulations, as applicable.
Sample Clause – Cross-Default (Loan Agreement):
> “The Borrower shall be deemed to be in default under this Agreement if the Borrower or any of its Affiliates defaults in the payment of any sum or the performance of any obligation under any other loan, debenture, or financial arrangement exceeding ₹1 crore, which shall constitute an Event of Default hereunder.”
Intercreditor Agreement
🎯 Why Is It Needed?
When multiple creditors (banks, NBFCs, bondholders, etc.) lend money to the same borrower:
They might have different types of debt (secured, unsecured, senior, subordinate),
The borrower defaults or undergoes resolution (e.g., under IBC),
Each creditor may otherwise act independently and complicate recovery.
An ICA creates order, prevents chaos, and defines:
Who leads the enforcement,
Who recovers what,
And how decisions are made among lenders.
Non-Recourse Loan
A type of loan where the lender’s recovery is limited to the collateral pledged and the borrower is not personally liable beyond that asset.
Indefeasibility
A principle in property law ensuring that once a title is registered, it cannot be challenged or annulled except in very limited circumstances.
Subordination Agreement
A legal arrangement in which one debt or claim is ranked behind another in priority for collecting repayment from a debtor’s assets.
Material Adverse Change (MAC) Clause
A contractual provision allowing a party, often a buyer or lender, to withdraw from a deal if a significant negative event affects the target company’s value or operations.
Forbearance Agreement
A contractual arrangement where a lender agrees to temporarily refrain from exercising its rights (such as foreclosure) in exchange for the borrower’s compliance with specific terms.
Tolling Agreement
An agreement to suspend or extend a statutory limitation period to allow parties to negotiate or resolve disputes without the risk of a claim becoming time-barred.
