IBS558 BL (A) / 0105

Semester – II End – Semester Examinations

IBS558 – Business Law
Part – A

Q. Which of the following is not a requisite of a valid custom?

a. The custom to have the force of law must be of immemorial antiquity
b. It must not be repugnant
c. A custom should not have an obligatory force
d. Customs should be consistent with one another
e. A custom must be certain and definite.

Q. As per Sale of Goods Act, the ‘risk’

a. Transfers with the transfer of property in the goods
b. Never transfers With the transfer of property in the goods
c. Always stays with the buyer
d. Always stays with the holder of the goods
e. Passes to buyer on agreement to sale

Q. General Insurance is a
a. Voidable contract
b. Wager
c. Contract of guarantee
d. Contract of Indemnity
e. None of the above.

Q. Doctrine of Ultra-Vires is related to

a. Memorandum of Association
b. Articles of Association
c. Object Claws
d. Both (a) and (c) above
e. Name Claws

Q. Which of the following will amount to Deficiency of Service as per the Consumer Protection Act?
a. Inadequate inventory
b. Shortage of labour
c. Non maintenance of the quality of service required to be provided under any law.
d. False representation regarding the grade of goods
e. Misleading representation about sponsorship.

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Q. Which of the following is/are excluded while counting the period of Legal Proceedings under
Section 12 of the Limitation Act?
a. The day from which suit period is to be reckoned
b. The day the judgment was pronounced
c. Time needed to obtain a copy of the decree or sentence
d. Time needed to obtain a copy of the order for appeal, revision, award etc.
e. All of the above

Q. Which of the following is not a not perquisites:

a. HRA
b. Rent free house
c. Free car provided by employer
d. Dearness allowance
e. City compensatory allowance

Q. A Contract entered with a lunatic during the time he is of sound mind is

a. Valid
b. Void
c. Void ab-initio
d. Voidable
e. Not enforceable

Q. A promises B to compensate the loss caused to B either by him or by another person. The
contract is called
a. Contract of guarantee
b. Contract of indemnity
c. Contract of security
d. Contract of bailment
e. Contract of agency

Q. A holder in due course is a person if he has obtained the negotiable instrument

a. For consideration
b. By gift
c. Before its maturity
d. After its maturity
e. Both (a) and (c) above

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Q. The doctrine of indoor management

a. Can be invoked by the company and operates in its favour
b. Can be invoked by the company but does not operate in its favour
c. Can be invoked by outside parties dealing with the company
d. Aims at protecting the outsider against the company
e. Both (c) and (d) above

Q. Which of the following is not the most commonly known dispute resolution method for ADRs
a. Negotiation
b. Mediation
c. Notation
d. Conciliation
e. Arbitration

Q. Which of the following is an agricultural income?

a. Dividend paid by a company our of its agricultural income
b. Share of profit of a partner from a firm engaged in an agricultural operation
c. Income from supply of water by the assessee from a tank in its agricultural land
d. Interest received by a money lender in the form of agricultural produce
e. Maintenance allowance charged on agricultural land

Q. Statutory meeting is mandatory for

a. Public company with unlimited liability
b. Government company
c. Public company limited by guarantee and having share capital
d. Company limited by guarantee and not having share capital
e. A private company which has become a public company after 6 months of its incorporation

Q. While issuing digital signature certificate, the certifying authority must be sure that the
a. e-commerce transaction is accurate
b. Applicant possesses a valid Trade License for the transaction
c. Applicant holds a private key capable of creating a digital signature
d. Applicant has a bank account with overdraft facility
e. Applicant has a credit card unique to the subscriber

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Q. A contract where consent is obtained by coercion is

a. A void contract
b. An illegal contract
c. Voidable at the option of either of the parties to the contract
d. Voidable at the option of party whose consent was obtained by coercion
e. Voidable only if coercion proceeds from one of the parties to the contract and not from the
third party

Q. An agent is personally liable where

a. He acts for a principal who cannot be sued
b. He acts for a principal residing abroad
c. His authority is coupled with interest
d. He acts for an undisclosed principal
e. All of the above

Q. In a contract of sale, quality of goods is a

a. Warranty
b. Implied warranty
c. Condition
d. Implied condition
e. Insufficient information

Q. For issuing shares at discount more than 10%, the company has to get approval
a. Through from an ordinary resolution
b. Through from a special resolution
c. From the Central Govt.
d. From the NCLT
e. From the registrar

Q. Which of the following statement(s) is / are false with respect to currency notes?
a. RBI decides the design, form and material of bank notes
b. Bank notes of denomination value of Rs.500 issued before 13th January, 1946 do not
constitute a legal tender
c. The Reserve Bank of India can issue bank notes which are torn, defaced or spoiled
d. Every bank note amounts to a legal tender at any place in India
e. All of the above are true

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Q. The chairman of the SEBI is appointed by

a. Central government
b. RBI
c. A joint committee consisting of the directors of IDBI, IFCI, ICICI,and UTI
d. The members of the SEBI
e. Jointly by the RBI and State Bank of India

Q. 'Quantum Meruit' means

a. Compensation as decided by the court
b. The Quantum of consideration earlier agreed to by the parties
c. As much as is merited
d. Quantifying the damages
e. Both (a) and (c) above

Q. ‘Income’ under the Income Tax Act includes

a. Profits and gains
b. Voluntary contributions received by a charitable institution
c. Value of the benefit received in kind of exercise of a profession
d. Both (a) and (b) above
e. All of the above

Q. A contract without free consent is

a. Voidable
b. Void
c. Illegal
d. Legal
e. Invalid

Q. Reconstruction can be effected by a scheme of compromise where a compromise is proposed

a. Between the company and the creditors or any class of them
b. The directors and the chairman
c. The members in total
d. The creditors and the banks
e. The shareholders and the directors

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Q. Which of the following statement is true in the insurance contract?

a. Offer and acceptance is not necessary
b. Offer is made by the Insurance Company
c. Insurance agent makes offer to the insured
d. Offer is made by the insured/assured
e. Consideration is required at the time of claim

Q. Which of the following is not related to the group of intellectual property rights?
a. Copyrights
b. Patents
c. Organizational Structure
d. Geographical Indications
e. Layout designs

Q. Which of the following amounts to a contract of Bailment?

a. Property deposited with a court
b. Money deposited in a bank
c. Government distributing food grains through fair price shops
d. Goods dispatched on consignment basis
e. Bank's loans to its customers

Q. The minimum number of members of a private company is

a. 2
b. 3
c. 4
d. 5
e. 6

Q. Conditions that constitute oppression are

a. Individual membership rights
b. Pattern of investigation
c. The events have to be considered as part of a continuous story
d. An application for an order under section 397 or 398
e. Both (c) and (d) above

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Part B
Problems, Conceptual Understanding, Analytical Ability and Situational Analysis

1. a. The Articles of Association of a company vested the directors with the power of
management of the business of the company and also the power to sell any property of the
company on such terms and conditions, as they deem fit. In a general meeting, the
shareholders gave a direction by an ordinary resolution to the directors to sell the
company's undertaking to a new company formed for that purpose. Can the board refuse to
carry out the directive?
b. The Memorandum of Association of a company was presented to the Registrar of
Companies for registration. The Registrar issued the Certificate of Incorporation in due
course. The company, after complying with all the prescribed legal formalities, started a
business in accordance with the object clause, but the business was illegal. The company
contends that the nature of the business cannot be questioned now, because the
Certificate of Incorporation is conclusive evidence regarding valid incorporation. Decide
whether the company can be prohibited from continuing its operations.
(5 + 5 = 10 marks)
Suggested Answer:
a. As per the provisions of Section 291 of the Companies Act, 1956 the directors have an
absolute power to do all the things which the company is authorized to exercise and do
subject to the provisions of the Act. This means that the powers of the Board of Directors
are co- extensive with those of the company. However, the directors of the company may
refuse to carry out a sale agreement resolved upon by the company in the general
meeting. This they can because in their opinion it was not in the best interest of the
company and they relied for their support of their decision on the Articles which delegated
to them all powers of management. A same decision was taken in the case of Automotive
Self-cleaning Filter Syndicate Co. Ltd. Vs. Cunningham.
The power to sell the assets of the company was vested in the board. It felt that it was not
in the best interest of the company to sell its assets, the board was not bound to do so,
notwithstanding that the company in general meeting has resolved that they should be
sold. Pothen Vs. Hindustan Trading Coop. (P) Ltd.]
Thus, in the given, case though the board cannot exercise the power under Section
293(1)(a) of the Companies Act, without the prior sanction of the general meeting; It is not
bound in terms of its articles of association to exercise these powers even when the
shareholders by resolution have asked the directors to do so.
b. The company's contention is not correct.
A certificate of incorporation is a conclusive evidence only as to its registration, i.e. as to
the fact that all the requirements of the Companies Act for the incorporation of the
company have been complied with, and now the company is a distinct legal entity.
However, it does not automatically mean that all its objects are also legal. The objects
specified in the Memorandum, if otherwise illegal, would not be rendered legal by the
certificate. Therefore, the contention of the company, that the nature of business cannot
be gone into after the certificate of incorporation has been obtained, is not tenable, and its
directors will be held guilty for misfeasance, even if the objects for which the money was
applied were expressly authorized by the Memorandum, because an agent cannot
undertake an illegal activity merely because his principal has authorized him to do so.

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2. a. M/s. Hitech Ltd. appointed M/s. Ram & Co. as their sole agents for sale of computers. Ram
& co. sold 10 computers valued at RS. 4.00 lakh to Ravi on credit and Ravi failed to repay
the amount subsequently M.s Hitech led. Filed a suite against Ravi for recovery of Rs.4.00
lakh plus interest. Is the claim of M/s Ltd. enforceable?
b. A entrusts his car to B for repairs. B agreed that the repairs would be completed within a
week. As B was busy with his daughter's marriage, he could complete only a part of the
work within this time. At the end of the week, A wanted the car back though the repairs
were not fully completed. B refused to hand over the car unless his charges pertaining to
the portion of the work completed by him were paid. Discuss the rights of A and B.
(5 + 5 = 10 marks)
Suggested Answer:
a. The doctrine of privity of contract says that a contract cannot confer rights or impose
obligations arising under it on any person other than the parties to it. However, there is
exception to this rule an done such exception is that the contracts entered into through an
agent are valid and enforceable. In this case M/s Hitech Ltd. being the principals can sue
Ravi for the recovery of dues to M/s. Ram & co. who are appointed as sole selling agents
for sale of computers. Sec. 182 of the Contracts Act states that ’He who does through
another does by himself’ in other words, the act of an agent is the act of the principal.
According to section 226 the contracts entered into through an agent and obligations
arising from acts done by an agent may be enforced in the same manner and will have the
same legal consequences as if the contracts had been entered into and the acts done by
the principal in person. The principal can enforce the contract provided, the agent acts
within the scope of this authority and in the name of the principal. Hence the claim of M./s
Hitech ltd, is valid and enforceable.
b. A is entitled to receive his car. Where the goods are bailed for a specific purpose involving
special skill or labour of the bailee, the bailee gets the right to retain the goods bailed till his
charges are paid. But this 'Right of Lien' is lost on bailee's default, e.g. - when the bailee
does not complete the work within the agreed time, or in a reasonable time if no time has
been fixed by the parties. In this case, since B failed to complete the repairs within the
agreed time of one week, he has lost his right of lien, and as such must return the car to A,
even if B might have had genuine difficulties.
Of course, A is bound to pay B for the part of the completed work, on the principle of
‘Quantum Meruit ‘, & if he fails to do so, B can recover the amount through the intervention
of the court. The only difference is that he cannot retain the car till a pays the amount.

3. a. Suketu, a customer on his visit to the bank was unduly harassed by the bank official. His
statement account was not given in time and his cheque was not honoured due to the
mistaken statements of the bank official. He suffered a bad credit issue in his business. He
makes effort to speak to the manager of the bank and get his statements in order. But he
does not get the desired co-operation from the bank officials. Advice Suketu. Would you
ask him to resort to get redressal under the consumer protection Act.1986.
b. What would be your answer, if the cheque had not bounced?
(5 + 5 = 10 marks)
Suggested Answer:
a. Yes, Suketu may approach for redressal under the consumer protection act. Though there
is no provision in CPA 1986 to fix responsibility and accountability of the individual official
of bank, there are instances where district forums, state commissions for national
commission directs the public authority to fix the responsibility for harassment or mental
agony on the complainant and recover the same from the salaries of the concerned. This is

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in pursuance of Article 141 of constitution of India.

b. The answer would be the same, even if the cheque had not bounced, because the
agreement between J & L, is, still, void. Therefore, J can recover the possession of the ring
from P even in this case, if he wants to, though, in real life situations, he may not exercise
this option, since he has not suffered any real loss.

4. a. A customer drew an open (bearer) cheque payable to P. The cheque was stolen & the thief
forged the payee's signature and presented the cheque for payment to the branch of the
bank upon which it was drawn. The Bank paid the amount without verifying his identity. Is
the bank liable to pay compensation & if so, to whom: to the customer, to the payee or to
both?
b. Shivamtech Ltd. puts up cable wires in a certain area. There was no power in the
memorandum of association of the company to put up the wire there. Satyam Ltd. a
business rival of Shivam cut the cable wires down. Shivam want to sue Satyam Ltd. for
damages. What would you advise?
(5 + 5 = 10 marks)
Suggested Answer:
a. The bank is not liable to compensate anyone. An open cheque is payable to the bearer,
except if there are circumstances to doubt the bona-fides of the person claiming the
amount & / or if the cheque has been materially altered.
Secondly, the bank is expected to know & verify the signature of its own customers only,
but not of every person in the world. In this particular case, though the signature of the
payee was forged, that of the drawer (customer) was genuine & as the bank was any way
not expected to know or verify the signature of the payee, there has been no negligence on
its part and this is a payment in accordance with the apparent tenor of the instrument.
b. Shivam can recover the damages from satyam as the doctrine of ultravires cannot prevent
the company from protecting its property.

Part C
Problems, Conceptual Understanding, Analytical Ability and Situational Analysis

5. a. In brief discuss the items, which are included in ‘Gross Salary’.

b. Reliance Company entered into an agreement with Dolphin India (DI) for supply of raw
material to its (Reliance’s) depot at Indore. For this purpose DI laid a pipe line from its own
dept at Aurangabad to another of its own dept at Indore. Reliance has made its own
arrangements to get the raw material from DI dept in Indore to its own factory. State
whether this constitutes an interstate sale or not.
Explain what constitutes an interstate sale?
(5 + 5 = 10 marks)
Suggested Answer:
a. It is important to note that any remuneration received by an employee from his employer,
for work done or services rendered, is known as salary irrespective of the term used for
such remuneration. While computing income under the head “Income from Salary”,
following items are included in gross salary:

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Salary/Wages
Allowance
Pension
Gratuity
Fees
Commission
Perquisites in addition to salary
Profits in lieu of salary
Salary received in advance
Taxable portion of amount of leave encashment
Employer’s contribution to Recognized Provident fund in excess 10% of salary
Interest credited to Recognized Provident fund in excess 9.5% of int. rate
Allowances: Are received in terms of money in excess of regular salary to meet certain
expenditure.
Allowances are classified into three categories:
¾ Fully exempt allowances – not included in gross salary, e.g. Sumptuary allowances.
¾ Fully taxable allowances – entirely included in gross salary e.g. D.A, CCA.
¾ Partially Taxable allowances – included in gross salary (only taxable portion) e.g.
HRA.
Perquisites are facilities in non monetary terms, made available to the employees in
addition to salary. Only taxable portion of any perquisite is included in gross salary.
e.g. Valuation of Rent Free House
Valuation of car etc.
From the total of above items Deductions u/s 16 are made:
• Standard Deduction [u/s 16(i)] – It is available to salaried employees for expenditure
incidental to his employment.
• Deduction for Entertainment Allowance [u/s 16(ii)] – Entertainment Allowance is
first added to the gross salary and then a deduction is available to the Govt.
employees as per rule.
• Deduction for Professional Tax [u/s 16(iii)] – Professional tax is paid by the employer
on behalf of employee and as such added in gross salary but later it is available as
deduction u/s 16(iii).

b. Yes, this would be considered as an interstate sale as per Section 4 of the Central Sales
Tax Act. DI has transferred the raw material solely for Reliance’s use, that is, the transfer
has been necessitated because of the sale.
The following are essential features of an interstate sale:
¾ Transaction should be a completed sale.
¾ There should be an agreement for sale (express or implied) with a stipulation (may be
express or implied) regarding movement of goods from one state to another.

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¾ Concluded sale must take place in a state which is different from the state from which
movement of goods commences
¾ The movement should be result of a contract (express or implied)
¾ There should be physical movement of goods from one state to another (such
movement must be inextricably connected with sale).
¾ It is sufficient if movement of goods arises as a result of contract of sale or is
incidental to the contract.
¾ It is not relevant in which state the property (i.e. the ownership) of good passes from
seller to the buyer
¾ It is not necessary that sale precedes the interstate movement of goods. Sale can be
either before or after the movement of goods
¾ Where the movement of goods commences and terminates in the same state, it shall
not be deemed to be movement of goods from one state to another by the fact that in
the course of such movement the goods pass through the territory of any other state.

Case Analysis / Applied Theory

6. What does the winding up of a company mean? When a company be wound up by the
Court?
(10 marks)
Suggested Answer:
Meaning of winding up

A company is regarded as an artificial person. The last stage of this artificial person is the
winding up process for a company. It means the process of dissolving of a company starts with
the decision of winding up. The decision of winding up may be done through various modes but
it essentially includes the process of:
¾ Disposition of the assets;
¾ Paying off dates out of the value realized from assets and/or from contributions from its
members;
¾ Surplus if any generated during the process is distributed amongst its members in the
proportion of their holding.
Winding up of a company is done for the benefit of its members and/or its creditors and/or
for public interest. A liquidator is appointed for the execution of the process of winding up.
Winding up by the Court
The Court in the following cases may wind up a company:
¾ By special resolution of the company [sec. 433(a)];
¾ Default in delivering Statutory Report [sec. 433(b)];
¾ Default in holding Statutory Meeting [sec. 433(b)];
¾ Failure to commence business or for suspension of business [sec. 433(c)];
¾ Reduction in membership [sec. 433(d)];

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¾ Inability to pay its debts [sec. 433(e)];

¾ Just and equitable [sec. 433(f)];
By special resolution of the company [sec. 433(a)]
As per the decision by the members through a special resolution, Court may be requested for a
winding up of the company. It is a rare and costlier option available to the members. Under such
a situation when member oft for winding up, they go for a voluntary winding up.
Default in delivering Statutory Report [sec. 433(b)]

A petition may be filed either by the Registrar or by the contributories for not delivering the
statutory report in time. The Court may either order for winding up or may order for delivery of
statutory report within a stipulated time.
Default in holding Statutory Meeting [sec. 433(b)]
A petition may be filed either for the winding up after the expiry of 14 days from the day on which
the statutory meeting was to have been held. The Court may either order for winding up or order
for holding of statutory meeting.
Failure to commence business or for suspension of business [sec. 433(c)

Every company is established to function as a business establishment. Under certain

circumstances if Court finds that the company is not showing its intension of commencing its
business or finds the company is not in a position to start its business or there is reasonable
delay to restart its business after a suspension of business, Court may direct for a winding up of
the company.
Reduction in membership [sec. 433(d)]

Minimum number of members for Public Ltd. Co. is 7, where as it is 2 for a Private ltd. Co. If
during the life time of a company, the minimum number of member’s drops below the required
number, the Court may direct for a winding up.
Inability to pay its debts [sec. 433(e)]

If Court finds that the company is no more in a position, where by the normal commercial
involvement cannot bring sufficient funds to meet the companies existing liabilities, the Court
may order for winding up of the company.
JUST AND EQUITABLE [SEC. 433(F)]
The Court has got the widest range of discreation under this heading to call for a winding up.

7. Write a note on:

a. Utmost Good Faith
b. Copyrights alternative
c. dispute restriction
d. Digital signature
(2½ x 4 = 10 marks)
Suggested Answer:
Since insurance shifts risk from one party to another, it is essential that there must be utmost
good faith and mutual confidence between the insured and the insurer. Any fact which goes to
the root of the contract of insurance and has a bearing on the risk involved is a material fact. It is
only when the insurer knows the whole truth that he is in a position to judge :-

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a. as to whether he should accept the risk, and

b. if so, what premium he should charge.

In a contract of insurance, it is the insured who knows more about the subject matter of the
contract than the insurer. Consequently, it is his duty to disclose all material facts and withhold
nothing.
Subrogation:

The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire
and marine insurance. Accordingly, when the insurer has compensated the loss for which he is
liable under the policy, all the rights and remedies which the insured may have against the third
parties pass on to the insurer and the insurer can recover the amount he has paid under the
policy. Excess, if any, will, of course, go to the insured, as the insurer is not allowed to make any
profit out of these rights.

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