LEB0009                                 Legal Wrangles of Kaushik    Kaushik, an ambitious entrepreneur, after his MBA and...
Legal Wrangles of KaushikIf you agree to all the terms and conditions then we may proceed with the leasing of the officesp...
Legal Wrangles of Kaushik        local or other authority, which may at any time or from time to time during the term here...
Legal Wrangles of Kaushikdecided, came to Hyderabad and finalised a software project deal with the firm and paid an advanc...
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03 leb0009 legal wrangles of kaushik

  1. 1. LEB0009 Legal Wrangles of Kaushik Kaushik, an ambitious entrepreneur, after his MBA and acquiring experience in a software businessfor a period of 3 years, decided to start a software business. He discussed his business proposal withtwo of his friends who were willing to join him as partners in his venture. They decided to investtowards their share and executed an agreement on the business venture. Kaushik along with his friends started a software business ‘Exotica Software Solutions’ in asmall room on the first floor of his residence located at Plot No.152, Vayuvihar, Sainikpuri,Secunderabad. He had to start the business in the small place as he could not find any place suitablefor his plan. However, one fine morning while reading the Deccan Chronicle Kaushik came acrossan advertisement (Exhibit I). Exhibit I Commercial Space “Ready to Occupy – Commercial space ideal for offices 16,500 sq.ft. spread in four floors with adequate parking space, available for lease at Kavuri Hills, Phase 2, Madhapur, Hyderabad. Minimum lease period will be 5 years and subject to renewal. Interested parties have to seek appointment with the owner Manas on mobile No. 9492333165 or 9426333165 , to visit the place, and finalise the deal in person.” Compiled by the author Kaushik was excited to see the advertisement as he was seriously searching for an office space.Kaushik, informed his friends and called Manas to enquire about the said advertisement. “Hi, I amKaushik. I and my friends are interested in the office building you have advertised. We would liketo visit and see the building. When can we see the place?” Manas replied, “You can come around10 a m on Saturday (August 1st). You can see the building and if satisfied, verify the lease agreement.This case study was written by Sonia Katoch and Dr A.V. Narasimha Rao, Corporate Law, IBS, Hyderabad. It is intended to be usedas the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The casewas written from generalised experiences.© 2009, IBSCDC.No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoeverwithout the permission of the copyright owner. License to use for the Class of 2012, Semester II, IBS Hyderabad. Course: Legal Environment Business
  2. 2. Legal Wrangles of KaushikIf you agree to all the terms and conditions then we may proceed with the leasing of the officespace.” In the meantime Manas received various other proposals on phone and they started discussingthe terms. Some of the parties were even calling on his residence number. Few more people senttheir representatives or agents to his residence along with a letter containing the lease documentsand other terms. Manas was very frustrated on receiving calls from agents and parties withoutgiving their proper identity and also he was irritated against some people as they directly visited theplace (building) without seeking appointment as mentioned in the advertisement. He failed tounderstand why some of the parties wrote letters to him when it was clearly specified in theadvertisement that the interested parties must contact Manas over the phone. Manas gave appointment to another party who called him before Kaushik at 11 a m on July 30th.They liked the building very much but, Manas could not come to any consensus regarding the monthlyrent, as the party was not ready to accept the quoted rent, norwas Manas ready to accept the rentquoted by the party. On August1st, Kaushik and his friends reached the place on time where Manaswas waiting for them. He showed them the building and they spontaneously liked it. They sat downto discuss the terms and conditions of the lease amount and other conditions attached to it. Manasstated the following terms and conditions which were not acceptable to Kaushik and his friends – • The change in the term of lease to 4 years (against 5 years as mentioned in the advertisement) • Lease Rent as INR 700,000 • Termination of lease may be at any moment (no Lock-in-Period mentioned in the agreement) • Earnest money of INR 3,000,000, and • Enhancement of monthly rent every year by 20%. Kaushik and his friends offered INR 400,000 as the monthly rent and insisted for a lock-in-periodof 6 years. But these terms were not acceptable to Manas. After intense deliberations and negotiationsboth the parties came to a mutual agreement that – • The term of the lease would be 5 years • A clause on Lock-in-Period be added to the agreement, i.e., neither party can terminate the lease agreement before 36 months. After completion of the Lock-in-Period, the lessee shall have the right to terminate the lease without assigning any reason whatsoever to the lessor, by giving 3 months’ notice • The monthly rent agreed as INR 500,000 • Earnest money deposit as INR 2,000,000 instead of INR 3,000,000 which is refundable on the termination of the lease without any interest • Upon completion of the three years Lock-In Period, the monthly rent shall be enhanced by 30% on the last paid monthly rent. The enhanced rent shall be payable at the beginning of 37th month of the lease i.e., August 3rd 2012 • The lessee to pay rates, taxes, assessment, duties, cess, impositions, outgoings and burdens whatsoever payable to State of Andhra Pradesh, the Municipal Corporation of Hyderabad,2
  3. 3. Legal Wrangles of Kaushik local or other authority, which may at any time or from time to time during the term hereby created be imposed or charged upon the building • The lessee to pay the electricity bills for the electricity consumed for lighting the building and for operation of air conditioners, fans, computers and electrical appliances in the demised premises • The lessee not to make any structural alterations in or upon the building or make any alterations or addition to the external appearance or any part of the building without the previous consent of the lessor in writing • To use the building for office purposes of the lessee only • The lessee not to place or keep or permit to be placed or kept on the building any offensive, dangerous or highly inflammable or explosive material or any other article or things, which may constitute a danger, nuisance or annoyance to the premises or surrounding premises or the owners or occupiers thereof. An agreement with the terms and conditions agreed was drafted and signed on August 4th andregistered according to the Indian Registration Act, 1908 by paying stamp duty of 2%. Aftersigning the agreement Manas told Kaushik, that they can take the possession of the building after10 days and on payment of the earnest deposit, as there were certain minor repairs which requiredat least 1week. Kaushik and his friends told Manas that they would come on August14th to takethe possession of the building, to which Manas agreed. On August14th, Kaushik and his friendswent to their new office building and handed over the demand draft for INR 2,000,000 towardsthe earnest deposit and Manas handed over of the premises to them. All were very happy as theygot the possession of the building. Kaushik wanted to bring new furniture including the computers into the new premises and informedto Smart Cyber Café (SCC) through his contacts that he is ready to dispose his old computers atINR 5,000 each, But, the owner of SCC said that he is ready to purchase the computer at INR 4,000.Kaushik informed his idea of selling the computers at INR 5,000 to Ramdev Computer TrainingInstitute (RCTI) who in turn agreed to purchase at INR 4,500 Kaushik agreed to sell and took partof the sale amount from RCTI. Meanwhile SCC approached him and informed that they were readyto purchase at INR 5,000. But by that time Kaushik informed that the sale was completed, however,he was in a dilemma whether he can cancel the agreement with RCTI as they have not paid theentire amount and SCC was ready to purchase at higher price. ‘Exotica Software Solutions’ moved to their new office, bought new furniture and recruited newstaff, targets were set and everyone was busy in their work. Kaushik, the managing partner andother partners along with the employees worked hard to achieve the set targets. After a year thefirm was established, Kaushik decided to take a break. He had promised his wife that he would takeher to Canada for a month. He purchased tickets and they were to take the flight at midnight.Incidentally, Kaushik received a call from Australia that a delegation, which was expected since along time, was arriving within next 2 days to finalise a deal worth about AUS$2 billion. Kaushikdecided to cancel the programme against the protests from his wife. The Australian delegation, as3
  4. 4. Legal Wrangles of Kaushikdecided, came to Hyderabad and finalised a software project deal with the firm and paid an advanceamount to meet the expenditure required for pooling up the resources for starting the project. Nextmorning, Kaushik’s wife left the house without informing him and sent a notice for not fulfilling hispromise. Kaushik was shocked and questioned himself, whether his promise to take her to Canadaamounts to a contract. He was not able to think beyond that. One fine morning, when Kaushik was busy discussing the course of action of the Australianproject, an unknown person came to his office with some papers in his hands, and told Kaushik thathe had given INR 300,000 as personal loan on execution of a promissory note. However, due tosome personal reasons he could not come to take money during the last 4 years and requested himto repay the money along with the interest. Kaushik’s friends inform him that the promissory note istime barred, therefore there is no contract between them and amount need not be paid. But, Kaushikhaving not accepted the plea; instead executed another promissory note for the principal and interestdue as on the date and requested him to give 1 month time for repayment which the other partyreadily accepted. At the same time, Kaushik recollected a phone call that he received when one ofhis partner was not in the office which informed him that other partners of the firm promised to payINR 200,000 to a temple to construct a compound wall which is located near to their office. All ofthem, excluding the legal advisor who was present in the meeting, decided that there is no obligationon them to pay the amount as it was a causal promise. But, the legal advisor told them that it will bea binding contract on them as the temple has constructed the compound wall and they have to paythe amount as promised. The firm received a notice from income tax department for payment of advance tax as per theprovisions of the Income Tax. But, the partners were not interested to pay with a plea that they donot have taxable income. They wanted to show the transaction of a gift of a car given to the fatherof Kaushik towards the expenditure. But, Kaushik expressed a doubt that without having anycontract, how a gift can be given. They hired a chartered accountant to prepare accounts so thatthey need not pay any tax and authorised to prepare some agreements in favour of some agenciesfor payment of money as donations. With the consent of the partners of the firm, the charteredaccountant manipulated some of the transactions and accounts to evade the tax payment. Theyarranged a residential flat at a very low cost compared to the open market rate with their influencein the name of Income Tax officer’s wife and also arranged a housing loan from a nationalisedbank for him with an intention that he may bail them out of their problems. Finally, they filed theirfinancial statements and income tax assessment papers with the tax authorities and waited for theapproval of assessment copies.4