Advisory on Conducting Legal Audit to Review Legal Aspects / Functions Related to Business Operations

Amid Covid-19 outbreak, our Hon’ble Prime Minister of India while addressing the nation dated 24.03.2020 announced 21 days precautionary lockdown to break the chain of the existing pandemic situation. The step is indeed commendable; however, the same will surely have an economic impact on the businesses. With travel restrictions, cancellations of all types of transport, business hibernation, it is very obvious for all businesses to worry a bit as it will directly impact the economy with each passing day. While everything has its downside and upside; it is our duty being responsible citizen of India to duly abide the lockdown advisories and there is no point in dismaying about the business hibernation; rather it is the right time to utilize this time to revamp the strategies and prepare for a powerful comeback with increased efficacies and help re-build the economy of our country in shortest possible time.

In view of the same, while it is quite easy for employees and students to subscribe for certain online courses to upgrade their skills; however, at the very same time, business owners are not helpless either. It is imperative for all the employers and business owners, be it a proprietary or incorporated company to utilize this time in analysing, revamping and introspecting the existing business modus and legal issues involved thereto. In view of the same, carrying out legal audit of the businesses would certainly help the businesses to get the things right which are generally gets inadvertently ignored in day to day business activities.

The term “Legal Audit” per se seems a very complex term; however, it simply means routine health check-up of your business. The general assumption in India as to Audits is limited to Tax Audits only; however, in the era of immense research and development, Globalization of the businesses; there are other things that indeed need to be timely audited and necessary upgrades to be done to the traditional practices to keep aligned with the changing business practices. Thus, besides financials and taxes, there are other things that need close monitoring to be in proper alignment with the changing needs and practices. However, such things gets inadvertently ignored in day to day hustle and this would be the right time to introspect such aspects; as the business owners now have got ample time to do the same and get the things right.

Legal audit is a systematic review of a company’s assets and related risks and opportunities. Legal audits, also interchangeably referred to in the instant note as Comprehensive Due-Diligence, can help assess, preserve, and enhance the company’s efficacy; correct defects in the existing process; identify risks as to following the existing process and policies; and implement best practices for effective management. A thorough Legal audit involves comprehensive review of a company’s agreements, policies and procedures, and other legal strategies to be followed for better and smooth administration.

Now the question arises, what sort of things that need close monitoring besides financials and tax part of the business. The same is very subjective and largely depends upon the business modalities of the respective businesses. However, there are certain things that largely apply to each and every business; be it a small scale or large scale, start up or established company. 

1. Contract/Agreement/Documentation Review:

Any business day in and day out, enters into one or more agreement with their vendors, employees, business partners, channel partners inter alia. All such agreements are required to be updated and upgraded with the change in practice or personal experience; as the agreement that you may have drafted few years back may not be aptly protecting your business in view of changes in practice or otherwise for any other reasons whatsoever. Hence, regular audit to check the same is indeed a need of the day and this hibernation can certainly be used for such introspection.

Moreover, it cannot be denied that many times businesses do not have any agreements or contracts ready with them and whenever any new transaction comes, the company need to invest time and efforts negotiating the agreement from scratch. Thus it is not only imperative to get the contracts reviewed/audited; but also there is need to evaluate the vacuum and need of certain agreements absence of which may have exposed the business at risk. It is also pertinent to mention here that when we say the term Contracts, it essentially includes Purchase orders, Invoices formats, Vendor Agreements, Employment agreements, IP related Agreements, Company policies, Agreements related to Third Party/outsourcing and any such documents that govern the rights of the parties.

Any business is indeed incomplete with the competent employees and thus agreements with the Employees who are real asset for your business definitely need a regular audit with two fold perspective; first employee retention and second protection of Employers’ rights in case of termination or resignation.

In today’s era, employees are thoroughly engaged in research and development for the employer and therefore, it is imperative to have a right contract at hand that protects employers and the intellectual property created by the employee for its employer and any discrepancy or loophole in the employment agreement with respect to such protection; may lead to serious issues for any business. Therefore, it is mandatory to introspect and review such agreements and make sure that such agreement is intact and water tight.

To conclude, Contracts have always formed a critical part of business. In this era of commercialisation, all businesses need and intend to enter into perfect contracts, ones that are clear enough to be easily understood by a person of ordinary prudence and at the same time detailed enough so that it cannot be willfully misinterpreted. Thus, it requires a timely audit of contract to ensure that they incorporate the stipulations of the parties, in order to meet the object of such contract with precaution and to minimize the legal and business risk resulting from the inconsistent language. Time and resources spent on such audit of Contracts / Agreements can save Corporations and Businesses from several legal issues.

2. Regulatory compliances:

Regulatory compliances are another domain that need to be introspected and timely reviewed to ensure that the business are in compliant with the applicable rules and regulations governing the same.

3. Litigation matters:

It is also important to make sure that all litigations with respect to the businesses are managed properly and the same are aligned with your expectations with the outcome.

Moreover, it is imperative to note that many times company faces issues pertaining to recovery of unpaid dues and thus it would be right time to analyse pending dues from various entities and get the groundwork/homework done with respect to strategizing the legal actions to be taken for such recovery under Insolvency and Bankruptcy Code, 2016 or through Civil route in case of individual or proprietorship firms and this time of hibernation would be better utilized liasoning with experienced lawyers and getting the legal notices ready to be immediately served post hibernation and set the action in motion.

4. Domain name issues and other common law rights:

In this era of digitization, every business is now online rejoicing the power of worldwide web. However, there are certain entities that take undue advantage of the reputation and goodwill of the established business and they purchase a domain name similar to your company’s domain name and ride on your established goodwill and divert or attempt to divert your consumers to their website; however, many a times these infringers escape from the attentions of the rightful owners and rightful owner did not even realize loss that being caused by such entities. Thus one part of legal audit is to ensure that you have adequate domain name registered for your business, products and services and at the same time the same is not being infringed by any third party. Such audit exercise is required to be carried out at timely interval so that any loss or damage to the reputation gets timely restrained.

5. Intellectual Property Audits:

It is indisputable proposition that a company’s intellectual property is its most valuable asset. From its Trade Marks to the product or services themselves, making sure that no one is riding on their goodwill in order to gain illegitimate gains is of the utmost importance. Further, similar protection is required to the inventions in terms of Patents, aesthetic features of the product in terms of Designs along with other intellectual property protection. Therefore, an essential component of the legal audit, intellectual property monitoring and review needs to be carried out with the help of IP attorney to ensure proper alignment and adequate protection is secured.

An IP audit is a systematic review of a company’s IP assets and related risks and opportunities. IP audits, also interchangeably referred to in the instant note as IP Due-Diligence, can help assess, preserve, and enhance IP; correct defects in IP rights; put unused IP to work; identify risks that a company’s products or services infringe another’s IP; and implement best practices for IP asset management. A thorough IP audit involves not only a review of a company’s IP assets, but also the company’s IP-related agreements, policies and procedures, and competitors’ IP.

For companies with a sophisticated knowledge of IP, the discussions can begin with a survey of the company’s IP portfolio and competitive position in the marketplace, followed by a more focused analysis of IP issues of particular interest. The most comprehensive audits include estimates of the IP’s monetary value, and protocols and detailed recommendations for dealing with IP in the future.

6. Audits of Other Legal Functions:

Apart from above-mentioned legal functions, depending on the desired scope of work, Audits/reviews can also be focused on any other legal aspect such as review of Corporate Law Practices, Environmental and Labour Law Compliances, Tax Compliances, Banking Practices, Exposure on IT/Software Compliance Aspect, among any other aspect where potential Legal Proceedings that can initiated by/against a business operation/function.

Thus, it would be prudent for all businesses irrespective of its size and reach to utilize such time in getting the legal audits done from an experienced firm and set the things aligned and get ready for a powerful comeback once the lockdown situation resulting the business hibernation gets over.

We at Khurana & Khurana, Advocates have a team of dedicated professionals who are techno-legal experts and take care of such Legal Audits as required for businesses. Business owners only need to get in touch with us and our team shall carry out all such activities in swift manner. Businesses only need to share the required documents/information as sought by the team and everything is done virtually with no actual need of physical inspection/audit at the Client’s place. Therefore, such exercise can surely be carried out during the lockdown period making complete use of this time of hibernation. 

Author: Abhijeet Deshmukh – Associate Partner, and  Abhishek Pandurangi – Partner,  at Khurana & Khurana, Advocates and IP Attorneys.  In case of any queries please contact/write back to us at abhishekp@khuranaandkhurana.com.

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