Maharaja Surajmal Institute

(Affiliated to GGSIPU, Delhi)

Department of Business Administration

Course: BBA( B&I)
Subject Module
on
BUSINESS LAWS [BBA(B&I)108]
Semester II (Credit: 4)

Module Contributor:
Dr. Anupama Sharma Dr.Beena Devi
Assistant Professor, BBA(M) Assistant Professor, BBA(E)
(Notes for Educational purpose only)

JULY 2021
 BUSINESS LAWS [BBA(B&I) 108]
Module Objectives: This module aims at familiarizing students with the basic
concepts of Business laws and Company Laws.

Unit-I: This unit focuses on the Indian Contract Act,1872:General Principles of Law
of Contract. It includes the basics of Indian Contract Act its meaning, characteristics
and kinds. It also explain the different essentials of valid contract including offer and
acceptance , consideration, contractual capacity ,free consent and legality of objects.
This unit will further stress upon the contract of Indemnity and Guarantee and
Contract of Bailment & pledge.

Unit-II: This unit basically focuses on the Sale of Goods Act, 1930. It includes
contract of sale its meaning and difference between sale and agreement to sell. The
topics like, conditions and warranties and transfer of ownership in goods including
sale by non-owners are explained. There would be proper explanation of performance
of contract of sale and regarding unpaid sellers, their rights against goods and buyers.

Unit-III: This unit mainly focuses on the Companies Act 2013 with up-to-date
amendments, types of companies, Memorandum of Association and Article of
Association, Prospectus and shares, its kinds, methods of allotment and transfer of
shares.Managing Directors, their appointments, remuneration, qualifications, powers
are also covered in this unit.

Unit-IV: This Unit basically focuses on The Negotiable Instruments Act 1881.It
covers the meaning and characteristics of Negotiable Instruments including
Promissory Note, Bill of Exchange, cheques, crossing of cheques and bouncing of
cheques. It also provides information about Holder and Holder in Due Course and
Privileges of Holder in Due Course. Further Negotiation and different types of
Endorsements are also explained in this unit.
 Contents
Unit Unit Name Page Number
No.
I The Indian Contract Act,1872:General Principle of Law of 1-28
Contract
Lesson1:Contract-Meaning,Characteristics and Kinds
Lesson2:Essentials of Valid Contract
Lesson 3:Contract of Indemnity and Guarantee
Lesson 4:Contract of Bailment and Pledge
II The Sale of Goods Act,1930 29-42
Lesson1:Contract of Sale,meaning and difference between sale
and agreement to sell
Lesson2:Conditions and warranties
Lesson 3:Transfer of ownership in goods including sale by
non-owners
Lesson 4:Performance of contract of sale
Lesson 5:Unpaid seller
III The Companies Act 2013 with up- to - date amendments 43-84
Lesson1:Essential Characteristics of a company
Lesson2:Types of companies
Lesson 3:Memorandum and Articles of Association,
Lesson 4:Prospectus
Lesson 4:Shares-Kinds,Allotment & Transfer
Lesson 5:Debentures
Lesson 6:Meetings-Essentials of a valid meeting, Kinds of
Meetings and Resolutions
Lesson7:Directors-Appointment,Remuneration and Powers
Lesson 8:Prevention of oppression and Mismanagement
IV The Negotiable Instruments Act 1881 85-104
Lesson1:Meaning and characteristics of Negotiable
Instruments
Lesson2:Promissory Note,Bill of Exchange, Cheques
,Crossing of Cheque, Bouncing of Cheques
Lesson 4:Holder and Holder in due course, Privileges of
Holder in due course
Lesson5:Negotiation:Types of Endorsements
Long & short Questions 105-107
Multiple choice questions 108-123
References and Further Readings 124
Glossary/Key Words
 UNIT I
The Indian Contract Act,1872

Contract Act

The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An
agreement enforceable bylaw”. In other words, we can say that a contract is anything that is
an agreement and enforceable by the law of the land.

Agreement
The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its section 2 (e),
the Act defines the term agreement as “every promise and every set of promises, forming the
consideration for each other”. Now that we know how the Act defines the term “agreement”,
there may be some ambiguity in the definition of the term promise.

Promise
This ambiguity is removed by the Act itself in its section 2(b) which defines the term
“promise” here as: “when the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. Proposal when accepted, becomes a promise”.
Agreement= Offer+Acceptance.
An agreement to change into a Contract as per the Act, it must give rise to or lead to legal
obligations or in other words must be with in the scope of the law. Thus we can summarize
it as-
Contract=Accepted Proposal(Agreement)+Enforceable by law (defined with in the law)

Essential Elements of a Contract

Essential Elements of a Contract as defined in Section10 of the Indian Contract Act 1872
1. Agreement -Offer and Acceptance
2. Legal purpose
3. Lawful Consideration
4. Capacity to contract
5. Consent to contract
6. Lawful object
7. Certainty
8. Possibility of Performance
9. Not expressly declared void
10. Legal formalities like Writing, Registration etc.

1. Agreement-Offer and Acceptance

The parties to the contract should have a mutual understand regarding the subject-matter of
the contract. There must be a "lawful offer" and "lawful acceptance" thus resulting in an
agreement. The parties must have agreed to the subject-matter in the same sense.

2. Legal purpose
There must be an intention among the parties that the agreement should be attended to by
legal consequences and create legal obligation. Agreements of social or domestic nature do

1
not contemplate legal relations

3. Lawful Consideration
Consideration means 'something in return'. In every legal contract, there must be something
in return. An agreement is legally capable to be enforced only when each of the parties to it
gives something and gets something. The =consideration should not be unlawful, illegal,
immoral or opposed to public policy.

4. Capacity to contract
Every person who enters into a contract must be competent. In other words, the person
should be of the age of majority, should have a sound mind, and must not be disqualified
from any law to which they subject.
Minors, lunatics, unsound and intoxicated persons are incompetent to enter into a contract.
However, there are exceptions as defined in Section 68.Incase of an exception the minor or
lunatic is not personally liability.

5. Lawful object
If the object in the agreement is unlawful, the agreement is void.
Eg: The landlord can not recover rent through court of law when he knowingly lets his house
to carry on prostitution.

6. Certainty
Every agreement of the contract must be certain. If the agreement is not certain or incapable
of being made certain, it is void.

7. Possibility of Performance
Every contract must be capable of performance. Otherwise, the agreement is void.
An agreement to do an impossible act whether physically or legally, is void.

8. Not expressly declared void

The agreement must not have been expressly declared to be void under the Act. Examples
of such agreements are restrainment of trade, marriage, legal proceedings and wagering
agreements. Such agreements are not enforceable by law.

9. Legal formalities like Writing, Registration etc.

A contract may be oral or in writing according to the Indian Contract Act. In certain special
cases the agreement must be in written. In some cases like contracts by companies, selling or
buying of shares etc., the contract must be registered.

Types of Contract as per Indian Contract Act,1872

A).On the basis of the validity
1. Valid Contract:Section2(h)of theIndianContractAct,1872as-“an agreement enforceable by
law”.
• It contains all the essential elements of a valid contract. Valid Contract Intention to
create legal relationship Lawful consideration Capacity of parties Legal formalities Not
declared to be void possibility of performance certainty of meaning lawful object free
consent offer and acceptance

2. Void Contract • Section 2 (j) states as follows: “A contract which ceases to be

enforceable by law becomes void when it ceases to be enforceable”. Thus a void contract is

2
one which cannot be enforced by a court of law. Example: Mr. X agrees to write a book
with a publisher. After few days, X dies in an accident. Here the contract be comes void
due to the impossibility of performance of the contract.•

3. Voidable Contract • Section 2(i) defines that “an agreement which is enforceable by law
at the option of one or more parties there to, but not at the option of the other or others is a
voidable contract”.
E.g., Absence of free consent, agreement by coercion, undue influence, fraud or
misrepresentation etc. • Evidence is essential. • Court can cancel the contract.

4. Illegal Contract:• It is a contract which the law forbids to be made. The court will not
enforce such a contract but also the connected contracts. All illegal agreements are void but
all void agreements are not necessarily illegal.
B.On the basis of the formation of contract
1. Express Contracts:•A contract would be an express contract if the terms are expressed by
words or in writing.
• Example: A tells B on telephone that he offers to sell his house for Rs. 2 lacs and B in
reply informs A that he accepts the offer, this is an express contract

2. Implied Contracts: • Implied contracts come into existence by implication. Most often the
implication is by law and or by action.
Example: Where a coolie in uniform picks up the luggage of A to be carried out of the
railway station without being asked by A and A allows him to do so, it is an implied contract
and A must pay for the services of the coolie detailed by him.
Tacit Contracts • The word Tacit means silent. Tacit contracts are those that are inferred
through the conduct of parties without any words spoken or written.
• A classic example of tacit contract would be when cash is with drawn by a customer of a
bank from the automatic teller machine[ATM]

3. Quasi-Contract: • A quasi-contract is not an actual contract but it resembles a contract. It

is created by law under certain circumstances. The law creates and enforces legal rights and
obligations when no real contract exists. Such obligations are known as quasi-contracts.
• Example: Obligation of finder of lost goods to return them to the true owner or
liability of person to whom money is paid under mistake to repay it back

C. On the basis of the performance of the contract

1. Executed Contract: • A contract which has already been performed. • Example: When a
grocer sells a sugar on cash payment it is an executed contract because both the parties have
done what they were to do under the contract.

2. Executory Contract:•A contract which has to be performed in future.

• Example: Where G agrees to take the tuition of H, a pre- engineering student, from the next
month and H inconsideration promises to pay G Rs. 1,000 per month, the contract is
executory because it is yet to be carried out. •Unilateral or Bilateral are kinds of Executory
Contracts and are not separate kinds
(a) Unilateral Contract: • Unilateral contract is a one sided contract in which one party has
performed his duty or obligation and the other party’s obligation is outstanding.
(performance is due from one party.)
• Example: M advertises payment of reward of Rs. 5000 to any one who finds his missing
boy and brings him. As soon as B traces the boy, there comes into existence an executed

3
 contract because B has performed his share of obligation and it remains for M to pay the
amount of reward to B

(b) Bilateral Contract: • A Bilateral contract is one where the obligation or promise is
outstanding on the part of both the parties (performance is due from both parties).
• Example: A promises to sell his plot to B for Rs.1 lacs cash down, but B pays only Rs.
25,000 as earnest money and promises to pay the balance on next Sunday. On the other hand
A gives the possession of plot to B and promises to execute a sale deed on the receipt of the
whole amount. The contract between the A and B is executor because there remains
something to be done on both sides. • Executory contracts are also known as Bilateral
contracts

Quasi Contract
Can there be a contact without offer, acceptance, consideration etc? Well, yes there can be such
a contract based on social responsibility. We call such contracts quasi contract.
There are cases where the law implies a promise and imposes obligations on one party while
conferring rights to the other even when the basic elements of a contract are not present. These
promises are not legal contracts, but the Court recognizes them as relations resembling a
contract and enforces them like a contract. These promises/relations are quasi contracts.
Sections 68 – 72 of the Indian Contract Act, 1872 detail five circumstances under which a
quasi contract comes to exist. Remember, there is no real contract between the parties and
the law imposes the contractual liability due to the peculiar circumstances.

Section68– Necessaries Supplied to Persons Incapable of Contracting

Imagine a person in capable of entering in to a contract like a lunatic or a minor. If a person
supplies
Necessaries suited to the condition in life of such a person, then he can get
reimbursement from the property of the incapable person.
A is a lunatic. B supplies John with certain necessaries suited to his condition in life. However,
John does not have the money or sanity and fails to pay B. This is termed as a Quasi contract
and Peter is entitled to reimbursement from A’s property.

Section69–Payment by an Interested Person

If a person pays the money on someone else’s behalf which the other person is bound by law to
pay, then he is entitled to reimbursement by the other person.
Ram is a zamindar. He has leased his land to Shyam, a farmer. However, Ram fails to pay the
revenue due to the government. After sending notices and not receiving the payment, the
government releases an advertisement for sale of the land (which is leased to Shyam). According
to the Revenue law, once the land is sold, Shyam’s lease agreement is annulled.
Shyam does not want to let go of the land since he has worked hard on the land and it has
started yielding good produce. In order to prevent the sale, Shyam pays the government the
amount due from Ram. In this scenario, Ram is obligated to repay the said amount to Shyam.

Section70–Obligation of Person enjoying the benefits of a Non-Gratuitous Act

Imagine a person lawfully doing something or delivering something to someone without the
intention of doing so gratuitously and the other person enjoying the benefits of the act done or
goods delivered. In such a case, the other person is liable to pay compensation to the former for
the act, or goods received. This compensation can be in money or the other person can, if
possible, restore the thing done or delivered. However, the plaintiff must prove that:

4
 ⚫ The act that is done or thing delivered was lawful
⚫ He did not do so gratuitously
⚫ The other person enjoyed the benefits

Section71–Responsibility of Finder of Goods

⚫ If a person finds goods that belong to someone else and takes them into his custody,
then he has to adhere to the following responsibilities:
⚫ Take care of the goods as a person of regular prudence
⚫ No right to appropriate the goods
⚫ Restore the goods to the owner(if found)
⚫ Peter owns a flower shop. Olivia visits him to buy a bouquet but forgets her purse in the
shop.
Unfortunately, there are no documents in the purse to help ascertain her identity.
Peter leaves the purse on the check out counter assuming that she would return to
take it.

Section72 –Money paid by Mistake or Under Coercion

⚫ If a person receives money or goods by mistake or under coercion, then he is liable to
repay or return it.
⚫ Let us see an example. Peter misunderstands the terms of the lease and pays municipal
tax erroneously. After he realizes his mistake, he approached the municipal authorities
for a reimbursement. He is entitled to be reimbursed since he had paid the money by
mistake.
⚫ Similarly, money paid by coercion which includes oppression, extortion or any such
means, is recoverable.
Topic-3 CAPACITY OF PARTIES
⚫ Section10 of the Contract Act requires that an agreement to be enforceable by law
must be made by the parties competent to contract.
⚫ Section 11 of the contract Act provides that “every person is competent to contract,
who is of the age of majority according to the law to which he is subject, and
who is of sound mind and is disqualified from contracting by any law to which
he is subject.”
⚫ This Section deals with personal capacity in three distinct branches:
 (a)Disqualification by infancy, i.e. minors.
 (b)Disqualification by insanity, i.e. lunaties.
 (c)Other special disqualifications by personal laws, such as in solvancy, conviction etc.

Disqualification by Infancy
⚫ Age of Majority: A valid agreement requires that both the parties to the contract
should understand the legal implications of their conduct. They must have mature
mind. They should be major in age.
⚫ According to Indian Majority Act, 1875, every person domiciled in India
shall be deemed to have attained his majority when he shall have completed his
age of eighteen years and not before. Incase, guardian has been appointed to the
minor or where the minor is under the guardianship of the court of wards, the
person shall become major on the completion of the age of 21 years.

Law Relating to Minor’s Agreement

⚫ The Act makes it essential that all contracting parties should be competent to contract,
and if a person is incompetent to contract by reason of infancy, he cannot make a

5
 contract within the meaning of the Act. Therefore, an agreement with a minor is void
and a minor can neither sue nor be sued upon it. The Contract is also not capable of
ratification in any manner. The parents of a minor are not legally responsible for his
contracts unless he acts as their agent.
⚫ Following important provisions govern agreements made with a minor.
⚫ (i) Agreement is absolutely void: An agreement by or with a minor is void-ab-initio.
It is considered to be a nullity and non-existing from the very beginning. Thus, if a
party who has parted with goods, can trace them with the minor then he can recover
damages for the breach of contract or recover their price. Nor can money lent to such
a minor be recovered because if that were to be allowed it would tent amount of
enforcing the contract
⚫ Leading case: Mohiri Bibi V. Dharmodus Ghosh.
⚫ In this case a minor executed a mortgage for Rs. 20,000 and received Rs.8,000 from
the mortgagee.
⚫ Mino’s liability for necessities: All contracts relating to the necessities supplied to a
minor according to this status in life are valid. But only the minor’s property is liable
for necessities, and no personal liability is incurred by him.
⚫ Necessities must be things which the minor actually needs; therefore it is not enough
that they be of a kind, which a person of his condition may reasonably want for
ordinary use, they will not be necessities if he is already sufficiently supplied with
things of that kind, and it is immaterial whether the other party knows this or not.
Objects of mere luxury cannot be necessities nor can objects which, though of real
use, are excessively costly. The fact that buttons are normal part of any kinds of
clothing, but it will not make pearl or diamond buttons necessities.
No ratification: Since the contract is void ab initio it cannot be ratifed by the minor
on attaining the age of majority. However, a minor who, on attaining majority, takes
up and carries on transaction commenced while he was under disability, will bind
himself for the whole transaction.
Example :A, a minor, takes a loan of Rs. 1,000 from B during his minority. After
attaining age of majority, A applies for a fresh loan of Rs. 1,000 B gives the loan and
obtain from A a combined promissory note of Rs.2,000.
This will be taken as a new contract and will therefore, be enforceable.
No restitution: When a contract becomes void, it is not to be performed by either
party. But if any party has received any benefit under such a contract from the other
party he must restore it or make compensation for it to the other party. This is called
restitution.
A minor is not liable to repay any money or compensation for any benefit that he
might have received under a void contract. Court, may however, in certain cases,
while ordering for the cancellation of an instrument at the instance of the minor,
require him to pay compensation to the other party to the instrument under Sec. 33 of
the Specific Relief Act.
No Estoppel: A minor is not bound by his mis-representations. If a minor procures a
loan or enters into any other agreement by representing that he he is of full age. He
cannot be prevented from pleading his minority in his defence. He will not be held
liable under the contract. It was held in Sadiq Ali Khan V. Jai Kishore (1928) that a
deed executed by a minor is a nullity there can be no estoppel against a statue, Thus
the rule of estoppel as per S.115 of the Evidence Act, 1872 is not applied against a
minor.
But this does not mean that the minors are allowed to cheat and to enjoy the fruits of
their fraud. According to S.33 of the Sepcific Relief Act, 1963 Court will order, on

6
equitable considerations for restitution if the
minor is still in possession of the money or things purchased out of it. The minor shall
have no liability if the money or things cannot be traced out in his hands.
Examples:
(a) A minor borrowed Rs. 1000 on a fraudulent representation that he was a major,
and he spent the whole
of the money in a picnic tour of Kashmir. In this case the creditor cannot sue for the
realization of the money so advanced by him.
(b) A minor fraudulently over states his age and takes delivery of a motor car after
executing a promissory note in favor of the trader for its price, though the minor
cannot be compelled to pay on the promissory note; but the court on equitable
grounds may order the minor to return the car to the trader, if it is still with the minor.
(c)A grocer supplies monthly rations for 6 months to B who is aged 17 years. On B’
failure to pay, he sues him for the realization of his dues. In this case B’s property is
liable for the payment of credit rations consumed by B during the period of his
minority.
Costs incurred in successfully defending a suit on behalf of a minor in which his
property was in jeopardy are “necessities”. Minor as a beneficiary: All such contracts
under which the minor is to receive some benefit or which are beneficial to him are
valid. These contracts include agreements which provide for the teaching, instruction
or employment of a minor. It is to be noted that only his property is liable for
liabilities arising out of such contracts. In no case he will be personally liable.
English law has expressly made a contract for the minor’s benefit enforceable. But in
India all contracts made by minors are void. Still majority of the contracts for the
benefit of minor have been held to be enforceable on the ground that it will be unjust
in the circumstances to deprive a minor of a benefit which he may be entitled to get
under a contract.
Minor as Agent: A minor can be appointed as an agent. He can represent his
principal in dealings with other parties. Since minor does not incur any personal
liability, he cannot be held responsible for his any act of negligence or fault.
Therefore the principal will be responsible to the third parties for the acts of his minor
agent. He cannot hold the minor agent personally liable for any wrongful acts. Thus
the principal runs a great risk.
Minor as a partner: A minor cannot be a partner of a firm. An agreement of
partnership making a minor a full-fledged partner is invalid between all partners.
However, he may be admitted to the benefits of an already existing partnership firm
with the unanimous express consent of all the existing partners. Such an agreement
may be entered into by his guardian on his behalf with the partners.
A minor admitted to the benefits of partnership, has a right to share the property and
profits of the firm in the proportion agreed upon by him with the other partners.
Further, he has a right to have access to and inspect and copy any of the accounts of
the firm but not the books of accounts of the firm. He liability is limited to the extent
of his share in the firm.
Minor as a member of a company: A minor cannot be a member of a company since
he is incompetent to enter into a contract. A minor may be allotted shares. His name
may remain on a company’s register of members, but during minority he incurs no
liability. On attaining majority and becoming aware of the presence of his name in the
register of members, the major has the option to repudiate his shares within a
reasonable time. Where he does not do so he may safely be taken to have accepted his
position. His liability as a share-holder then commences.

7
However, it a minor has been allotted shares through ignorance and his name has been
entered in the
Register of members both the company and the minor, can repudiate the allotment of
shares during his minority.
Surety for a minor: A person who stands as a surety for a loan taken by the minor
will be liable to the creditor for payment of the loan, even though minor was not
liable.
Mortages and sales in favour of minors : A sale or mortgages of his property by a
minor is void. But a duly executed transfer by way of sale or mortgage in favour of a
minor who has paid the consideration money is not void and it is enforceable by him
or any other person on his behalf. A minor, therefore, in whose favour a deed of sale
is executed is competent to sue for the possession of the property conveyed thereby.
A minor can not be declared as an insolvent even for his necessities of life. Only his
property is liable even for necessities of life and he, personally, is not liable for the
same.
Thus, the contract made with the minors can be under three head
(i) Valid Contracts: They include (a) contracts for necessities which include goods
as well as services.
(b) Contracts for loans taken to purchase “necessities”.
(ii) Voidable Contracts: This category of voidable contracts is not recognised our
country. This category includes those contracts in which minor is a beneficiary. Only
minor is entitled to enforce but not the other party. They can be reasonably called as
contract voidable at the option of the minor.
(iii) Void Contracts: All contracts by a minor other than those referred to above shall
be void
Disqualification by insanity
According to Sec.12 “A person is said to be of sound mind for the purpose of making
a contract if, at the time when he makes it, he is capable of understanding it and of
forming a rational judgment as to its effect upon his interests.”
A person who is usually of unsound mind, but occasionally of sound mind, may make
a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally of unsound mind, may not
make a contract when he is of unsound mind.
Example:
(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract
during those intervals.
(b) A sane man, who is delirious from fever, or who is so drunk that he can not
understand the terms of a contract or form a rational judgment as to its effect on his
interests, can not contract during such delirium or drunkenness.
Thus, idiots, lunatics and drunkard are not considered to be persons of sound mind.
(i) Idiot : A person who is devoid of any faculties of thinking or rational judgment.
All agreements, other than those for necessaries of life, with idots are absolutely void.
(ii) Lunatic: A person whose mental powers are derange is called a lunatic. Lunatic is
not a person who is continuously in state of unsoundness of mind but he may have
lucid intervals. period in which he is to his senses. Agreement with lunatics are void
except those made during lucid intervals and made for necessities of life. However,
for necessities of life, the property of such persons is liable. He does not have
personal liabilities.
(iii) Drunkards: A person under the influence of drink or drugs, stands on the same
footing as lunatic.

8
 Mere drunkenness affords no ground for resisting a suit to enforce a contract. But
where the judgment of one party was, to the knowledge of the other part, seriously
affected by drink, equity will generally refuse specific performance at the suit of the
other. And, where the court is satisfied that a contract disadvantageous to the party
affected has been obtained by “drawing him into drink” or that three has been real
unfairness in taking advantage of his position, the contract may be set aside.
Persons disqualified by any other laws:
Certain types of people are specifically disqualified by special statues from entering
into valid contracts
Alien Enemies: A person who is not an Indian citizen is an alien. An alien may be
either an alien friend or an alien enemy. An alien friend is one, whose state or
Sovereign is at peace with India. He has full contractual capacity like an Indian
Citizen subject to certain restrictions put by the Government of India, e.g., and alien
can not acquire any ownership interests in any Indian ship. On the declaration of war
between India and alien’s country he becomes an alien enemy. A contract with an
enemy becomes unenforceable on the outbreak of war. With regard to a contract with
an alien enemy following rules will apply:
(i) Since trading with an alien enemy is considered illegal, no contract can be made
with an alien enemy during the subsistence of war except with the prior approval from
the Central Government.
(ii) Contracts entered into before the outbreak of war will be suspended during the
course of war. They will be performed after the war is over.
Foreign Sovereigns and Ambassadors: Foreign sovereigns and accredited
representatives of foreign states, i.e., Ambassadors. High Commissioners. enjoy a
special privileges in that they can not be used in Indian courts, unless they voluntarily
submit to the jurisdiction of Indian courts. Though they can enter into contracts
through agents residing in India. In such cases the agent becomes personally liable for
the due performance of the contracts
Corporations: A corporations is only an artificial person created by law, e.g. a
company registered under the Companies Act, public bodies created by statue such as
Industrial Finance Corporation of India, A corporation exists only in contemplation of
law, it has no physical body or form. It can hold property, can sell or purchase goods
and can sue or be sued in relation to any of the contracts entered into by it. Being a
mere creature of law it cannot go beyond those objectives which have been laid down
in the charter of its creation, i.e., Memorandum of Association. Further, its capacity
and powers to contract are also limited by its charter. Any contract beyond such
powers is ultra vires and void. Such ultravires contracts can not be ratified even by the
unanimous vote of all its members.
Convicts: While undergoing sentence a convict is incapable of entering into a
contract. This inability comes to an end on the expiration of the sentence or if he has
been “pardoned”.
Professional persons: In England barristers-at law, are prohibited by the etiquette of
their profession from suing for their fees. So also are the Fellow Members of the
Royal College of Physicians. In our country no such professional disqualification
exists.
Free Consent
⚫ Contracts are usually described as valid, void and voidable. Valid Contract is an
agreement enforceable at the law courts. Those agreements which are not enforceable
at the law courts, i.e., for the enforcement of which legal recourse cannot be taken, are
known as Void Contracts. In between the valid and the void contracts are the voidable

9
 contracts. Such contracts are the outcomes of Flaw in Consent. At an early stage you
have read that, “an agreement can be called a contract provided it is made with the
Free Consent of the parties, competent to contract for a lawful consideration and for a
lawful object and is not expressly declared to be void”. When we analyze this
statement we come to know that to be a contract, an agreement must be made with the
Free Consent of the parties to the contract. Here is the importance of “Free Consent”
which is very much necessary for the validity of the contract.
The genuineness of the consent implies that the parties to the contract must mean the
some thing in the same sense and not only that but they should mutually agree
voluntarily. If their minds do not meet at the same thing in the same sense voluntarily,
then their consent shall not be called Free or Voluntary. The consent in such case
might have been obtained under Fraud or Misrepresentation or Coercion or undue
influence. In such a case the party giving his consent under any of these four elements
shall have a right to withdraw his consent. Such a contract where the consent of a
party or parties to the contract is caused by any of the elements stated above, i.e.
Fraud Misrepresentation, Coercion or Undue Influence/shall be called a Voidable
Contract and shall be enforceable at the option of the aggrieved party or parties and
not at the option of the other or others.
Coercion (Section 15)
Meaning: It is committing, or threatening to commit, any act forbidden by the Indian
Penal Code (XLV of 1860), or the unlawful detaining or threatening to detain, any
property to the prejudice of any person whatever, with the intention of causing any
person to enter into an agreement.
Characteristics:
Coercion by threat need not necessity be directed by a party to the contract. It may or
may not emanate from a stranger to the contract. Similarly, it may be aimed at any
person. either a party to the contract or a strange to the contract. But the idea or
intention of the party resorting to coercion should be to cause a person to enter a
contract.
Example :
(a) A threatens to Kill C (B’s son), if B does not lend Rs. 10,000 to A. B agrees to
lend the aforesaid amount. The agreement is caused by Coercion.
(b) A threatens to Kill B if B does not lend Rs. 10,000 C.B agrees to lend the amount
to C. This agreement is made under Coercion.
Effect of Coercion
Coercion vitiates Free Consent. The party or parties whose consent is taken under
the effect of Coercion get a right to avoid the contract, if he so likes. However, if the
aggrieved party has received any benefit under the contract which he is avoiding on
the basis of Coercion, he has to return that benefit to the other party or parties (S.72).
The point can be made clear by the following example:
A enters into a contract with B to sell his horse for Rs. 5000 B takes A’s consent
under Coercion. A at the time of entering into an agreement receives Rs. 1000 as an
advance from B. Later on, A avoids the sale ofthe horse on the basis of Coercion. A
has to return Rs. 1000 to B. He cannot retain the money received as an advance from
B.
Burden of Proof: The party avoiding the contract has to prove that Coercion was
exercised upon him and his consent received is not voluntary or he has not exercised
his consent freely.
Threat to commit suicide : It is an important question whether threat to commit
suicide amounts to ‘Coercion? The act of committing suicide is forbidden by the

10
 Indian Penal Code and on this basis Madras High Court has decided in Amiraju vs
Seshamma (1918, 41 Mad. 33) that threat to commit suicide amounts to Coercion and
the party affected is entitle to avoid the contract.
Coercion and Duress distinguished
(a) Coercion is the term applied under the Indian law of Contracts while Duress is the
term applied under the English law of Contracts.
(b) Coercion has a wide scope than Duress, Coercion includes threat to property also
while Duress includes actual act of violence over the person and not of property.
(c) Coercion can be applied by even a stranger, while Duress must be applied by a
party to the Contract upon the other party or to his wife or patent or child.
Undue Influence (S.16)
Definition as per S.16:
(1) A contract is said to be induced by “undue influence” where the relations
subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain an unfair advantage
over the other.
(2) In particular and without prejudice to the generality of the foregoing principle, a
person is deemed to be in a position to dominate the will of another. where he holds a
real or apparent authority over the other, or where he stands in a fiduciary relation to
the other; orwhen he makes a contract with a person whose mental capacity is
temporarily or permanently affected by reason of age, illness, or mental or bodily
distress.
3) Where a person who is in a position to dominate the will of another, enters into a
contract with him, and the transaction appears, on the fact of it or on the evidence
adduced, to be unconscionable, he burden of proving that such contract was not
induced by undue influence shall lie upon the person in a position to dominate the will
of the other.
a) A, a man enfeebled by disease or age, is induced, by B’s influence over him as his
medical attendant, to agree to pay B an unreasonable sum for his profession services.
B employs undue influence.
Salient Features
The above definition has got the following salient features:-
(1) One of the two parties to the contract is in a position to dominate the will and
mind of the other party. This is presumed when the parties to the contract have a real
or apparent authority over the other or one of the parties has got a fiduciary
relationship which puts him in a position to win over the mind of the other party. Such
position or relationship exists in the cases of minor and guardian; trustee and
beneficiary; son and father, wife and husband or vice-versa. The position is also
presumed where the party is disabled or infirm and has to depend upon the other party
to the contract. Mentally deficient and physically disabled people can take the plea of
undue influence in avoiding the contract.
(2) The dominating party should have obtained an unfair advantage from the weaker
party: and
(3) The transaction between the contracting parties is unconscionable. The bargain is
called ‘unconscionable’ where the two parties are not on equal footing and one of
them is making an exorbitant profit of the other’s distress.
Effect of Undue Influence (S.19-A)
A contract vitiated by undue influence is voidable at the option of weaker party. The
court can set aside such contract-
(i) either wholly: or

11
 (ii) where the weaker party has enjoyed some benefit under the terms of the contract,
then upon just and equitable terms.
Burden of Proof
The weaker party has a right to avoid the transaction on the plea of Undue Influence.
It is the other party who is to prove that he has not exercised any undue influence in
getting the consent of the weaker party. If the other party is unable to prove it, the
court shall set aside the transaction.
Transaction with Parda-nishin women:
Who is a parada-nishin women? A woman who observes complete seclusion due to
the prevailing custom in her community is said to be parda-nishin. She does not act
independently but has to depend upon someone else for performing her outward
duties. A woman going to the Court to give her evidence, settling gent with her
tenant, collecting rents from them, dealing with other parties in matters of business,
falling to outsiders can not be regarded as a Parda-nishin woman. The training, habit
and surrounding circumstances are the main elements to be considered to decide
whether a woman is a Parda-nishin or not Wearing a Burga does no make a woman a
Parda- nishin.
Distinction between Coercion and Undue Influence
We can distinguish between Coercion and Undue Influence. The distinction can be
made on the following basis:
(a) Definition, Coercion is an act punishable under the Indian Penal Code, while
Influence is not a penal act.
(b) Nature of force used, Coercion requires physical force exercised by one of the
parties to contract,
while undue influence requires moral force.
(c) Parties Even a stranger’s act may account to coercion, but undue influence can be
exercised only by one of the parties to the contract. Stranger has no place in undue
influence.
(d) Effect. Coercion gives a right to the effected party to repudiate the contract in full
but under undue influence court may set aside the contract absolutely or modify the
terms of the contract on such terms which it feels just and equitable.
“Fraud” : (S.1)
“Fraud” means and includes any of the following acts committed by a party to
contract or with his connivance, or by his agent, with intent to deceive another party
thereto of his agent, or to induce him to enter into the contract:
(1) the suggestion, as to fact, of that which is not true, by one who does not to believe
it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or commission as the law specially declares to be fraudulent.
Explanation
Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that, regard being
had to them it is the duty of the person keeping silence to speak, or unless his silence
is in itself, equivalent to speech. Sir Samuel Romilly argued in Hurgamin Vs.
Raseley (1807) Ves. 285;Mulla on the Indian Contract Act 10th Ed. P. 53.
Characteristics
From the above definition we can state the following characteristics of Fraud:
(1) The act done by the party is done with an intention to device.

12
 (2) The act may be done by the party himself or with his connivance by some one else
or by his agent.
(3) The act amounting to fraud may be a suggestion of fact (suggestion false) i.e., the
statement being made is without belief to its truth.
(4) The act may amount to an active concealment of a fact i.e. the party has concealed
a fact which was duty bound to disclose.
(5) The act amounting to fraud is in the form of a false promise.
(6) The act or mission is declared fraudulent by the Court or regarded by the Court as
a deceit.
(7) The act committed must have deceived the other party and the party has suffered
the damage.
Is silence a Fraud?
Explanation to S.17, states in clear terms that mere silence is not fraud. Where silence amounts to
active concealment, it shall amount to fraud. Thus generally silence does not amount to fraud.
However where a party chooses to speak, he must do so clearly and fully. He should not make a
partial and fragmentary statements of fact, so that the other party is misled. The court has decided
in Bimla Bai vs Shankarlal (AIR 1959 M.P. 8) that a partial statement verbally accurate may be
as false a statement as if it has been misstated fully. A father called his illegitimate son, a ‘son’ at
the time of fixing his marriage. It was held that the statement was false and thereby fraudulent.
Effects of Fraud
Fraud gives the following rights to the aggrieved party.
(1) He can avoid the contract and file a suit on the other party for damages; or
(2) He can revoke the contract, or
(3) He can refuse to fulfill his part of the promise and defend the suit filed by the
other party for the breach of contract for damages or specific performance, or
(4) He can treat the contract as a valid one and ask for the specific performance, or for
damages in addition to the substitution of the original contract.
Misrepresentation (S.18)
Misrepresentation has been defined by the Act as follows: “Misrepresentation” means
and includes:-
(a) the positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true though he believes it to be true;
(b) any breach of duty which without an intent to deceive, gains an advantage to the
person committing it, or any one claiming under him, by misleading another to his
prejudice or to the prejudice of anyone claiming under him.
(c) causing, however innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.
Characteristics
The ingreditients of a contract vitiated by misrepresentation are:
(a) There must be a misstatement of a material fact.
(b) The statement must not be a mere opinion, or hearsay, or commendation, because
praise carries no obligation.
(c) The mis-statement must be made with the intention that the other party shall act
upon he contract.
(d) The other party must have been induced by the mis-statement.
(e) The statement being made is a wrong one, although the party making it has not
known it to be false.
(f) The statement has been made by the party to the contract or his agent and not by a
stranger.
Effect of Misrepresentation

13
 The party being affected by misrepresentation has got the following rights:
(1) He can avoid or revoke the contract; or
(2) He can affirm the contract and insist on the misrepresentation to be made good, if
it is possible to do so; or
(3) He can rely upon the misrepresentation as a defense to an action of the contract.

DISCHARGE OF CONTRACTS
A contracts is discharged when the obligations created by it come to an end. A
contract may be discharged in any of the following ways:
1. By agreement.
2. By performance of the contract.
3. By lapses of time.
4. By operation of law.
5. By material alteration.
6. By subsequent impossibility of the performance.
7. By breach.
By Agreement Sec. (62-64)
The parties may agree to terminate the existence of the contract by any of the
following ways:-
By Novation (Sec. 62): Substitution of a new contract in place of the old existing one
is known as ‘inovation of contract’. New contract may be either between the same
parties or between different parties, the consideration being mutually the discharge of
the old contract.
(i) Substitution of a contract with new terms for an old contract between the same
parties.
(ii) Substitution of a new party for an old one, the contract remaining the same.
Promise will now look to the third party for the performance of the contract. Original
promisor is released of the obligations under the old contract. As a result of novation,
old contract is completely discharged and law will not entertain any action based upon
the terms of the old contract.
By rescission (Sec. 64): Rescission means cancellation of the contract. A contract can
be rescinded by any of the following ways :-
(i) By mutual consent :- Parties may enter into a simple agreement to rescind the
contract before it’s breach.
(ii) By the aggrieved party :- Where a party has committed a breach of the contract,
the aggrieved party can rescind the contract without in any way effecting his right of
getting compensation for the breach of contract.
(iii) By the party whose consent is not free:- In case of a voidable contract, the party
whose consent is not free can, if so decides, rescind the contract.A contract may also
be taken to be impliedly rescinded where none of the parties has performed his part
till a long and no party has any complaint against the other.
By alteration: Alteration means change in one or more of the conditions of the
contract.
Alteration made by the mutual consent of the parties will be perfectly valid. But any
material alteration in terms of a written contract by the one party without the consent
of other party will discharge such party from its obligations under the contract.
In case of novation a new contract replaces an old contract. The parties may also
change. While in case of alteration only some of the terms of the contract are
changed. Parties also continue to be the same.
By remission (Sec. 63): Remission means acceptance of a lesser performance than

14
what was actually due under the contract. According to Sec. 63 a party may dispense
with or remit, wholly or in part, the performance of the promise made to him. He can
also extend the time of such performance or accept instead of any satisfaction which
he deems fit. A promise to do so will be binding even though there is no consideration
for it.
Example:(1) A owes B Rs. 5,000. A pays to B and B accepts in satisfaction of whole
debt Rs. 2,000 paid at the time and place where Rs. 5,000 were payable. The whole
debt is discharged.
By performance of the contract (Sec. 37)
When parties fulfill their obligations and promises under a contract the contract is said
to have been performed and discharged. Performance should be complete and
according to the real intentions of the agreement. Offer of performance shall have the
same effect as performance. A party to a contract shall become free from all
obligations if it had offered to perform his part of the promise but it was not accepted
by the other party.
By Lapse of time
Every contract must be performed either within the period fixed or within a
reasonable time of the contract.
Lapse of time may discharge the contract by barring the right to bring an action to
enforce the contract under the Limitation Act.
By operation of Law
A contract is discharged or terminated by operation of other laws in the following
cases:
(a) Merger. Merger implies coinciding and meeting of an inferior and superior right
on one and the same person. In such a case inferior right available to a party under an
agreement will automatically vanish.
Examples: A is holding a property under lease. He subsequently buys that property.
A’s right as a tenant is inferior to his right as an owner of the property. The right as a
tenant and right as owner have coincided and met in one person i.e. A. Therefore, A’s
rights as a lesee will terminate.(b) Death: In case a contract is of a personal nature,
the death of the promisor will discharge the contract. In other case, the rights and
liabilities of the deceased person shall pass to his legal representatives. (c) By
complete loss of evidence of the existence of the contract. (d) By insolvency. An
insolvent is released from performing his part of the contract by law. Order of
discharge, however gives a new lease of life to the insolvent and he is discharged
from all obligations arising from all his earlier contracts.
By material alternation
Any material alteration made intentionally in a written contract by the promisee or his
agent without the consent of the promisor entitles the later to regard the contract as
rescinded.
An alternation will be taken to be material if it directly or indirectly affects the nature
or operation of the contract or the identity, validity or effect of the document.
By supervening impossibility of performance (Sec. 56)
Supervening impossibility arises due to the happening of certain events which were
neither in the contemplation of the parties when they entered into the agreement nor
either of the parties are responsible for causing the performance of the contract
impossible. In such a case the contract will be void as soon as such events make the
performance of the contract impossible. The impossibility must be either legal or
physical but not commercial. This is called “Doctrine or Supervening Impossibility”.
Section 56 of the Indian Contract Act lays down:

15
 “An agreement to do an impossible act is void”.
A contract to do an act, which after the contract is made, becomes impossible, or by
reason of some event which the promisor could not prevent, becomes void when the
act becomes impossible or unlawful. This is called “Supervening Impossibility”, i.e.
impossibility arising subsequent to the formation of the contract. The supervening
impossibility may be due to any of the following causes:
(a) By the destruction of the subject matter. If the subject matter of the contract is
destroyed subsequent to the formation of the contract, without any fault of either of
the parties, the contract shall become void. Example: (i) A music hall was let for a
series of concerts on certain days. The hall was burnt down before the date of the first
concert. The contract was held to be void.
(b) By the non-existence of a state of things necessary for the performance. If a
contract is made on the basis of continued existence of certain state of circumstances,
the contract stands discharged if the state of things ceases to exist
(c) Death or personal incapacity of the promisor. Contracts involving personal skill
of the promisor will stand discharged in the case of his death or personal incapacity.
Example: A contracts to act at a theatre for six months in consideration of a sum paid
in advance by B. On several occasions A is too ill to act. The contract to act on the
occasions becomes void.
(d) Change of law. On account of subsequent change in law, the performance of the
contract may become impossible. The object of the contract may be declared to be
unlawful. Example: (i) A, who is governed by Muslim law and who already had a
wife promises to marry B. Subsequent to this promise and before it is carried out,
Special Marriage Act prohibiting polygamy is passed. The contract to marry becomes
void.
(e) Outbreak of War. A contract entered into with an alien enemy during the war is
unlawful and, therefore, void ab initio contracts made before the outbreak of war
either suspended or declared void by the Government. If they are suspended, they
may be performed after the termination of the war. Example: A contracts to take in
cargo for B at a foreign port. A’s Government afterwards declared war against the
country in which port is situated. The contract becomes void when war is declared.
Cases not Covered by Supervening Impossibility
Difficulty in performance
Commercial impossibility
Impossibility due to behaviour of a third person
Strikes, lockouts and civil disturbances:
Partial Impossibility
By Breach
Breach means failure of a party to perform his or her obligation under a contract
Breach of contract may arise in two ways.
1. Actual Breach.
2. Anticipatory Breach.

Actual Breach : Actual breach means breach committed either; at the time when the
performance of the contract is due; or during the performance of the contract. Example: (i) agrees
to supply to B on the 1st February, 1975, 1000 bags of sugar. On 1st February, 1975 he fails to
supply. This is actual breach of contract at the time when the performance is due. The breach has
been committed by A.
Anticipatory Breach: Breach of a contract committed before the date of performance of the
contract is called anticipatory breach of contract. (Sec. 39). The contract in this case is repudiated

16
before the time fixed for its performance arrives and is so discharged. Example: (i) A agrees to
employ B from 1st of March. On 1st February, he writes to B that he need not join the service,
the contract has been expressly repudiated by A before the date of its performance.
REMEDIES FOR BREACH OF CONTRACT
⚫ In the case of breach of contract on the part of one party, the aggrieved or injured
party has the following remedies available:-
1. Rescission of the contract.
2. Damages.
3. Quantum meruit.
4. Specific Performance.
5. Injunction.
Rescission of the Contract
⚫ Rescission means the setting aside of the contract. The aggrieved party may be
allowed by the court of treat the contract at an end and thereby, terminate all his
liabilities under the contract. The court, however, will not allow recession of the
contract in the following cases:
(i) Where the party wishing to set aside the contract has expressly or impliedly
ratified the contract.
(ii) Where only a part of the contract is sought to be set aside and that part cannot be
separated from the rest of the contract.
(iii) Where without fault of either party, there is a change in the circumstances since
the making of the contract, on account of which the parties cannot be substantially
restored to the position in which they were before the contract was made.
(iv) Where during the subsistence of the contract, third parties have acquired rights in
the subject matter of the contract in good faith and for value.
Damages
⚫ Damages mean monetary compensation payable by the defaulting party to the
aggrieved party in the event of the breach of a contract. The object of providing
damages is to put the aggrieved party in the same position, so far as money can do, in
which he would have been, had the contract been performed.
Types of Damages
Damages may be.
1. Ordinary damages.
2. Special damages.
3. Exemplary or vindictive damages.
4. Nominal damages.
Ordinary damages: Damages which arise in the ordinary course of events from the breach of
contract are called ordinary damages. These damages constitute the direct loss suffered by the
aggrieved party. They are estimated on the basis of circumstances prevailing on the date of the
breach of the contract. Subsequent circumstances tending to change the quantum of damages are
ignored.

Special damages: They are those which result from the breach of the contract under special
circumstances. They constitute the indirect loss suffered by the aggrieved party on account of
breach of the contract. They can be recovered only when the special circumstances responsible
for the special losses were made known to the other party at the time of the making of the
contract
Exemplary or vindictive damages: They are quite heavy in amount and are awarded only in two
cases:
⚫ 1. Breach of a contract to marry.

17
 ⚫ 2. Dishonor of a customer’s cheque by the bank without any proper reason. These
damage are awarded with the intention of punishing the defaulting party. They are of
a different nature and their object is to prevent the parties from committing breach. In
the case of breach of contract to marry damages will include compensation for the
loss of the feelings and the reputation of the aggrieved party. In the case of dishonour
of a cheque damages are awarded taking into consideration the loss to the prestige and
goodwill of the customer and the general rule is that the smaller the cheque the greater
is the amount of damages.
Nominal Damages: These damages are quite small in amount. They are never granted by way of
compensation for the loss. In such usually actual loss is very negligible. They are awarded simply
to recognize the right of the party of claim damages for breach of the contract. Quantum Meruit
⚫ Literally speaking the words “Quantum Meruit” mean “as much as merited” or “as
much as earned”. It is principle which provides for payment of compensation under
certain circumstances, to a person who has rendered goods or services to another
person under a contract which could not or has not been fully performed. Example (i)
:A person renders some service to a company under contract of employment which is
duly approved by the Board of Directors of that compnay. Subsequently the
constitution of Board of Director’s found to be illegal and, therefore, the contract of
employment becomes void. The employee who has rendered some service to the
company shall be entitled to claim remuneration for his service under the doctrine of
quantum meruit.
⚫ Specific performance: Law courts can at their discretion, order for the specific
performance of a contract according to the provisions of the Specific Relief Act in
those cases where compensation will not be an adequate remedy or actual damages
cannot accurately be assessed.
Specific performance means the actual carrying out by the parties to contract, and in proper cases
the court will insist on the parties carrying out their agreement.
Specific performance of agreement will not be granted in the following cases:-
(1) Where the agreement has been made without consideration.
(2) Where the court cannot supervise the execution of the contract e.g. a building
contract.
(3) Where the contract is of a personal nature.
(4) Where on of the parties is a minor.
Injunction:
⚫ Where a contract is of a negative character, i.e., a party has promised not to do come
thing and he does it, and thereby commits a breach of the contract, the aggrieved party
may under certain circumstances, seek the protection of the court and obtain an
injunction forbidding the party from committing breach. An injunction is an order of
the court instructing a person to refrain from doing some act which has been the
subject matter of a contract, Courts, at their discretion, may grant a temporary or a
perpetual injunction for an indefinite period.For example: A agreed to sing at B’s
theatre and to sing nowhere else for a certain period. Afterwards A made a contract
with E to sing at E’s theatre and refused to sing at B’s theatre. The court refused to
order specific performance as the contract was of a personal nature but granted an
injunction to restrain the breach of A’s promise not to sing else where.

CONTRACTS OF INDEMNITY
Definition:
A contract of indemnity is “a contract by which one party promises to save the other from the
loss caused to him by the conduct of the promisor himself, or by the conduct of a third party”

18
(Sec.123).
Example : A contracts to indemnify B against consequences of any proceedings which C may
take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity. A will
be termed as “Idemnifier” and B as the “Idemnity-holder”.
Definition is not very exhaustive:
According to the definition given by Sec. 124 of the Contract Act, contract of indemnity includes
(i) only express promise to idemnify and
(ii) cases where loss is caused by the conduct of the promisor himself or by the
conduct of any other person.
It does not include (a) implied promise to indemnify and (b) cases where the loss is
caused by accident or by the conduct of the promises.
According to English law, a contract of indemnity is “a promise to save another
harmless from loss caused as a result of a transaction entered into at the instance of
the promisor”.
It thus, includes the loss caused by events or accidents also. The definition of a
contract of indemnity as per Indian Law is thus very restrictive. If it is strictly applied,
even the contracts of insurance would fall out side the purview of contract of
indemnity. But Indian Courts apply the English definition to contracts of indemnity.
Rights of the indemnity-holder when sued
The indemnify holder is entitled to the following rights:
1. Indemnity-holder is entitled to recover all damages which he might have
compelled to pay in any suit in respect of a matter covered by the contract.
2. Indemnity holder is entitled to recover all costs incidental to the institution or
defending of the suit. But the party indemnified can not recover costs when he has not
acted as a prudent man in defending the action against him or has not been authorised
by the indemnifier to defend the suit or where the costs incurred have been
unreasonable in amount.
3. Indemnity holder is entitled to recover all sums paid under any compromise of any
such suit, provided the compromise was not contrary to the directions of the promisor
and it has been made on the best available terms. Promisee must have acted prudently
in making such a promise. (Sec. 125).
It is to be noted that a contract of indemnity being a specie of the general contract and
therefore, must satisfy all essentials of a valid contract such as competent parties, free
consent, lawful object etc., otherwise it will not be valid.

CONTRACTS OF GUARANTEE
Definition
A ‘Contract of Guarantee” is a contract to perform the promise or discharge the liability, of a
third person in case of his deault. The person who gives the guarantee is called the ‘surety’; the
person in respect of whose default the guarantee is given is called ‘the principal debtor’ and the
person to whom the guarantee is given is called the ‘creditor’. The contract of guarantee may be
either written or oral (Sec. 126).
Purpose: Contracts of guarantee are usually entered into
(a) to secure the performance of something which may be immediately related to a
mercantile agent, or
(b) to secure the honesty and fidelity of someone who is to be appointed to some
offce, or
⚫ (c) to secure some one from injury arising out of some wrong committed by another.
Essentials of a valid contract must be present
A contract of guarantee like other ordinary contrary must satisfy all the essentials of a

19
 contract but it has two distinctive features.
(a) Something done or any promise made for the benefit of the principal debtor is
presumed by law to be a sufficient consideration for the contract of guarantee. It is not
necessary that the surety himself must be benefited. Example: A sells and delivers
goods to B. C afterwards requests A to forbear to sue B for the debt for a year and
promises that if he does so, C will pay for them in default of payment by B. A agrees
to forbear as requested. This is a sufficient consideration for C’s promise.
(b) In a contract of guarantee, the creditor and surety must be competent to enter into
a contract but principal debtor may be a minor or a person incapable of entering into a
contract. In such a case the surety will be taken as the principal debtor and will be
liable to pay.
(c) In a contract of guarantee, the liability of the surety is condition. It arises only
when the principal debtor makes a default. A liability which arises independently of a
‘default’ is not within the definition of guarantee. (Punjab National Bank V. Sri
Vikram Cotton Mills, (1970) ISCC 60).
Invalid Guarantee
Following are a few of those cases when the guarantee given by the surety will be invalid and
cannot be enforced against him:
(i) Guarantee obtained by misrepresentation (Sec. 142): Any guarantee which has
been obtained by means of misrepresentation made by the creditor, or with his
knowledge and assent, concerning a material part of the transaction, is invalid.
(ii) Guarantee obtained by concealment (Sec. 143): Any guarantee which the
creditor has obtained by means of keeping silence as to material circumstances is
invalid.
(iii) In case co-surety does not join (Sec. 144): Where a person gives a guarantee
upon a contract that the creditor shall not act upon until another person has joined in it
as co-surety, the guarantee will be invalid if that other person does not join. Example
(i) A agrees with B to stand as a surety for C for a loan of Rs. 1000 provided D also
joins him as surety. D refuses to join. A is not liable as a surety. (ii) A guarantees to C
payment for iron to be supplied by him to B to the amount of 2,000 tons. B and C
have privately agreed that B should pay five rupees per ton beyond the market price,
such excess to be applied in liquidation of an old debt. This agreement is concealed
from A. A is not liable as a surety

Kinds of Guarantee
Contracts of guarantee may be
(i) Specific, or
(2) Continuing.
1. Specific guarantee: Specific guarantee means a guarantee given for one specific
transaction. In this case the liability of the surely extends only to a single transaction.
Example: A guarantee payment to B of the price of 5 sacks of flour to be delivered by
B to C and to be paid in a month. B delivers sacks to C. C pays for them. Afterwards
B delivers four sacks to C, which C does not pay. The guarantee given by A was only
a specific guarantee and accordingly he is not liable for the price of the four sacks
2. Continuing guarantee (Sec. 129): A continuing guarantee is that which extends
to a series of transactions (Sec. 129). It is not confined to a single transaction. Surety
can fix up a limit on this liability as to time or amount of guarantee, when the
guarantee is a continuing one. The fact that the guarantee is continuing can also be
ascertained from the intentions of the parties and the surrounding circumstances.
Example: (i) A, in consideration that B will employ C in collecting the rents of B,s

20
 zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due
collection any payment by C of those rents. This is continuing guarantee.
Revocation of continuing guarantee
A continuing guarantee is revoked by any of the following ways.
1. By notice (Sec. 130). A continuing guarantee may at any time be revoked by the
surety as to future transactions, by giving a distinct notice to the creditor.Example: A
in consideration of B’s discounting at A’s request, bills of exchange, for C guarantees
to B, for twelve months, the due payment of all such bills to the extent of 5,000
rupees, B discounts bills for C to be extent of 2,000 rupees. Afterwards at the end of
three months, A revokes the guarantee. This revoation discharges A from all liability
to B for any subsequent discount. But A is liable to B for 3,000 rupees, on the default
of C
2. By Death (Sec. 131): Death of the surety will operate as a revocation of the
continuing guarantee with regard to the future transactions unless the contract
provides otherwise. No notice of death need be given tothe creditor. Heirs of the
surety will not be liable forany fresh transactions entered into by the creditor with the
principal debtor after the death of the surety without knowledge of such death.
Nature of surety’s liability
⚫ Where the parties do not specifically agree as to the extent of he liability or the surety
does not put up any limit on his ability at the time of entering into the contract, the
liability of the surety will be co-extensive with that of the principal debtor. In other
words, whatever amount of money a creditor can legally realise from the principal
debtor including interest, cost of litigation, damages etc., the same amount he can
recover from the surety. Example: A guarantees to B the payment of a bill of
exchange by C, the acceptor. The bill is dishonoured by C. A will be liable not only
for the amount of the bill also for any interest and charges which have become due on
it.
Rights of the Surety
Rights of the surety can be classified under three heads:
(i) Against the principal debtor.
(ii) Against the creditor.
(iii) Against the co-sureties.
Rights of the surety against the principal debtor
(a) Rights to be subrogated: When the principal debtor had committed the default
and the surety pays the debt to the creditor, surety will stand in the shoes of the
creditor and will be invested with all the rights which the creditor had against the
debtor (Sec. 140).
b) Right to claim indemnity:( In every contract of guarantee, there is an implied
promise by the principal debtor to indemnify the surety and the surety is to recover
from the principal debtor whatever sum he has rightfully paid under the guarantee but
no sums which he has paid wrongfully, e.g., cost of fruitless litigation (Sec. 145).
Examples : (i) B is indebted to C, and A is surety for the debt. C demands payments
from A, and on his refusal sues him for the amount. A defends the suit, having
reasonable grounds for doing so, but is compelled to pay the amount of the debt with
costs. He can recover from B the amount paid by him for costs, as well as the
principal debt.
2. Rights of the surety against the creditor
A surety is entitled to the benefit of every security which the creditor has against the
debtor at the time when the contract of suretyship is entered into, whether the surety
knows of the existence of such securityor not and if the creditor loses or without the

21
 consent of the surety parts with such security, the surety is discharged to the extent of
the value of the security (Sec. 141). But a surety, however, cannot claim the benefit of
the securities only on the payment of a part of the debt.
3. Right against co-sureties
When two or more persons stand as sureties for the same debt or obligation they are
termed as co-sureties. The position of co-sureties is as follows.
Co-sureties liable to contribute equally (Sec. 146): Where two or more persons are co-
sureties for the same debt or duty, either jointly or severally, and whether under the
same or different contract, and whether with or without the knowledge of each other,
the co-sureties in the absence of any contract to the contrary, are liable, as between
themselves, to pay each an equal share of the whole debt, or of that part of it which
remains unpaid by the principal debtor. Example: A, B and C are sureties to D for the
sum of 3,000 rupees lent to E.E makes default in payment. A, B and C are liable, as
between themselves, to pay 1,000 rupees each.
Discharge of surety
Surety will be discharged from his liability in the following cases:
1. By notice or death (Secs. 130 & 131): A contract of continuing gurantee may be
terminated at any time by notice to the creditor. The death of the surety brings an end
to continuing gurantee. No notice of death need to given to the creditor. The surety
will not be responsible for acts done after his death.
2. Variations in terms of the original contract between the principal debtor and
the creditor (Sec. 133): If the contract between the creditor and the principal debtor
is materially altered without the consent of the surety, the surety is discharged as to
transactions subsequent for the alteration.
3. By release or discharge of the principal debtor (Sec. 134). The surety is
discharged by any contract between in creditor and the principal debtor, by which the
principal debtor is released or by any act or omission of the creditor, the legal
consequence of which is the discharge of a surety on one agreement will not release
the other surety bound for the same debtor by a separate agreement from his
engagement, unless the effect of such release is to adversly affect the others right to
contribution. Example (i) : A gives a gurantee to C for goods to be supplied by C to
B. C supplies goods to B, and afterwards B becomes embrassed and contracts with his
credtiors (including C) to assign to them his property in consideration of their
releasing him from their demands. Here B is released from his debt by the contract
with C, and A is discharged from his suretyship.
4. Compounding by creditor with the principal debtor (Sec. 135). A contract
between the creditor and the principal debtor by which the creditor makes a
composition with, or promise to give time to, or not sue to the principal debtor
discharges the surety unless the surety assents to such contract.
5. Creditor’s act or omission impairing surety’s eventual remedy (Sec. 139). If
the creditor does any act which is inconsistent with the rights of the surety, or omits to
do any act which his duty to the surety requires him to do, any the eventual remedy of
the surety himself against the principal debtor is thereby impaired, the security is
discharged.
6. Loss of security (Sec. 141). If the creditor losses on, without the consent of the
surety, parts with any security given to him at the time of the contract of guarantee,
the surety is discharged from liability to the extent of the value of security.
7. By invalidation of the contract of guarantee (Secs. 142, 143 and 144). A
contract of guarantee becomes invalid if guarantee was obtained by fraud or
concealment etc. about meterial facts as discussed before. Surety in such a case will

22
 be discharged from his liability.
CONTRACTS OF BAILMENT

Bailment is “the delivery of goods by one person to another for some purpose, upon a contract
that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the direction of the person delivering them. The person delivering the goods is
called the ‘bailor’. The person to whom they are delivered is called the ‘bailee’.
Examples:-
(i) A lends his motor cycle to B for his use.
(ii) A gives a piece of cloth to a tailor to make it into a coat. (iii) A gives his radio set
to a mechanic for repairs.
Essential characteristics
The essential elements of the definition of bailment can be summed up as under:-
(a) Bailment is always based upon a contract. In exceptional cases it can also be
implied by law, e.g., finder of goods.
(b) There can be a bailment of moyable properties only but money is not included in
the category of movable goods.
(c) In Bailment the possession of goods must change. It thus requires temporary
delivery of goods. Mere custody of goods without possession will not be sufficient to
constitute bailment. A servant or a guest using his master’s or host’s goods will not be
a bailee.
In bailment the delivery of goods may be actual or constructive. Example:
(i) A delivers his radio set to B for repair. This s a case of actual delivery of goods by
A to B. A is the bailor and B is the bailee.
(ii) A employed a goldsmith to melt old jewelry and prepare new jewels. Everyday
she used to receive half-made jewels from the goldsmith and put them in a box and
leave the box in the goldsmith’s room. She kept the key of the room with her. On one
night-the jewels were stolen. It was held that there was redelivery of jewels to the lady
and the goldsmith could not be regarded as bailee. The lady herself must bear the loss
(Kaliapurimal v. Visalakshmi). (d) In bailment, ownership is not transferred. The
bailor continues to be the owner of the goods. (e) Goods are delivered upon a
condition that they are to be returned in specie. Deposit of money in a bank is not a
case of bailment since the return of money will not be of the identical coins deposited.
Moreover the money handed over to the bank is not for safe custody but to be credited
to some kind of account. The relation between the bank and the depositor of money is
that of a borrower and the lender and not that of a bailor and bailee.
RIGHTS AND DUTIES OF THE BAILEE
Rights of the bailee
1. Rights to interplead (Sec. 165). If a person, other than the bailor, claims the
goods bailed, bailee may apply to the court to stop the delivery of the goods to the
bailor and to decide the title to the goods.
2. Rights against third person (Sec. 180). If a third person wrongfully deprives the
bailee of the use or possession of the goods bailed, or causes them any injury, the
bailee is entitled to use such remedies as the owner might have used in a like case if
no bailment has been made. Bailee can thus bring a suit against a third person for such
deprivation or injury.
3. Right of particular lien for payment for services (Sec. 170). Where the bailee
has in accordance with the purpose of bailment, rendered any service involving the
exercise of labour of skill, in respect of the goods, he shall have in the absence of a
contract to the contrary, right to retain such goods, until he receives due remuneration

23
 for the services he has rendered in respect of them. Bailee has, however, only a right
to retain the article and not to sell it. The service must have entirely been formed
within the time agreed or a reasonable time and the remuneration must have become
due. This right of particular lien shall be available only against the property in respect
of which skill and labour has been used. Examples: A delivers a rough diamond to
jeweller, to be cut and polished, which is accordingly done. B is entitled to retain the
stone till he is paid for the services he has rendered. A gives cloth to B, a tailor, to
make into a coat. B promises A to deliver the coat as soon as it is finished, to give A
three month’s credit for the price. B is not entitled to retain the coat until he is paid.
4. Right of general lien (Sec. 171). Bankers, factors, wharfingers, attorneys of a
High Court and policy brokers will be entitled to retain, as a security for a general
balance of amount, any goods bailed to them in the absence of a contract to the
contrary. By agreement other types of bailees excepting the above given five may also
be given five may also be given this right of general lien.
5. Right to indemnity (Sec. 166). Bailee is entitled to be indemnified by the bailor
for any loss arising to him by reasons that the bailor was not entitled to make the
bailment or to receive back the goods or to give a directions respecting them. If the
bailor has not title to the goods, and the bailee in good faith, delivers them back to, or
according to the directions of the bailor, the bailee shall not be responsible to the
owner in respect of such delivery. Bailee can also claim all the necessary expenses
incurred by him for the purpose of gratuitous bailment.
6. Right to claim compensation in case of faulty goods (Sec. 150): A bailee is
entitled to receive compensation from the bailor or any loss caused to him due to the
failure of the bailor to disclose any faults in the goods known to him. If the bailment
is for hire, the bailor will be liable to compensate even though he was not aware of the
existence of such faults.
7. Right to claim extraordinary expenses (Sec. 158) : A bailee is expected to take
reasonable care of the gods bailed. In case he is required to incur any extraordinary
expenses, he can hold the bailor liable for such expenses.
8. Right of delivery of goods to any one of the several joint bailor of goods.
Delivery of goods to any one of the several joint bailors of goods will amount to
delivery of goods to all of them in the absence of any contract to the contrary.
Duties of the bailee
1. To take reasonable care (Sec. 151 & 152): Bailee is bound to take as much care of
the goods bailed to him as a man of ordinary prudence would, under similar
circumstances, take of his own goods of the same bulk, quality and value as the good
bailed. It will not make any difference whether the bailment is gratuitous for reward.
If any loss is caused to the goods, in spite of such reasonable care by the bailee, he
shall not be liable for the loss. Bailee shall be held liable for losses arising due to his
negligence.
Example
(i): A delivered to B certain gold ornaments for safe custody. B kept the ornaments in
a locked safe andkept the key in the case box in the same room. The room was on the
ground and was locked from outside, and therefore, was easily accessible to burglars.
The ornaments were stolen. It was held that the bailee did not take reasonable care,
and therefore, was liable for the loss (Rampal V. Gauri Shanker, 1952).
2. To return the goods. Bailee must return or deliver the goods bailed according to
the direction of the bailor, on the expiry of the time of bailment or on the
accomplishment of the purpose of bailment (Sec. 160).
Bailee shall be responsible to the bailor for any loss, destruction or deterioration of

24
 the goods from of the date of the expiry of the contract of bailment, if he fails to
return deliver or tender the goods at the proper time (Sec. 161).
3. To return any increase or profit from the goods (Sec. 163). Bailee is bound to
deliver to the bailor any increase or profit which might have came from the goods
bailed, provided the contract does not provide otherwise. Example: A leaves a cow in
the custody of B. The cow gives birth a calf. B is bound to deliver the calf as well as
the cow to A.
4. To use goods according the conditions of bailment (Sec. 154). Bailee must use the
goods according to the conditions of the contract of bailment or the directions of the
bailor. He shall be held liable for compensation to the bailor if any damage is caused
to the goods because of his unauthorized use. Bailee must not do any act with regard
to the goods bailed which is inconsistent with the terms of the bailment, otherwise the
contract shall become voidable at the option of the bailor and bailee shall be held
liable to compensate and damages caused to the goods. Example: A lends his horse to
B for his own riding only. B allows C, a member of his family, to ride the horse. C,
rides with care but the horse accidently falls and is injured. What remedy has A
against B ? A can claim damages from B for the injury caused to the horse from an
unauthorised use. B in this case has failed to use the horse according to the conditions
of bailment, and therefore, he shall be liable to pay compensation to the bailor for the
damages caused to the horse because of his unauthorized use.
5. Must not mix up the goods with his own goods (Sec. 155 & 156-157). Bailee is
not entitled to mix up the goods bailed with his own goods except with the consent of
the bailor. If he, with the consent of the bailor, mixes the goods bailed with his own
goods, both the parties shall have an interest in proportion to their respective shares in
the mixture thus produced (Sec. 155).If the bailee, without the consent of the bailor,
mixes the goods bailed with his own goods and the goods can be separated or divided,
the property in the goods remains in the parties respectively bailee is bound to bear
the expenses of separation and division and any damage arising from the mixture
(Sec. 156).
6. Must not set up an adverse title. Bailee must not set up a title adverse to that of the
bailor. He must hold the goods on behalf of and for the bailor. He cannot deny the
title of the bailor
Rights of Bailor and Bailee against Third Parties

1. Suit by bailor or bailee against a wrong-doer (Sec. 180). If a third person wrongfully
deprives the bailee of the use of possession of the goods bailed, or does them any injury,
the bailee is entitled to use such remedies as the owner might have in a like case if no
bailment had been made; and either the bailor or the bailee may bring a suit against a
third person for such deprivation or injury.
2. Appointment of compensation obtained by such suits (Sec. 181). Whatever is
obtained by way of relief or compensation in any such suit shall as between the bailor
and bailee, be dealt with according to their respective interests.
Rights and liabilities of the finder of goods
One who finds goods belonging to another and takes them in his possession is called
the finder of the goods. He rights and liabilities have been discussed in Secs. 168 and
169 of the Contract Act as follows:
(i) A finder of the goods is free to take or not to take the goods found out under his
custody. A person who finds goods belonging to another and takes them into his
custody is subject to the same responsibility as a bailee.
(ii) Finder of goods is not entitled to bring a suit for the realization of compensation

25
 for the trouble and expenses voluntarily incurred by him in preserving the goods and
in finding out the real owner. However, he can exercise his right of particular lien on
the goods found out and may refuse to deliver them to the real owner until he receives
the compensation for his trouble and expenses.
(iii) In case where the real owner of the goods has offered a specific reward for their
return of goods lost, the finder of the goods may sue for the realization of such
rewards and may also retain his possession ever the goods until he received the
reward with all other necessary costs.
(iv) Finder of the goods has no right to sell the goods found out except when all the
following conditions are satisfied.
(a) When the thing found out is commonly the subject of sale.
(b) When the owner cannot be found out with reasonable diligence or when the owner
refuses to pay the lawful charges of the finder.
(c) When the thing is in danger of perishing or losing the greater part of its value or
when the lawful charges of the finder in respect of thing found out exceed two-thirds
of the value of the goods.
Lien
Lein is a right of person to retain that which is in his possession and which belongs to another,
until the demands of the person in possession are satisfied.
Kinds of Lien There are two kinds of liens :
(a) particular lien
(b) general lien. Particular Lien
It is a right to retain possession over those particular goods in connection with which the debt
arose. It is restricted to those goods which are subject matter of the contract and are liable for
certain demands of the person in possession of those goods. According to Section 170 where the
bailee has, in accordance with the purpose of the contract of bailment, rendered any service
involving the exercise of labour and skill in respect of the goods bailed, he has, in the absence of
a contract to contrary, a right to retain such goods in his possession until he receives due
remuneration for the services he had rendered in respect of them. Besides the bailee, other
persons who are entitled to exercise particular lien are unpaid seller of goods, finder of goods,
pawnee, agents, etc
General Lien
It entitles a person in possession of the goods to retain them until all claims of the
person in possession against the owner of the goods are satisfied. It is not necessary
that the demands should arise only out of the articles detained under possession.
General lien is a kind of a special privilege which the law has granted only to few
persons
(i) bankers,
(ii) factors
(iii) wharfingers
iv) attorney of the High Courts,
(v) policy brokers, and
(vi) others by agreement.
These parties, can exercise general lien against any goods under their possession and
for any sum legally due on a general balance of account. But where the goods are
deposited for some special purposes, e.g., safe custody, they will not come under the
spell of general lien. This is because acceptance of goods for, special purpose implied
by excludes general lien Example-
(i) K deposited certain jewels with the Madras Bank to secure certain debt. after
payment of this debt he demanded the return of these jewels from the bank. He was

26
 still indebted to the bank for certain other debts. On the bank’s refusal to return, it was
held that he was not entitled to recover unless he proved that the bank had agreed to
give up its general lien (Kunhan V. Bank of Madras, 1895).A solicitor has a general
lien on all the papers of the client in his possession in his professional capacity as
solicitor. He can claim a lien for all costs due to him from the client but not for money
loans (Re. Taylor)
Pledge
Pledge is the bailment of goods as security for payment of a debt or performance of promise.
Bailor in this case is called the ‘pawnor’ and the bailee is called the ‘pawnee’ (Sec. 172).
⚫ Pledge by non-owner.
⚫ Ordinarily only a person who is the real owner of the goods can make a valid pledge,
but in the following cases pledge made by non-owners will also be valid.
1. Pledge by a mercantile agent (Sec. 178). Where a mercantile agent is, with the consent
of the owner, a possession of goods or the documents of title to goods, any pledge made
by him, when acting in the ordinary course of business of a mercantile agent, shall be as
valid as if he were expressly authorised by the owner of the goods to make the same,
provided that the pawnee act in good faith and has not at the time of the pledge notice that
the pawnor has no authority to pledge.
2. Pledge by person in possession under voidable contract (Sec. 178 A). When the
pawnor has obtained possession of the goods pledged by him under a contract
voidable under Section 19 or Section 19A, but the contract has not been rescinded at
the time of the pledge, the pawnee acquired a good title to the goods, provided he acts
in good faith and without notice of the pawnor’s defect of title.
3. Pledge where pawnor has only a limited interest (Sec. 179). Where a person
pledges goods in which he had only a limited interest, the pledge is valid to the extent
of that interest. Example: A finds a watch on the road and spends Rs. 25 on its repairs.
He pledges it with B for Rs. 50/-. The real owner can get the watch by paying Rs. 25
to the pledge.
4. Pledge by a co-owner in possession. If there are several joint owners of goods and
goods are in the sole possession of one of the co-owners with the consent of other co-
owners, such a co- owner can make a valid pledge of goods.
5. Pledge by seller or buyer in possession after sale: A seller who has got possession
of goods even after sale, can make a valid-pledge, provided the pawnees act in good
faith.
Example: X buys goods from Y, pays for them, but leaves them in the possession of
Y, and Y Similarly, if the buyer obtains possession of goods with the consent of the
seller before payment of price and pledges them, the pawnee will get a good title
provided he does not have the notice of seller’s right lien or other’s right.
Rights and duties of the pawner and pawnee
Rights and duties of the pawner
Right to receive goods till sole (Sec. 177). If a time is stipulated for the payment of
the debt or performance of the promise, for which the pledge is made, and the pawnor
makes default in the payment of the debt or the performance of the promise at the
stipulated time he may redeem the goods pledged at any subsequent time, before their
actual sale of them, but he must in that case pay, in addition, any expenses which
might have arisen from his default. Rights and duties of the pawnee
⚫ Right to receive payment of the debt or to obtain the performance of promise with
interest and expense(Sec. 173). Pawnee has a right to retain possession on the goods
pledged till he obtains payment of his debt interest on that debt and all other necessary
expenses which he might have incurred for the preservation of the goods pledged or

27
 in respect, of his possession.
⚫ Right of Particular lien (Sec. 174). Pawnee has no right to retain his possession over
the goods pledged for any debt or promise other than the debt or promise for which
they were pledged unless otherwise provided for, by a contract.
⚫ 3. Right to receive extraordinary expenses (Sec. 175). Pawnee is also entitled to
receive from the pawnor any extraordinary expenses which he might have incurred for
the preservation of the goods pledged.
⚫ 4. Pawnee’s right in case of default of the pawnor (Sec. 176). In the case of default
by the pawnor in the payment of debt or the performance of promise at the stipulated
time or on demand or within reasonable time, the pawnee can exercise the following
two rights:
⚫ (a) He has a right to bring a suit on the debt or promise and can retain the goods
pledged as a collateral security.
⚫ (b) He has also a right to sell the goods pledged after giving reasonable notice of sale
to the pawnor.
⚫ He has a right to claim any deficit arising from the sale of the goods pledged from the
pawnor. He will have to return to the pawnor any excess obtained by the sale of goods
pledged beyond the amount necessary to pay the debt and other expenses due.

Glossary/Key Words: Contract, Offer, Acceptance, Indemnity, Guarantee, Bailment,

Pledge

28
 UNIT-II
The Sale of Goods Act, 1930
Sale of Goods
Sec. 4(1) of the sale of Goods Act defines a contract of sale of goods as “a contract whereby the
seller transfers or agrees to transfer the property in goods to the buyer for a price.”
Characteristics of a contract of sale
1. Two parties: There must be two distinct parties to a contract of sale, a buyer and a seller, as
person cannot buy his own goods.
 “Part-owners” (who is a joint owner with divisible share) may sell their share to
other part-owners. Therefore, it is a contract of sale of goods.
 An exceptional case where a person buy his own goods: when his goods are sold in
execution of a decree. Therefore, it is a contract of sale of goods.
2. Transfer of Ownership: A mere transfer of possession of the goods cannot be termed as
sale. The term property as used in the sale of Goods Act, means “general property" in goods
as different from “special property”. In contracts of bailment and pledge, only the special
property (means only some of the rights or interest) is passed to bailee and Pawnee. Bailee’s
interest in goods limited only to the extent of his labor charges likewise pledgee has special
interest to the extent of the amount of loans. Owner of the goods has general property in
goods where Pawnee and bailee have only special property or interest. Transfer of property
in goods for a price is the linchpin of the contract of sale.
3. Goods, Subject Matter of the Contract of Sale: The subject matter of the contract of sale
must be “goods”. According to Sec 2(7), “goods means every kind of movable property
other than actionable claims and money; and includes stock and shares, growing crops, grass
and things attached to or forming part of the land which are agreed to be several before sale
or under the contract of sale”. Thus every kind of movable property except actionable claims
and money is regarded as “goods”. Goods of incorporeal or intangible character are
“goods”. Goodwill, trademarks, copyrights, patent rights, water, gas, electricity, SIM card
are all regarded as goods.
4. Price: The consideration for a contract of sale must be money consideration called the
“price”. If goods are sold or exchanged for other goods, the transaction is barter, governed
by the Transfer of Property Act and not a sale of goods under this Act. But if goods are sold
partly for goods and partly for money, the contract is one of sale.
5. Include both a “Sale” and an “Agreement to sell”: The term “Contract of sale” is a
generic term and includes both “sale” and an “agreement to sell”. An “agreement to sell”
becomes a “sale” when the time elapses or the conditions are full-filled subject to which the
property in the goods is to be transferred (Sec. 4(4)).
6. Presence of essential of a Valid Contract:It deserves to be noted that Indian Contract Act
is the parent Act and lays down general principles and rules regarding to all kinds of
Contracts, including the contract of sale of goods. To constitute a Valid contract all the
essential elements of a contract of sale.
Kinds of Goods
1. Existing Goods: Goods which are physically in existence and which are in seller’s
ownership and /or possession, at the time of entering the contract of sale are called “existing
goods”. Existing goods may again be either “specific” or “unascertained”.

29
 a) Specific Goods: Goods identified and agreed upon at the time of the making of the
contract of sale are called “specific goods” (Sec. 2(14)).
b) Unascertained or generic goods i.e. goods defined only by description: The goods
which are not separately identified or ascertained at the time of the making of the
contract are known as “unascertained goods”.
2. Future Goods: Good to be manufactured or produced or acquired by the seller after making
of the contract of sale are called “Future goods” (Sec. 2(6)).
3. Contingent Goods: Goods, the acquisition of which by the seller depends upon a
contingency which may or may not happens are called as “contingent goods”. (Sec. 6(2)).
Ascertainment of Price (Sec. 9, 10)
1) Modes of ascertaining the price may be (Sec. 9)

a)Expressly stated in the contract or

b)Fixed in a manner provided by the contract or
c)Determined by the course of dealing between the parties or
d)Reasonable price where the price is not determined in accordance with the foregoing
provisions.
2) Agreement to sell at valuation (Sec. 10): The provisions regarding valuation by a third
party are as follows:

a) Where there is an agreement to sell goods on the terms that the price is to be fixed by the
valuation of a third party and such third party cannot or does not make such valuation,
the agreement becomes void.
b) Where the goods or any part thereof have been delivered to and appropriated by the
buyers, he shall pay a reasonable price therefor.
c) Where such third party is prevented from making valuation by the faults of the seller or
buyer, the party not in fault may maintain a suit for damages against the party in fault.
Stipulations as to Time (Sec. 11)
Stipulation as to time may be:
a) Stipulation as to time of payment: As regards the time fixed for the payment of the
price, the general rule is that “time is not deemed to be essence of the contract” unless a
different intention appears from the seller cannot avoid the contract. Thus even if the
price is not paid on fixed time, the seller cannot avoid the contract. The seller will have
to deliver the goods if the buyers gives the price within reasonable time before resale of
the goods. The seller may however, claim compensation for the loss due to buyer’s
failure to pay on fixed time.
b) Stipulation as to time of delivery: As regards the time fixed for the delivery of goods,
time is usually held to be of the essence of the contract. Thus in case the seller delays
beyond the time fixed for delivery of goods, the contract can be avoided at the option of
the buyer.

Condition and Warranties:

Condition : It is defined in Sec 12 (2) as a stipulation essential to the main purpose of the contract,
the contract of which gives the aggrieved party a right to repudiate the contract itself. In addition,
action for damages for losses suffered, if any, due to breach of condition can also be made.

30
Warranty is defined in Sec 12 (3) as a stipulation collateral to the main purpose of the contract, the
breach of which gives the aggrieved party a right to sue for damages and not to avoid the contract
itself.
When Breach of Condition is to be treated as Breach of Warranty (Sec.13)
1. Voluntary Waiver by Buyer: Though on a breach of condition by the seller, the buyer has
a right to treat the contract as repudiated and reject the goods, yet he is not bound to do so.
He may instead choose to waive the condition, i.e., to treat the breach of condition as a
breach of warranty and accept the goods and sue the seller only for damages for breach of
warranty.

2. Acceptance of Goods by Buyer: Where the buyer has accepted the goods and subsequently
he comes to know of the breach of condition, he cannot reject them, but can only maintain
an action for damages. This does not depend upon the will of the buyer but here the law
compulsorily treats a breach of condition as a breach of warranty.

Acceptance of Only part of the goods

If the buyer has accepted only part of the goods and (i) the contract is inseparable, he will have to
treat the breach of condition as a breach of warranty and accept the remaining part also (ii) in case
of separable contracts, he can repudiate the contract with regards to remaining goods, if he has
accepted only part thereof. Inseparable contracts are those where price for a lot, consisting goods
for different qualities, as such is fixed and not fixed per unit or per bag etc.
Meaning of Acceptance; According to Sec.42, the buyer is deemed to have accepted the goods
a) When he intimates to the seller that he has accepted them or
b) When he does any act in relation to goods which is inconsistent with the ownership of the
seller, e.g., consumes, uses, pledges or resells the goods or puts his mark on them, etc. or
c) When, after the lapse of reasonable time, he retains the goods without intimating the seller
that he has rejected them. On rejection of goods, however, mere informing the seller is
enough and the buyer is not bound to return the rejected goods actually (Sec.43).
Express and Implied Conditions and Warranties
Conditions may be express or implied. These are express when, at the will of the parties,
inserted in the contract. These are said to be implied when the law presumes their existence in
the contract, even though these have not been put into contract in express words. According to
Sec.62, implied conditions and warranties may be varied by express agreement or by the course
of dealing between the parties, or by usage of trade. This provision is an application of the
general legal maxim ‘what is expressly done puts an end to what is tacit or implied’ and
‘custom’ and ‘agreement’ overrule implied conditions and warranties.
Implied Conditions
1. Condition as to Title: Sec 14(a) of the Act lays down that in a contract of sale there is ‘an
implied condition on the part of the seller that, in the case of a sale, he has right to sell the
goods and that in the case of an agreement to sell, he will have a right to sell the goods at the
time when the property is to pass’.
The condition as to title means the following:
a) The seller is the owner of the goods and he has title to the goods which he can transfer.
b) The seller has the right to sell the goods under the brand name under which he is selling
the goods.

31
 2. Condition in a Sale by Description (Sec.15): Sec.15 of the Act states that ‘where there is a
contract for the sale of goods by description, there is an implied condition that the goods
shall correspond with the description’ Therefore, if the seller delivers goods which do not
correspond with the description, he commits a breach of this implied condition.
Sale of goods by description includes the following situations:
a) The condition ‘must apply to all cases where the purchaser has not seen the goods, but is
relying on the description alone’.
b) The condition as to ‘sale by description’ is applicable even in case the buyer has seen the
goods and relies not on what he has seen but on the description given by the seller, and
the deviation of the goods from the description is not evident.
3. Condition in a Sale by Sample (Sec.17): According to sub-section (1) of this section, ‘A
contract of sale is contract for sale by sample where there is a term in the contract, express
or implied, to that effect’
Requirements of Sale by Sample are:
a) In case of a sale by sample there is an implied conditions that the bulk should correspond
with the sample. So there is an implied condition that the bulk will tally with the sample.
b) The buyer should be given a reasonable opportunity of comparing the bulk with the
sample. If the seller does not do so, the buyer can reject the goods.
c) The goods shall be free from latent defects, i.e., defects which would not be evident on
reasonable examination of the sample.
4. Condition in a Sale by Sample as well as by Description (Sec.15): Sec.15 further states
that when the goods are sold on the basis of sample as well as description, the implied
condition is that the goods should correspond not only with the sample but also with the
description.
5. Conditions as to Quality or Fitness (Sec. 16(1). The general rule is that of caveat emptor
or let the buyer beware, i.e., the buyer must take care while choosing the goods about their
suitability for his use.
But according to Sec 16(1) implied condition on the part of the seller that the goods shall be
reasonably fit for buyer’s purpose shall apply when the following conditions are fulfilled:
a) The buyer makes known to the seller the particular purpose for which the goods are
required.
b) The buyer relies on the seller’s skill and judgment.
c) The seller deals in such goods in the ordinary course of his business.
6. Conditions as to Merchantability: Sec. 16(2); Conditions as to merchantability is implied
only in case of sale by description.
The requisites for application of this implied condition are:
a) The sale must be by description.
b) The seller must be dealer in goods of that description.
c) The buyer has not been given any opportunity to examine the goods or there is some
latent defect.

7. Condition as to Wholesomeness: This condition applies only in case of eatables and

provisions. According to this condition, the eatables and provisions must be wholesome, i.e.,
they must be fit for human consumption.

IMPLIED WARRANTIES
1. Warranty of Quiet Possession (14 (b): This warranty is an assurance against the
consequences of a defective title. In a contract of sale there is an implied warranty that the
buyer shall have and enjoy quiet an implied warranty that the buyer shall have and enjoy
quiet possession of the goods. It is a warranty as to undisturbed possession.

32
 If this warranty is broken, the buyer can hold the seller liable in damages.
2. Warranty of Freedom from Encumbrance or Charge (Sec. 14(c ): In a contract of sale,
there is an implied warranty that “the goods shall be free from any charge or encumbrance in
favour of any third party not declared or known to the buyer, before or at the time when the
contract is made.” Encumbrance means burden or charge.
Breach of this warranty arises where a pledger obtains delivery of the goods pledged (under
some pretence) before discharging the debt, and sells those goods.

3. Warranty of Disclosing Dangerous Nature of Goods to an Ignorant buyer: If an

ignorant buyer suffers injury because of non-disclosure of dangerous nature of goods known
to seller beforehand then such buyer can recover damages from the seller.

DOCTRINE OF CAVEAT EMPTOR

The principle of caveat emptor means “let the buyer beware”. According to this it is the duty of the
buyer to be careful while purchasing goods. The seller is not bound to disclose every defect in
goods of which he may be aware of. The buyer must examine the goods thoroughly and must see
that the goods he buys are suitable for the purpose for which he wants them. If the goods do not suit
this purpose, the buyer cannot hold the seller liable for the same, as there is no implied undertaking
by the seller that he shall supply goods suitable for buyer’s purpose. If, therefore, while making
purchases of goods, the buyer depends upon his own skill and makes a wrong choice, he must
blame himself and bear the cost of his inattention and careless decisions.
Exceptions under the Indian Contract Act, 1872
1. Consent by Misrepresentation: where the seller makes a misrepresentation and the buyer
relies on it, the doctrine of caveat emptor does not apply. Such a contract being voidable at
the option of the innocent party, the buyer has a right to rescind the contract.
2. Consent by Fraud: Where the seller makes a false representation amounting to fraud and
the buyer relies on it, the doctrine of caveat emptor does not apply.
Exception under the Sale of Goods Act, 1930
1. Sale of Description: Where the goods are sold by description, the goods must correspond
with the description (Sec.15)
2. In case of sale by description by a seller who deals in such class of goods and they are not
of ‘merchantable quality’, the doctrine of caveat emptor does not apply in case of latent
defect or where buyer has not been given opportunity to examine the goods.
3. Sale by Sample: Where goods are sold by sample, the bulk must match sample and buyer
be given opportunity to compare bulk with sample otherwise the buyer is entitled to reject
the goods (Sec.17).
4. Sale by sample as well as Description: Here the bulk of the goods must correspond both
with the sample and with the description otherwise the buyer is entitled to reject the goods
(Sec.15)
5. Where the buyer makes known to the seller the purpose for which he requires the goods
and relies upon the seller’s skill and judgment but the goods supplied unfit for the specified
purpose, the principle of caveat emptor does not apply (Sec. 16(1).
Customs or Usage of Trade: Where the trade usage attaches an implied conditions or warranty as to
quality or fitness and seller deviates from that, the doctrine of caveat emptor does not apply and the
seller is liable in damages (Sec.16 (3).
Transfer of Property or Ownership

33
 Meaning of Property: Property in goods is different from possession. As such, transfer of
property does not mean transfer of possession. It is quite possible to transfer property in the goods
without transferring possession and vice versa is equally true.
Rules regarding Transfer of Property
 Transfer of Property in specific or ascertained goods.
 Transfer of Property in unascertained and future goods.
Transfer of Property in Specific or Ascertained Goods
Property passes when intended to pass: In case of a contract of sale for specific or ascertained
goods the property in them is transferred to the buyer at such time as the parties to the contract
intend it to be transferred (Sec. 19(1). For the purpose of ascertaining the intentions of the parties,
regards shall be had to
i) The terms of the contract
ii) The conduct of the parties
iii) The circumstances of the case
Thus, in the case of specific goods, the transfer of property takes place when the parties intend to
pass it. The parties may intend to pass the property at once at the time of making of the contract or
on delivery of goods or on payment of goods.
Rules applicable when intention cannot be inferred: It is only when the intention of the parties
cannot be inferred from their contract or conduct or other circumstances that the rules laid down in
Sec. 20 to 24 apply (Sec. 19(3).
i) When goods are in a deliverable state (Sec. 20): Where there is an unconditional
contract for the sale of specific goods in a deliverable state, the property in the goods
passes to the buyer when the contract is made, and it is immaterial whether the time of
payment of the price or the time of delivery of the goods, or both are postponed.
ii) When goods have to be put into a Deliverable State (Sec. 21): Where there is a
contract for the sale of specific goods and the seller is bound to do “something” to the
goods for the purpose of putting them into a deliverable state, the property shall not pass
until such thing is done and the buyer is informed thereof.
iii) When the Goods have to be Measured or Tested etc. to Ascertain Price (Sec. 22):
Where there is a contract of sale of specific goods in a deliverable state, but the seller is
bound to weigh, measure, test or do some other act or thing with reference to the goods
for the purpose of ascertaining the price, the property does not pass until such act or
thing is done and the buyer has notice thereof.
iv) When Goods are Delivered on “Approval” or on “Sale or Return” Basis (Sec. 24):
When goods are delivered to the buyer on approval or “on sale or return” or on other
similar terms, the property therein passes to the buyer:
a) When he signifies his approval or acceptance to the seller or does any other act
adopting the transaction, such as uses the goods, pledges the goods or resell them.
b) If he does not signifies his approval or acceptance to the seller but retain the goods,
without giving notice of rejection, beyond the time fixed for the return of goods, if
no time has been fixed, beyond a reasonable time.
Transfer of Property in Unascertained and Future Goods
As per rules under Sec. 18 and 23:
Sec. 18 and 23 contains rules relating to transfer of property in unascertained and future goods.
These Secs. Provide that where goods contracted to be sold are not ascertained or where they are

34
future goods, the property in goods does not pass to the buyers unless and until the goods are
ascertained or unconditionally appropriated to the contract so as to bring them in a deliverable state,
either by the seller with the assent of the buyer or by the buyer with the assent of the seller. Such
assent may be expressed or implied, and may be given either before or after the ascertainment or
appropriation is made (Sec. 23(1)).
Transfer of Title by Non-Owners
Transfer of title by Non-Owners or exceptions to the maxim “Nemo Dat Quod Non-Habet” (Sec. 28
to 30). If the rule laid down by Sec. 27 as stated above is enforced rigidly then the innocent buyer
(One who buys in good faith) may be put to great inconvenience and loss in many cases. Therefore
to protect the interest of innocent buyers a number of exceptions have been provided under law. In
the words of Justice Denning, “In the early days of the common law the governing principle of our
law of property was that no person could give a better title than he himself has got but the needs of
commerce have led to a progressive modification of this principle so as to protect innocent
purchasers”.
In the following exceptions the buyer gets a better title to goods than what the seller himself
possesses:
1. An Unauthorized Sale by a Mercantile Agent (Sec. 27) : A mercantile agent means an
agent having in the customary course of business as such agent authority either to sell goods,
or to consign goods for the purposes of sale, or to buy goods, or to raise money on the
security of goods (Sec. 2(9). Thus as a rule a mercantile agent having an authority to sell
goods conveys a good title to the buyers.
By provision to Sec. 27 a mercantile agent convey a good title to the buyers even though he
sells goods without having any authority from the principle to do so, if the following
conditions are satisfied:
a) Agent is in possession of the goods or documents of title to the goods with the consent
of the owner.
b) Agent sells the goods while acting in the ordinary course of business.
c) The buyer acts in good faith without having any notice, at the time of the contract, that
the agent has no authority to sell.
2. Transfer of Title by Estoppel (Sec. 27): When the true owner of the goods by his conduct
or words or by any act or omission leads the buyer to believe that the seller is the owner of
the goods or has the authority to sell them, he cannot afterwards deny the sell’s authority to
sell. The buyer, in such a case gets a better title that that of the seller.
3. Sale by One of the Joint Owners (Sec. 28): If one of several joint owners of goods has the
sole possession of them by permission of the co-owners, the property in the goods is
transferred to any person who buys them from such joint owners in good faith without
notice of the fact that the seller has no authority to sell.
4. Sale by Person in Possession under Voidable Contract (Sec. 29): When a person has
obtained possession of goods under a voidable contract and he sells those goods before the
rescission of the contract, the buyer of such goods acquires a good title to them provided the
buyer acts in good faith and without notice of the Seller’s defect of title.
5. Sale by Seller in Possession after Sale (Sec. 30(1): Where a seller, after having sold the
goods, continues to be in possession of the goods or of the documents of title to them and
again sells or pledges them either himself or through a mercantile agent, he will convey a
good title to the buyer or the pledgee provided the buyer or the pledgee acts in good faith
and without notice of the previous sale.
6. Sale by Buyer in Possession after “Agreement to Buy” Sec. 30(2): Where a buyer has
agreed to buy the goods and has obtained possession of the same or the documents of title to

35
 them with consent of the seller, he will convey a good title to the buyer or the pledgee
provided the person receiving the goods acts in good faith and without notice of any lien or
other rights of the original seller in respect of those goods.
7. Resale by an Unpaid Seller (Sec. 54(3): Where an unpaid seller, who has exercised his
right of lien or stoppage in transit, resells the goods (of which ownership has passed to the
buyer), the subsequent buyer acquires a good title thereto as against the original buyer,
notwithstanding that no notice of the resale has been given to the original buyer.
8. Exceptions Under Other Acts: Some cases under other acts where a non-owner may pass
to the buyer a better title than he himself has are:
a) Sale by finder of lost goods under certain circumstances (Sec. 169, The Indian Contract,
Act)
b) Sale by pawnee or pledgee under certain circumstances (Sec. 176, The Indian Contract,
Act)
c) Sale by official Receiver or Assignee in case of insolvency of an individual, liquidators
of companies and Limited Liability Partnership.

Performance of Contract of Sale (Sec.31)

Performance of Contract of Sale (Sec.31)

Delivery of goods by the seller Acceptance of goods and payment for the same by
buyers

Unless otherwise agreed delivery and payment of the price are concurrent conditions (Sec.32)
Meaning of Delivery of Goods (Sec. 2(2))
Delivery means Voluntary transfer of possession from one person to another.

Modes of Delivery

Modes of Delivery

36
Actual Symbolic Constructive

Delivery of Goods may be made in any of the following ways:

i) Actual Delivery or Physical Delivery: Where the goods are physically handed over by the seller
(Or his authorized agent) to the buyer (or his authorized agent), the delivery is said to be actual.
E.g: The seller of bike hands over the bike to the buyer, there is actual delivery of goods.
ii) Symbolic Delivery: Here the goods remain where they are, but the means of obtaining
possession of goods is delivered.
E.g; The seller gives the key of the go down where the goods are stored to the buyer, or endorse a
document of title (i.e., bill of lading or railway receipt as explained) to the buyer which shall enable
him to obtain the possession of goods.
iii) Constructive Delivery: Such a delivery takes place when the person who is in possession of
the goods of the seller acknowledged to hold the goods on the behalf of the buyer. In such a
delivery all the parties, the seller, the person holding the seller’s goods and buyer, must agree.
E.g: Where the seller after having sold the goods agrees to hold them as a bailee for the buyer.
Rules as to Delivery of Goods
The rules regarding delivery of goods are as follows:
i) Delivery and Payment are Concurrent Conditions (Sec.32): Delivery of goods and
payment of the price are concurrent conditions, that is, the seller shall be ready and
willing to deliver the goods to the buyer in exchange for the price and buyer shall be
ready and willing to pay the price in exchange for possession of the goods. E.g: A
contract to sell B 10 bags of wheat for Rs. 10,000. A need not deliver the goods unless B
is ready and willing to pay for the goods on delivery, B need not pay for the goods
unless A is ready and willing to deliver them on payment.
ii) Delivery may be either Actual, Symbolic or Constructive (Sec. 33): Delivery of
goods sold may be made by doing anything which the parties agree shall be treated as
delivery or which has the effect of putting the goods in the possession of the buyer or of
any person authorized to hold them on his behalf. Thus, delivery of the goods may be
either actual, symbolic or constructive.
iii) Effect of Part Delivery, when Property in goods is to pass on Delivery (Sec 34) : A
delivery of part of the goods, in progress of the delivery of the whole, has the same
effect, for the purpose of passing the property in such goods, as a delivery of the whole.
a) When a delivery of part of the goods has been made with the intention of delivering
the rest also, the property in the whole of the goods is deemed to pass to the buyer as
soon as some portion is delivered.
b) But when a part of goods is delivered with the intention of segregating it from the

37
 whole, it is not regarded as delivery of the whole of the goods and the property is
deemed to pass to the buyer in that portion of the goods only which has been
delivered.
iv) Buyer to Apply for Delivery (Sec.35): It is the duty of the buyer to demand delivery,
and if he fails to do so, he cannot blame the seller for the non-delivery.
v) Rules as to Place to delivery (Sec.36(1) ): Whether it is for the buyers to take
possession of the goods or for the seller to send them to the buyer is a question
depending in each case on the contract, express or implied between the parties. Apart
from any such contract, goods sold are to be delivered at the place at which they are the
time of the sale, and goods agreed to be sold are to be delivered at the place at which
they are at the time of the agreement to sell, if not then in existence, at the place at which
they are manufactured or produced.
vi) Time of Delivery: (Sec. 36(2) & (4): Where under the contract of sale the seller is
bound to send the goods to the buyer, but no time for sending them is fixed, the seller is
bound to send them within a reasonable time. Further, demand of delivery by the buyer
or the tender of delivery by the seller should be made at a reasonable hour and not at odd
hours.
vii) Delivery of Goods where they are in Possession of a third party (Sec. 36 (3): Where
the goods at the time of sale are in the possession of a third person, there is no delivery
by the seller to the buyer unless and until such third person acknowledges to the buyer
that he holds the goods on his behalf. Such a delivery is known as “Constructive
delivery” and requires the consent of all the three parties, the seller, the buyer and the
person having possession of the goods.
viii) Expenses of Delivery (36(5): The expenses of and incidental to bringing the goods into a
deliverable state are to be borne by the seller and expenses of obtaining the delivery by
buyer.
ix) Delivery of Wrong Quantity (Sec.37):
a) Where the seller delivers to the buyer a quantity of goods less than he contracted to
sell, the buyer may reject them, but if the buyer accepts the goods so delivered he
shall pay for them at the contract rate.
b) Where the seller delivers to the buyer the goods he contracted to sell mixed with
goods of a different description not included in the contract, the buyer may accept
goods which are in accordance with the contract and reject rest or may reject the
whole.
c) The provisions of this section are subject to any usage of trade, special agreement or
course of dealing between the parties.
x) Instalment Deliveries (Sec.38): The buyer of goods is not bound to accept delivery
thereof by installment. Where the parties agree that the delivery is to be made by
installments and each installment is to be paid separately and either buyer or seller
commits a breach of contract in respect of one or more installments, there arises a
question as to whether such a breach amounts to a breach of the whole contract or a
breach of only a part of it?
xi) Delivery to Carrier or Wharfinger (Sec 39): Where the seller is authorized or required
to send the goods to the buyer, delivery of the goods to a carrier, whether named by
buyer or not, for the purpose of transmission to the buyer, or delivery of the goods to a
wharfinger for safe custody.
xii) Liability of Buyer for Neglecting or Refusing to take Delivery of Goods (Sec.44):
When the seller is ready and willing to deliver the goods and requests the buyers to take
delivery, and the buyer does not within a reasonable time after such request take delivery
of the goods, he becomes liable to the seller for any loss occasioned by his neglect or

38
 refusal to take delivery, and also for a reasonable charge for the care and custody of the
goods.
Acceptance of Goods by Buyer
As per sec.42 the buyer is deemed to have accepted the goods in any of the following
circumstances:
i) When he intimates to the seller that he has accepted the goods.
ii) When he does any act in relation to the goods which amounts to acceptance, e.g.,
consumes, pledge or resale of the goods.
iii) When after the lapse of a reasonable time, he retains the goods without intimating the
seller that he has rejected them, if time for rejection is stipulated, rejection must be
within that period. As per Sec.43 rejection of goods by the buyer because of defective
delivery, mere informing the seller is enough and the buyer is not bound to return the
rejected goods.

Unpaid Seller and His Rights

Definition
The seller of goods is deemed to be an unpaid seller, a) when the whole of the price has not been
paid, b) where a bill of exchange or other negotiable instruments has been received as a conditional
payment, i.e., subject to the realization thereof, and the same has been dishonored.
Characteristics of Unpaid Seller
i) He must be unpaid either wholly or partly. Even if only a portion of the price, however
small, remains unpaid, he is deemed to be an unpaid seller.
ii) He must not refuse to accept payment tendered. If the price has been tendered by the
buyer but the seller wrongfully refuses to take the same, he ceases to be an unpaid seller.

Rights of Unpaid Seller against the Goods

1. Right to Lien (Sec.47)
According to section 47(1) of sale of goods Act, “The unpaid seller of the goods who is in
possession of them, is entitled to retain possession of them until payment or tender of the price in
the following cases:
a) Where the goods have been sold without any stipulation as to credit.
b) Where the goods have been sold on credits, but the credit period has expired
c) Where the buyer have become insolvent, even though the period of credit may not have
yet expired.
Rules regarding Right of Lien
a) Goods must be in possession of the seller. Once the possession is lost, the lien is also
lost. Right of lien is possessory in nature.
b) When the goods have not been sold on credit and the buyer fails to pay the full price,
right of lien can be exercised.
c) When the goods have been sold on credit and the credit period has expired, lien can be
exercised.
d) When the buyer becomes insolvent, the seller can retain possession of the goods.
e) The right of lien can be exercised even if the goods are in the possession of the seller in

39
 any other capacity, such as a bailee or an agent.
f) The right of lien can be exercised only for the price and not for any other expenses, e.g.,
godown charges, interest etc.
g) Where an unpaid seller has made part delivery of goods, he may exercise his right of lien
on the reminder, unless such part delivery has been made under such circumstances as to
show an agreement to waive the lien.
h) The right of lien can be exercised even though the seller has obtained a decree for the
price of the goods (Sec. 49 (2).
Termination of Lien
The right of lien depends upon the possession of the goods. The unpaid seller’s right of lien shall,
therefore, be lost in the following cases;
a) By delivery of goods to a carrier or other bailee: When the goods are delivered to carrier or
other bailee for the purpose of transmission to the buyer without receiving the right of
disposal of goods (Sec. 49 (1) (a)).
b) By delivery to the buyer or his Agent: When the buyer or his agent lawfully obtain
possession of the goods (Sec 49 (1) (b)).
c) By Waiver: When the seller waives his rights of lien. This waiver may be express or
implied. Thus, when the seller extends the period of credits or assets to sub-sale by the
buyer, there is implied waiver.
d) By Tender of Price: When the buyer tenders the price, but the seller refuses to accept it, the
right of lien is lost.

2. Right of Stoppage of Goods in Transit

When the unpaid seller parts with the possession of the goods, the right of lien is lost. If after
delivering the goods to the carrier, the buyer becomes insolvent, the seller has got another right, i.e.,
to stop the goods-in-transit. He can prevent the goods from being delivered to the buyer or to his
agent. Right of stoppage in transit is available only where the goods are still in transit and the buyer
becomes insolvent. By exercising this right, the unpaid seller regains possession of the goods.
The right is exercised by the seller only if following conditions are satisfied:
a) The seller must be unpaid.
b) He must have parted with the possession of goods.
c) The goods must be in transit.
d) The buyer must have become insolvent.
e) The goods-in-transit can be stopped only for the payment of the price of the goods.
Duration of Transit (Sec.51)
Rules regarding duration of Transit
a) Course of Transit: The goods are deemed to be in the course of transit from the time when
they are delivered to a carrier or other bailee for the purpose of transmission to the buyer,
until the buyer or his agent takes delivery of them from such carrier or other bailee.
b) Obtaining delivery before the appointed destination: If the buyer or his agent obtains
delivery of goods before their arrival at the appointed destination, the transit comes to an
end.
c) Seeking delivery at a Different Place: Sometimes, the buyer ask said the seller to deliver
the goods at a different place other than the agreed one, the goods shall be said to be in
transit until they are received by the buyer or his agent at that place.
d) Rejection of goods by the buyer: Where the goods are rejected by the buyer and they are in
the possession of the carrier or other bailee, the transit is not deemed to be at an end, even if
the seller has refused to receive them back.

40
 e) When does the Transit End? Transit comes to an end in the following circumstances:
a) Buyer taking the Delivery: Once the goods reach the hands of the buyer or his agent
the transit comes to an end. If the buyer or his agent obtains delivery of goods before
their arrival at the appointed destination, the transit shall come to an end.
b) Carrier’s Acknowledgement to the Buyer: If after the arrival of goods at the appointed
destination, the carrier acknowledges to the buyer or his agent, that he holds the goods
on his behalf, the transit ends.
c) Carrier’s wrongful refusal to delivery the goods to the buyers: Where the carrier
wrongfully refuses to deliver the goods to the buyer or his agent, the transit is deemed to
be at an end.
d) Part Delivery of Goods: Where part of delivery of the goods has been made to the buyer
or his agent, the reminder of goods may be stopped in transit, unless such delivery has
been given in such circumstances as to show an agreement to give up possession of the
whole of the goods.
How Stoppage in Transit is Effected (Sec.52)
The unpaid seller may exercise his right of stoppage in transit either:
a) By taking possession of goods.
b) By giving notice of his claim to the carrier in whose possession the goods are.
Such notice may be given either to the person in actual possession of the goods or to his principle.
In case notice is given to the principle, to be effective, it must be given at such time and in such
circumstances that the principle, by the exercise of reasonable diligence, may communicate it to his
servant or agent in time to prevent delivery to the buyers.
Duty of the Carrier
When the carrier or the bailee who is in possession of goods receives such a notice from the seller,
it becomes his duty to re-deliver the goods to, or according to the directions of the seller. The
expenses of such re-delivery shall be borne by the seller (Sec. 52 (2)).
Effect of Sub-Sale or Pledge by the Buyer (Sec.53)
The unpaid seller right of lien or stoppage in transit is not affected by any further sale or other
disposition of the goods by the buyer (Sec. 53 (1)).
But there are two expectations of the above rule. These expectations are:
a) Seller’s Assent: In case the sub-sale or other disposition by the buyer has been assented to
by the seller, he loses his right of lien or stoppage in transit.
b) Transfer of Document of Title: Where a document of title to goods has been issued or
lawfully transferred to any person as a buyer, and the buyer transfers the document to a
purchaser who buys them in good faith and for valuable consideration, then the unpaid
seller’s right of lien or stoppage in transit would be defeated, if the transfer by buyer is by
way of sale.

3. Right of Re-Sale (Sec.54)

The unpaid seller, who has retained possession of goods in exercise of his right of lien or who has
regained possession from the carrier upon insolvency of the buyer can resell the goods as per the
following provisions:
a) Where the goods are of Perishable nature: The unpaid seller can sell the goods without any
notice to the buyer in case of goods of perishable nature.
b) Where the seller expressly reserves a right of resale: In case where the seller expressly

41
 reserves right of resale if the buyer commits a default in making the payment, the unpaid
seller may resell the goods.
c) After giving reasonable notice: Where the unpaid seller has given a notice to the buyer
about his intention to resell and the buyer does not pay or tender the price within a
reasonable time.
Notice of Resale
Except in case of perishable goods and where the seller expressly reserves the right of resale, a
reasonable notice of unpaid seller’s intentions to resell must be given to the buyer. This notice is
necessary because of following two reasons:
a) The buyer is given another opportunity to perform the contract, i.e., pay the price and tae the
delivery of the goods.
b) If the buyer is still unable to pay, he can at least supervise the sale and see to it that the
goods are sold at a proper price.
Rights of Unpaid Seller against the Buyer Personally

An unpaid seller, besides his rights against goods, has the following rights against the buyer
personally:
a) Suit for the Price (Sec. 55): Where under a contract of sale the property in the goods has
passed to the buyer, and the buyer wrongfully neglects or refuses to pay the price, the seller
can sue the buyer for the price of the goods.
b) Suit for damages for non-acceptance (Sec.56): Where the buyer wrongfully neglects or
refuses to accept and pay for the goods, the seller may sue him for damages for non-
acceptance.
c) Suit for Interest (Sec. 61 (2)): The seller may claim interest on the amount of the price. The
interest may be calculated from the date of the tender of the goods or from the date if any on
which the price was payable.
Glossary/Key Words: Conditions, Warranty, Non-owners, Unpaid Seller

42
 UNIT-III

The Companies Act, 2013

Aims And Objectives

This unit aims at educating the students about companies. Companies are an important form of
business ownership and have a wide array of concepts to be understood. After reading this unit,
the students will be able to
i. Define a company
ii. Differentiate between various types of companies
iii. Explain about Memorandum of Association, Articles of Association, Prospectus, Directors
and company meetings

Introduction
A company means a group of persons associated together for attaining some common interest or
objective. There are various kinds of companies established for a wide variety of purposes. The
Companies Act, 1956 governs these companies.
A company means a group of persons associated together for the attainment of a common
goal either social or economic or both. The term registered company means a company
incorporated under the CompaniesAct,1956 or some other earlier companies act
.Companies incorporated under the Companies Act, 1956 are mostly business companies but
they may also be formed for promoting art, charity, research, religion, commerce, or any other
useful purpose.
The law relating to companies in India is contained in the Companies Act, 1956, as amended
up-to-date. The latest amendment of the Act was made in 2001by the Companies
(Amendment) Act, 2001.

Definition of Company

Lindley. L.J defines a company as “associations of many persons who contribute money or
money’s worth to a common stock, and employ it in some common trade or business, and
who share the profit or loss arising there from. The common stock so contributed is denoted in
money and is the capital of the company. The persons who contribute it, or to whom it
belongs, are members. The proportion of capital to which each member is entitled is his share;
shares are always transferable although the right to transfer the is often more or less
restricted”.

A company is a voluntary association of persons:

A company, in broad sense, may mean an association of individuals formed for some
common purpose [Smith vs .Anderson,(1880)Ch.D.247].But it is a voluntary association of
persons. It has capital divisible into parts, known as shares. At the same time it is an artificial
person created by a process of law. It has a perpetual succession and a common seal. It exists

43
 only in contemplation of law, i.e., it is regarded by the law as a person, just as a human being,
Ram or Shy am, is a person.
An artificial person–has no body or soul:

A company has no body, no soul and no conscience nor is it subject to imbecilities of the
body. It is not visible, other than to the eyes of law. These physical disabilities make a
company an artificial person. But then a company really exists and it is not a fictitious entity.

On incorporation, a company becomes a body corporate or corporation with perpetual

succession and a common seal. It also acquires a personality distinct from its members.

Characteristics of the Company

1. Separate legal entity;

A company is regarded as an entity separate from its members by law. It has an
independent corporate existence. The company’s money and property belong to the
company and not to the shareholders.
2. Limited Liability:
A company may be a company limited by shares or a company limited by guarantee.
In a company limited by shares, the liability of members is limited to the unpaid value
of the shares. In a company limited by guarantee, the liability of members is limited to
such amount as the members may undertake to contribute to the assets of the company
in the event of the company being wound up.

3. Perpetual Succession:
A company is an artificial person created by law with a perpetual succession. It is
created by a process of law and can be put to an end only by a process of law.
Members may come and go, but the company can go on forever. (until dissolved).It
continues to exist even if all its human members are dead.
Perpetual succession means that a company’s existence continues irrespective of the
change in the composition of its membership.

4. Common Seal:
Since a company has no physical existence, it must act through its agents and so all
such contracts entered into by its agents must be under the seal of the company. The
common seal acts as the official signature of the company.

5. Transferability of shares:
The capital of the company is divided into parts called shares. These shares are,
subject to certain conditions, freely transferable, so that no shareholder is permanently
or necessarily required to remain as the shareholder of the company.

6. Separate property:
As a company is a legal person, distinct from its members, it is capable of owning,
enjoying and disposing of property in its own name. Although its capital and assets are

44
 contributed by its shareholders, they are not the private and joint owners of its
properties.

7. Capacity to sue:
A company can sue (file case against in a court) and be sued in its corporate name. It
may also inflict or suffer wrongs. It can in fact do or have done to it most of the things
which may be done by or to a human being.

Corporate Veil
From the juristic point of view, a company is a legal person distinct from the members who
are the shareholders. This principle is known as “Veil of Incorporation” or “Corporate Veil”.
The court in general considers itself bound by this principle. The effect of this principle is
that, there is a fictitious(imaginary)veil(and not a wall)between the company and its members.
It means that the company has a corporate personality which is different from its members.

People started using this veil of corporate personality as a cloak/cover for fraud or improper
conduct. Thus, it became necessary for the courts to break through or lift the corporate veil
and look at the persons who are behind the company and who are the real beneficiaries of the
corporate fiction.
Lifting of Corporate Veil:
The various cases/circumstances in which corporate veil has been lifted are as follows:
i.Protection of revenues:
The courts may ignore the corporate entity of a company where it is used for taxation
(Juggilal Vs. Commissioner of Income Tax, 1969, Supreme Court982).Tax planning
may be legal, provided it is within the frame work of law .No fictitious company can
be used as a device for tax planning.

ii. Prevention of fraud or improper conduct:

The legal personality of a company may be disregarded where it is used for some
fraudulent purpose like defrauding creditors or defeating or circumventing law.

iii. Determination of character of acompany-(Deciding whether its an enemy company):

A company may assume an enemy character when persons in defacto control of its
affairs are residents in an enemy country. In such a case, the court may examine the
character of persons in real control of the company and declare the company to be an
enemy company.
iv. Company avoiding legal obligations:
Where the use of an incorporated company is being made to avoid legal obligations or
where the company refuses to perform the necessary legal obligation, the court may
disregard the legal personality of the company and proceed to take action against the
members of the company.
v. Company is acting as an agent or trustee of the shareholders:
Where a company acting as an agent for its shareholders ,the shareholders will be
liable for the acts of the company.
vi. Where the company is a sham(hoax):
The courts will lift the corporate veil whereas company is only a cloak or hoax.

45
vii. Avoidance of welfare legislation:
Avoidance of welfare legislation is as common as avoidance of taxation. In such cases,
the courts consider the problems arising out of such avoidance as due to negligence of
shareholders and hence the veil will be lifted and the shareholders will be held liable.
viii. Protecting public policy:
The courts will lift the corporate veil to protect the public policy and prevent
transactions which are against public policy.

Kinds Of Companies (Classification Of Companies)

Companies may be classified into various kinds on the following basis:

I. Classification on the basis of incorporation:

1. Statutory companies:
These are the companies which are created by a special Act of the legislature. E.g., Reserve Bank of
India (RBI), State Bank of India (SBI), Life Insurance Corporation (LIC), Industrial Financial
Corporation, Unit Trust of India (UTI).

These are mostly concerned with public utilities. E.g., Railways, Electricity companies. The
provisions of the Companies Act, 1956 are applicable to these companies. Thus, these are the
companies which are established by a special law or statute but are required to operate as every
other organization.
2. Registered companies:
These are the companies which are formed and registered under the Companies Act, 1956, or which
were registered under any of the earlier Companies Acts. These are the most commonly found
companies.
II. Classification on the basis of liability:
1. Companies with limited liability:
a. Companies limited by shares:

The liability of the members of this kind of company is limited to the amount unpaid on the shares.
The liability can be enforced on the members. The members can be asked to pay the unpaid amount
during the existence of the company or during the winding up of the company. If the shares are
fully paid, the liability of the members holding such shares is nil. A company limited by shares may
be a public company or a private company.
b. Companies limited by guarantee:
In this type of companies, the liability of the members is limited to a fixed amount which the
members undertake to pay to the assets of the company in the event of its winding up. The liability
of its members is limited. The Articles of such companies must mention the number of members
with which the company is to be registered.
Companies limited by guarantee are not established for the purpose of profit but for the promotion
of art, science, culture, charity and sports. They may or may not have a share capital.

2. Unlimited companies:
Section 12 of the Companies Act provides that any 7 or more persons in the case of public
companies and 2 or more persons in the case of private companies may form an incorporated
company with or without limited liability. A company without limited liability is known as an
unlimited company. In case of such a company, every member is liable for the debts of the

46
company, as in an ordinary partnership in proportion to his interest in the company. An unlimited
company may or may not have a share capital. If it has a share capital, it may be a public or private
company. It must have its own Articles of Association.

III. Classification on the basis of number of members:

1. Private companies:
A private company is normally what the Americans call as a “Close Corporation”. According to
Section 3, I (iii), a private company means a company which has a minimum paid up capital of
Rs.1,00,000 or any other higher paid up capital as may be prescribed and the company Articles of
Association states the following rules;
i. Restricts the right to transfer its share;
ii. Limits the number of its members to 50, not including its employee members, present or past;
iii. Prohibits any invitation to the public to subscribe for any shares in, or debentures of the
company.
A private company must have its own Articles of Association which contains the conditions that are
applicable to private companies.
2. Public companies:
A public company means a company:
i. Which has a minimum paid up capital of Rs.5,00,000 or any higher amount as prescribed by the
Act.

ii. Which is not a private company and therefore the rules applicable to the private company do
not apply to the public company.
Special privileges enjoyed by a private company:
1. No. of members:
A private company may have only 2 members.
2. Allotment before minimum subscription:
A private company can allot shares before the minimum subscription is subscribed for.
3. Prospectus or Statement in lieu of prospectus:
A private company may allot shares without issuing a prospectus or delivering a statement in lieu of
prospectus.
4. Issue of new shares:
When a public company issues new shares, after the expiry of 2 years from its formation or at any
time after the expiry of 1 year from the date of first allotment of share, whichever is earlier, a
private company has to offer these shares first to the existing equity shareholders pro rata. However,
the members in a general meeting may, by a special resolution, decide otherwise. There is no such
provision in case of private companies.
5. Kinds of share:
A private company may issue share capital of any kind, and with such voting rights, as it may think
fit.
6. Commencement of business:
A private company can commence business immediately on incorporation.
7. Index of members:
A private company need not keep an index of members.
8. Statutory meeting and statutory report:
A private company need not hold statutory meeting or file with the Registrar the statutory report.
9. Demand for poll:

47
Even one member having the right to vote and present in person or by proxy (if not more than 7
such members are personally present) may demand a poll. If the number of members present is
more than 7, two members present in person or by proxy may demand a poll.
10. Managerial remuneration:
The rule of overall maximum managerial remuneration does not apply to a private company which
is not a subsidiary of a public company. In the case of a private company which is a subsidiary of a
public company, the overall managerial remuneration must not exceed 11 per cent of the net profits.
11. Number of directors:
A private company need not have more than 2 directors.
12. Rules regarding directors:
The rules regarding directors of a private company are less stringent. For example, it is not
necessary for a private company to file with the Registrar the consent of a director to act as such;
the company may provide additional grounds for disqualification of directors and their vacation of
office; a director can vote on a contract in which he is interested.

Legal position of a private company:

The legal position of a private company in most aspects is similar to that of a public company. Even
if one member holds majority of shares in a private company, the private company is considered as
a distinct person different from the member. Thus, a private company has got separate legal entity
and considered as an artificial person.
Situations in which a private company becomes a public company: A private company may become
a public company by-
1. Conversion by default [Section 43]:
If a private company does not follow the essential requirements of a private company, it stops to be
called as a private company. It gets the status of a public company when it breaks the restrictions
like not having more than 50 members, non-transferability of shares and no issue of shares to the
public.
2. Conversion by operation of law [Section 43-A]:
a. Where not less than 25% of the paid up share capital of the private company is held by one or
more public companies.
b. Where the average annual turnover of a private company is not less than such amount as
prescribed by the Companies Act, 1956. At present this amount is Rs.10 crores or more for 3
consecutive financial years.
c. Where the private company holds not less than 25% of the paid up share capital of a public
company having a share capital, the private company holding such shares will automatically
become a public company.
d. Where the private company invites, accepts or renews deposits from the public, then the private
company becomes a public company.
A private company which is converted into a public company by operation of law is known as
“Deemed Public Company”. Such converted companies have to inform the registrar of companies
about their conversion within a period of 3 months.

3. Conversion by choice/volition [Section 44]:

A private company can get itself converted into a public company if it wishes to become a public
company. It can do so by altering its Articles of Association and deleting those rules relating to
private company. The private company within 30 days of bringing about changes in the Articles of
Association should register it with the registrar of companies.

48
[If a private company takes steps to increase its membership to at least 7 if it is below that number
on the date of conversion and also increase the number of its directors to more than 2 if it is below
that number].
Conversion of a public company into a private company:

A public company may be converted into a private company by passing a special resolution. The
special resolution should be to change the Articles of Association of the company so as to give it the
benefit of a private company. Such alteration will have effect only when they are approved by the
Central Government. After getting the approval from the Central Government, the new Articles
must be filed with the Registrar within a period of one month.
IV. Classification on the basis of control:
On the basis of control, companies may be classified as follows:
1. Holding company [Section 4(4)]:
A company is known as a holding company of another company, if it has control over that
company.
2. Subsidiary company [Section 4(1)]:
A company is known as a subsidiary of another company when control is exercised by the latter
(called holding company) over the former called a subsidiary company. A company is said to be a
subsidiary of another company in the following cases:
Assumptions:
H = Holding company
S = Subsidiary company
a. Company controlling composition of Board of directors:
Where a company (H) controls the composition of Board of directors of another company (S), then
company S is known as the subsidiary of company H.
b. Holding of majority of shares:
Where a company (H) holds more than 50% of the nominal value of equity share capital of another
company (S), company S here becomes the subsidiary of company H.
c. Subsidiary of another subsidiary:
Where a company (S) is a subsidiary of another company (H1) which is itself a subsidiary of the
controlling company (H), the former (S) becomes the subsidiary of the controlling company (H).
Example:
Company S is a subsidiary of company H and Company S1 is a subsidiary of company S. Company
S1 is a subsidiary of company H, by virtue of the above clause. If company S2 is a subsidiary of
company S1, company S2 will be a subsidiary of company S and consequently also of company H,
by virtue of the above clause.

The following chart explains the point:

Company H (Holding company) Company S1 (Subsidiary of company H) Company S2 (Subsidiary
of company S1) Company S3 (Subsidiary of company S2)
Company S3 and company S2 are subsidiaries of company H.
V. Classification on the basis of ownership;
1. Government company:
A government company means any company in which not less than 51% of the paid up share
capital is held by:
i. The Central government
ii. Any State government or governments
iii. Partly by the Central government and partly by one or more State governments.
2 .Non-governments Company:

49
 It is a company controlled and operated by private capital.

Foreign Company [Sec.591 (1)]:

It means any company incorporated outside India, which has an established place of business in
India.
Example: If the representatives of a foreign company frequently come and stay in a hotel in India
for purchasing raw material s or machinery and equipments, the foreign company has a place of
business in India.
Associations not for profit [Sec.25]:
Some associations are established as limited companies for promoting commerce, science, religion,
charity or any other useful purpose. Such companies do not have profit maximization as their
objective. Such companies are exempted from using the words Ltd., or Pvt. Ltd., behind their
names.
One-Man company:
This is usually a private company in which one man holds practically the whole of the share capital
of the company. In order to meet the statutory requirement of minimum number of members, some
dummy members who are mostly his relatives or friends, hold just one or two shares each. A one-
man company, like any other company, is a legal entity distinct from its members.
Incorporation of a Company
Before a company is formed, certain preliminary steps have to be taken and decisions have to
be made regarding the following aspects:
i.Whether the company should be a private company or a public company
ii.Its total capital investment
iii.Whether to form a new company to take over the business of an already established concern
All these steps are taken by certain persons known as promoters. They do all the necessary
preliminary work required for the incorporation of the company.

Method Of Forming An Incorporated Company [Sec.12]

Any 7 or more persons, in case of a public company, and, 2 or more persons in case of a
private company, associated for any lawful purpose may form an incorporated company. They
shall subscribe their names to a Memorandum of Association (MoA) and also abide by the
other formalities in respect to registration. A company so formed may be:
i. A company limited by shares ,or
ii. A company limited by guarantee ,or
iii. A un- limited company.

Companies limited by shares are the most popular among incorporated companies
.Documents to be filed with the Registrar:
The following documents which are properly prepared on stamped papers with the necessary
fees are to be filed with the Registrar:

i.Memorandum of Association (MoA):

A duly signed MoA containing the details of the subscribers should be submitted.

50
 ii. Articles of Association(AoA):
Where required, the AoA ,signed by the subscribers must be filed .A public company
limited by shares need no have its own Article of Association.

iii. The Agreement:

The agreements which the company plans to enter into with any individual for
appointment as its managing director or whole-time director must be prepared and
filed [Sec 33(1)].

iv. A list of the Directors:

A list of directors who have agreed to become the first directors of the company must
be prepared. This document along with the written consent has to be filed with the
Registrarin the case of public company limited by shares.
v. A Declaration;
A Declaration stating that all the requirements of the Companies Act and
otherformalities relating to registration have been followed correctly. Such a
declarationmust be signed by any of the following persons;

 An Advocate of the Supreme Courtor the High Court

 An Attorneyor a Pleader whocanappearbeforeaHighcourt
 A Secretary or a Chartered Accountant who practices full-time in India and who is
engaged in the formation of the company

 A person named in the Articles as a director, manager or secretary of the company.All the
above documents have to be filed with the Registrar of companies of the state in which the
company is going to be incorporated .Then ,within 30 days of the date of incorporation ,a
notice containing the details abou the Registered office of the company must be given to
register,who will record all the details in the register of companies.

Certificate of Incorporation
When all the required documents are filed with the Registrar, the Registrar shall satisfy
himself that all the statutory requirements regarding the registration have been complied with.
TheRegistrar is no trequired to carry out any investigation regarding the details given in the
documents. The Registrar retains all the documents with him and issues aCertificate of
Incorporation.
By issuing this certificate, the Registrar certifies that the company is incorporated [Sec.
3].Conclusiveness of the Certificate of Incorporation [Sec.35]:
A certificate of incorporation given by Registrar to a company is the conclusive evidence that
all the re quirements of the Companies Act have been satisfactorily met by the promoter’s
.The certificate concludes the following aspects:
i.That the requirements of theAct in respect to registration have been complied with
ii.That the association is a company authorized to be registered under the Act

Effects of registration [sec. 34]

When a company is registered and a certificate of incorporation is issued by the Registrar, three
important consequences follow:

51
 i.The company becomes a distinct legal entity
ii.The company acquires a perpetual succession
iii.The company’s property is not the property of the shareholders

A private limited company can start business immediately after its incorporation. A public
company has to get the certificate to commence its business.

Promoter

A Promoter is a person who does the necessary preliminary work required for the formation
of a company. The first persons who control a company’s affairs are its promoters. It is they
who conceive the idea of forming a company to attain specific goals. It is they, who take the
necessary steps to incorporate the company, provide it with share and loan capital and acquire
the property for the company. When these things have been done, they and over the control
of the company to its directors. Sometimes, the promoters themselves are the directors of the
company and hence they take the total control of the company as its directors.

Functions of Promoters:

The promoter of the company decides its name and ensures that it will be accepted by the
Registrar of companies.

iv. He settles the details of the company’s MoA

v.He nominates the directors, legal advisors, bankers, auditors, the secretary and the Registered
Office of the company
vi.He arranges for the printing of the MoA and AoA
vii. He arranges for the registration of the company
viii. In the case of public company, he prepares the prospectus and issues the same for
raising capital through public issue of shares.

Legal Status:

A promoter is not a trustee or the agent of the company that is to be established by him. He
occupies the peculiar position of the Quasi-trustee.

Contents

 Purpose of Memorandum
 Contents of Memorandum
 Alteration of Memorandum
 Doctrine of Ultra Vires

Memorandum of Association is a document of great importance in relation to the proposed

company. It contains all the fundamental conditions upon which the company is allowed to be

52
 incorporated. It is the “Charter of the Company”. It defines Raison d’etre (reason for
existence) of the company. It lays down the area of operation of the company. It also regulates
the external affairs of the company in relation to outsiders. Its purpose is to enable the
shareholders and all those who deal with the company to know about the operations of the
company.

Purpose Of Memorandum

 The prospective shareholders will know the purpose for which their money is going to be
used by the company and what risks they are undertaking in making investment
 The outsiders dealing with the company shall know as to what the objects of the company
are and know for certain their contractual relationship with the company.

Printing and signing of Memorandum [Sec. 15]:

The Memorandum of Association of a company shall be –
i. Printed,

ii.Divided into paragraphs numbered consecutively, and

iii. Signed by 7 subscribers in the case of public companies and 2 subscribers in the case of
private companies.

Each subscriber shall sign (and add his address, description and occupation, if any) in the
presence of at least 1 witness who shall attest the signature and shall likewise add his address,
description and occupation, if any.

The Memorandum of Association printed on computer laser printers should be accepted by

the Registrar for registration of a company, provided it is neatly and legibly printed.
Form of Memorandum [Sec. 14]:
The Memorandum of Association of a company shall be in such one of the Forms in Tables
B, C, D and E in Schedule I to the Companies Act, 1956, as may be applicable to the case of
the company, or in a Form as near thereto as circumstances admit.

Contents Of Memorandum (Sec.13)

The Memorandum of every company shall contain the following clauses (described as
conditions of the company’s incorporation)-

53
 1. The name of the company, with ‘Limited’ as the last word of the name in the case of a
public limited company and with ‘Private Limited’ as the last words of the name in the
case of a private limited company.

2. The State in which the registered office of the company is situated

3. The objects of the company which shall be classified as-

a. the main objects of the company to be pursued by the company on its
incorporation and objects incidental or ancillary to the attainment of the main objects; and
b. Other objects of the company not included in (a).

4. In the case of companies (other than trading corporations) with objects not
confined to one State, the States to whose territories the objects extend.

5. Limited liability: The Memorandum of a company limited by shares or by guarantee

shall also state that the liability of its members is limited.

6. Share capital: In the case of a company having a share capital, the amount of share
capital with which the company is to be registered and the division thereof into shares of a fixed
amount. In such a company each subscriber shall take at least one share and shall write opposite
his name the number of shares he takes. The Memorandum of a company limited by guarantee
shall also state that each member undertakes to contribute a certain sum to the assets of the
company, if need be, in the event of its being wound up.
The Memorandum shall conclude with an ‘association clause which states that the subscribers
desire to form a company and agree to take shares in it.
These clauses are now considered in detail:
I.The name clause (Sec. 20):
The name of a company establishes its identity and is the symbol of its existence. A company
may, subject to the following rules, select any suitable name-
1. Undesirable name to be avoided: A company cannot be registered by a name which, in the
opinion of the Central Government, is undesirable. Broadly speaking, a name is
undesirable and rejected if it is either-
a. too similar to the name of another company; or
b. Misleading, i.e., suggesting that the company is connected with a particular
business or that it is an association of a particular type when this is not the case.

54
 Injunction if identical name adopted: If a company gets registered with a name which
resembles the name of an existing company, the other company with whom the name
resembles can apply to the Court for an injunction to restrain the new company from
adopting the identical name.

An injunction will not be granted to prevent the use of a purely descriptive word with a
definite meaning and in common use. Where the names of the 2 companies contain a word
which is in common use, its use cannot be restrained and even a very trifling distinction
between their names will suffice to make them acceptable.

3. ‘Limited’ or ‘Private Limited’ as the last word or words of the name. The Memorandum
shall state the name of the company with ‘Limited’ as the last word of the name in case of a
public limited company, and with ‘Private Limited’ as the last words of the name in case of a
private limited company. In case the company has been formed for the promotion of art,
science, religion, etc., the Central Government may permit by a licence, the omission of the
word ‘Limited’ or the words ‘Private Limited’ from the name.

The omission to use the word ‘Limited’ as part of the name of a company must have been
deliberate and not merely accidental.
4. Prohibition of use of certain names: The Emblems and Names (prevention of
Improper Use) Act, 1950 prohibits the use of or registration of a company or firm with,
any name or emblem specified in the Schedule to that Act. The Schedule specifies,
amongst others, the following items, i.e., the name, emblem or official seal of the United
Nations Organisation, the World Health Organisation, the United Nations Educational,
Scientific and Cultural Organisation, the Indian National Flag, the name, emblem or
official seal of the Central Government and State Governments, the name, emblem or
official seal of the President of India or Governor of any State.

5. Use of some key words according to authorised capital: If a company uses any of
the following key words in its name, it must have a minimum authorised capital
mentioned against the key words :

Key words Required authorised capital

Rs.

1. Corporation 5 crores

2. International, Globe, Universal, Continental, Inter- 1 crore

Continental. Asiatic, Asia, being the first words of the
name
3. If any of the words at (2) above is used within the name (with 50 lakhs
or without brackets)

55
 4. Hindustan, India, Bharat, being the first 50 lakhs
word of the name
5. If any of the words at (4) above is used within the name (with 5 lakhs
or without brackets)

6. Industries/Udyog I crore
7. Enterprises, Products, Business, 10 lakhs
Manufacturing

Publication of name (Sec. 147):

Every company shall-
a. paint or affix its name and the address of its registered office, the outside of
every office or place in which its business is carried on,
b. have it engraved in legible characters on its seal, and
c. have its name and the address of its registered office mentioned in legible
characters in all business letters, bill-heads, negotiable instruments, invoices, receipts, etc.,
of the company.

II. The registered office clause (Sec. 146):

Every company have a registered office from the day on which it begins to carry on business,
or as from the 30th day after the date of its incorporation whichever is earlier. All
communications and notices are to be addressed to that registered office. Notice of the
situation of the registered office and every change shall be given to the Registrar within 30
days after the date of incorporation of the company or after the date of change. If default is
made in complying with these requirements, the company and officer of the company who
is in default shall be punishable with fine which may extend to Rs. 500 for every day during
which the default continues.
The situation of the registered office of a company determines its domicile [Daimler Co. Ltd.
vs. Continental Tyre & Rubber Co. Ltd., (1916) 2 A.C.307].

III. The objects clause [Sec. 13 (1)]:

The objects of a company shall be clearly set forth in the Memorandum, for a company can do
what is within, or incidental to, the objects stated in the Memorandum. The objects clause
both defines and confines scope of the company’s powers and once registered, it can only be
altered as provided by the Act.
The purpose of the objects clause is
i.to enable subscribers to the Memorandum to know the uses to which their money may be put,
and

56
ii.to enable creditors and persons dealing with the company to know what its permitted range of
enterprise or activities is.
The objects clause in the Memorandum of every company state-
a. Main objects of the company to be pursued by the company on its incorporation and
objects incidental or ancillary to the attainment of the main objects, and
b. Other objects of the company not included in the above clause.
Further, in the case of a company (other than a trading corporation) whose objects are not
confined to one State, the States to whose territories the objects extend has also to be stated.
A company, which has a main object together with a number of subsidiary objects, cannot
continue to pursue the subsidiary objects after the main object has come to an end.
Incidental acts: The powers specified in the Memorandum must not be construed strictly. The
company may do anything which is fairly incidental to these powers. Anything reasonably
incidental to the attainment or pursuit of any of the express objects of the company will, less
expressly prohibited, be within the implied powers of the company.

IV. The capital clause [Sec. 13(4)]:

The Memorandum of a company, having a share capital, shall state the amount of the
share capital with which the company is to be registered and the division thereof into
shares of a fixed amount. The capital with which a company is registered is called the
‘registered’, ‘'authorised’ or ‘nominal’ capital. A company cannot issue more shares
than are authorised for the time being by the Memorandum. The shares issued by a
company can only be equity shares or preference shares, but they cannot have
disproportionate rights (Secs.85 and 89). A private company which is not a subsidiary
of a public company may issue shares of any kind and with disproportionate rights
(Sec. 90).

V. The liability clause [Sec. 13(2)]:

The Memorandum of a company limited by shares or by guarantee shall also state that
the liability of its members is limited. This means that the members can only be called
upon to pay to the company at any time the uncalled or unpaid amount on the shares
held by them, or up to the maximum of the amount which they have guaranteed. There
is, however, one exception to this rule.

VI. The association clause [Sec. 13 (4)]:

The association clause states: “We, the several persons whose names and addresses are
subscribed, are desirous of being formed into a company in pursuance of this
Memorandum of Association, and we respectively agree to take the number of shares
in the capital of the company set opposite our respective names.” This is followed by
the names, addresses and descriptions of the subscribers and the number of shares
taken by each of them. Each subscriber has to take at least 1 share.

57
 The Memorandum shall be signed by at least 7 subscribers in the case of a public company,
and by at least 2 subscribers in the case of a private company. The signature of each
subscriber shall be attested by at least 1 witness who cannot be any of the other subscribers.

Alteration Of Memorandum

Alteration of conditions
I.Change of name:
By special resolution: A company may change its name by a special resolution and
with the approval of the Central Government signified in writing. But a change of
name which merely involves the deletion or addition of the word “Private” on the
conversion of a public company into a private company or vice versa does not require
the approval of the Central Government.

By ordinary resolution: Sometimes, through inadvertence or otherwise, a company is

registered by a name which in the opinion of the Central Government, is identical with, or too
nearly resembles, the name of an existing company. In such a case, the company-
a. may change its name, by ordinary resolution and with the previous approval of the
Central Government,
b. shall change its name if the Central Government so directs within 12 months of its
registration. When so directed by the Central Government the company shall, by ordinary
resolution and with previous approval of the Central Government, change its name within a
period of 3 months from the date of the direction. The above rule also applies to an existing
company which is registered by a new name which is identical with, or too nearly resembles,
the name of an existing company. If the company makes default in complying with any
direction given by the Central Government in this regard, the company and every officer of the
company who is in default shall be punishable with fine which may extend to Rs. 100 for every
day during which the default continues.
Fresh certificate of incorporation (Sec. 23):
Where a company changes its name, the Registrar shall enter the new name on the Register in
the place of the former name. It shall also issue to the company a fresh certificate of
incorporation. The change of name shall be complete and effective only on the issue of such a
certificate. The Registrar shall also make the necessary alteration in the Memorandum of
Association of the company.

II. Change of registered office:

This may involve -
i.Change of registered office from one place to another state within a state
ii.Change of registered office from one State to another Procedure of alteration:

58
 1. Special resolution:
A special resolution shall be passed at a general meeting so as to change the place of
registered office from one State to another.

2. Confirmation by the Company Law Board:

The alteration shall not take effect until it is confirmed by the Company Law Board on
petition.

3. Notice to affected parties:

Before confirming the alteration, the Company Law Board shall be satisfied that
sufficient notice has been given to every person whose interest will be affected by the
change, and that the consent of the creditors of the company has been obtained or their
debts or claims have been discharged or secured.

4. Notice to Registrar:
The Company Law Board shall cause notice of the petition for confirmation of the
change to be served on the Registrar. The Registrar shall also be given a reasonable
opportunity to appear before the Company Law Board and state his objections and
suggestions, if any, with respect to the confirmation of the change.
s

5. Power of the Company Law Board to confirm change is discretionary:

The Company Law Board may confirm the change, on such terms and conditions as it
thinks fit.

6. Rights and interests of members and creditors to be taken care of:

The Company Law Board shall have regard to the rights and interests of every class of
the members and the creditors of the company.

7. Copy of special resolution and the order of the Company Law Board to be filed with the
Registrar (Sec. 18).

59
 A company shall file with the Registrar-
a. the special resolution passed by the company within one month from the date of such
resolution;
b. a certified copy of the order of the Company Law Board confirming the change within 3
months of the order. The company shall also file a printed copy of the Memorandum as altered.
The Registrar shall register the same and certify the registration within 1 month from the date of
filing of such documents. The certificate shall be conclusive evidence that all the requirements
of the Act with respect to change and the confirmation thereof have been complied with.

Effect of failure to register (Sec. 19):

No alteration of Memorandum shall have effect unless it has been registered in accordance
with the provisions of Sec. 18. If the documents to be filed with the Registrar under Sec. 18
are not filed within the prescribed period, such alteration and order of the Company Law
Board and all proceedings connected therewith shall become void and inoperative.

A certified copy of the order confirming the change shall be filed by the company with the
Registrar of the State in which the registered office is to be transferred and he shall register
the same. All the records of the company shall then be transferred to the Registrar of the State
in which the registered office of the company is transferred.

III. Alteration of objects (Sec. 17)

The objects clause is the most important clause in the Memorandum of Association. The legal
personality of a company exists only for the particular purposes of incorporation as defined in
the objects clause.

The power of alteration of objects is subject to two limits, namely

i.substantive or physical limit, and
ii.Procedural limit.

Substantive limit:
By Sec. 17 (1), the objects of a company may be altered by special resolution so as to enable the
company-

a. To carry on its business more economically or more efficiently.

b. To attain its main purpose by new or improved means.
c. To enlarge or change the local area of its operations.

60
 d. To carry on some business which may conveniently or advantageously be
combined with the objects specified in the Memorandum
In the following cases alteration of the objects clause was permitted
e. To restrict or abandon any of the objects specified in Memorandum;
f. To sell or dispose of the whole, or any part of the undertaking, or of any of the
undertakings, of the company; or
g. To amalgamate with any other company or body of persons

Procedure of alteration:
i.Special resolution:
A special resolution shall be passed at a general meeting so as to alter the objects
company.
ii. Copy of special resolution to be filed:
The company shall file with the Registrar the special resolution within 1 month from the
date of the resolution with a printed copy of the Memorandum as altered.
iii. Certification of registration:
The Registrar shall register the resolution and certify the registration under his hand
within 1month from the date of the filing of the special resolution.
IV. Change in liability clause:
A. company limited by shares or guarantee cannot change its Memorandum so as to impose
any additional liability on the members or to compel them to buy additional shares of the
company unless all the members agree in writing to such change either before or after the
change (Sec. 38).

V. Change in capital clause:

Changes in the capital clause which involve increase, reduction or reorganisation of capital
can be carried out by passing special resolutions.
s

Doctrine Of Ultra Vires

A company has the power to do all such things as are

1. authorised to be done by the Companies Act, 1956 ;
2. essential to the attainment of its objects specified in the Memorandum ;
3. reasonably and fairly incidental to its objects [Foster vs. London Chatham & Dover Co.
(1895) 1 Q.B. 711].

Everything else is ultra vires the company. ‘Ultra’ means ‘beyond’ and ‘vires’ means
‘powers’. The term ultra vires a company means that the doing of the act is beyond the legal
power and authority of the company. The purpose of these restrictions is to protect-

61
i.investors in the company so that they may know the objects in which their money is to be
employed; and

ii. creditors by ensuring that the company’s funds are not wasted in unauthorised activities.

Ultra vires act is void. If an act is ultra vires the company, it does not create any legal
relationship. Such an act is absolutely void and even the whole body of shareholders cannot
ratify it and make it binding on the company. It is not necessary that an act to be considered
ultra vires must be illegal; it may or may not be [Anand Parkash vs. Asstt. Registrar, A.I.R.
(1968) All. 22].
[sThe main feature and facet of the doctrine of ultra vires is that a company being a corporate
person should not be mucted (fined or punished) for its own acts or acts of its agents, if they are
beyond its powers and privileges [Bhodani vs. Bank of Baroda, (1957) 27 Comp. Cas. 233].
Where the company exceeds its authority, the act is good to the extent of the authority and bad as
to the excess. But if the excess cannot be separated from the authority conferred on the company
by the Memorandum, the whole transaction would

be affected by the doctrine of ultra vires and would be void. But there is nothing to prevent a
company from protecting its property.

Ultra vires the directors:

If an act or transaction is ultra vires directors (i.e., beyond their powers, but within the powers
of company), the shareholders can ratify it by a resolution in a general meeting or even by
acquiescence provided they have knowledge of the facts relating to the transaction to be
ratified. If an act is within powers of the company, any irregularities may be cured by the
consent of the shareholders [Express Engg. Works Ltd., Re (1920) 1 Ch. 466].
Ultra vires the Articles:
If an act or transaction is ultra vires the Articles, the company can ratify it by altering the
Articles by a special resolution. Again if the act is done irregularly, it can be validated by the
consent of the shareholders provided it is within the powers of the company.

Articles Of Association

Contents

 Contents of Articles
 Alteration of Articles
 Articles and Memorandum – their relation

62
 Constructive notice of Memorandum and Articles
 Doctrine of Indoor Management

The Articles of Association or just Articles are the rules, regulations and bye-laws for the
internal management of the affairs of a company. They are framed with the object of carrying
out the aims and objects set out in the Memorandum of Association.

The Articles are next in importance to the Memorandum of Association which contains the
fundamental conditions upon which alone a company is allowed to be incorporated. They are
as such subordinate to, and controlled by, the Memorandum.

In framing the Articles of a company care must be taken to see that regulations framed do not
go beyond the powers of the company itself as contemplated by the Memorandum of
Association.

Contents Of Articles

Articles usually contain provisions relating to the following matters:

1. Share capital, rights of shareholders, variation of these rights, payment of commissions,

share certificates.
2. Lien on shares.
3. Calls on shares.
4. Transfer of shares.
5. Transmission of shares.
6. Forfeiture of shares.
7. Conversion of shares into stock.
8. Share warrants.
9. Alteration of capital.
10. General meetings and proceedings thereat.
11. Voting rights of members, voting and poll, proxies.
12. Directors, their appointment, remuneration, qualification, powers and proceedings of
Board of directors.
13. Manager.
14. Secretary.
15. Dividends and reserves.
16. Accounts, audit and borrowing powers.
17. Capitalisation of profits.
18. Winding up.
Companies which must have their own Articles (Sec. 26):

63
 The following companies shall have their own Articles, namely,
a. Unlimited companies.
b. Companies limited by guarantee.
c. Private companies limited by shares.

The Articles shall be signed by the subscribers of the Memorandum and registered along with
the Memorandum.
A public company may have its own Articles of Association. If it does not have its own
Articles, it may adopt Table A given in Schedule I to the Act.
Regulations required in case of an unlimited company, a company limited by guarantee and a
private company (Sec. 27):

1. Unlimited company:
In the case of an unlimited company, the Articles shall state-
a. the number of members with which the company is to be registered, and
b. if it has a share capital, the amount of share capital with which the company is to
be registered.
2. Company limited by guarantee:
In the case of a company limited by guarantee, the Articles shall state the number of
members with which the company is to be registered.
3. Private company:
In the case of a private company having a share capital, the Articles shall contain
provisions which -

i.restrict the right to transfer shares,

ii.limit the number of its members to 50 (not including employee-members), and

iii.Prohibit any invitation to the public to subscribe for any shares in, or debentures of, the
company.

Adoption and application of Table A (Sec. 28):

There are three alternative forms in which a public company may adopt Articles:
1. It may adopt Table A in full.
2. It may wholly exclude Table A and set out its own Articles in full.
3. It may frame its own Articles and adopt part of Table A.

In other words, unless the Articles of a public company expressly exclude any or all provisions of
Table A, Table A shall automatically apply to it.

64
 Form of Articles in the case of other companies (Sec. 29):
The Articles of any company, not being a company limited by shares, shall be in such one of
the Forms in Tables C, D, and E in Schedule I to the Act, as may be applicable, or in a Form
as near thereto as circumstances admit. Further, such a company may include any additional
matters in its Articles in so far as they are not inconsistent with the provisions contained in the
Form in any of the Tables C, D, and E adopted by the company.
Form and signature of Articles (Sec. 30):
The Articles shall be
i. printed,
ii.divided into paragraphs, and
iii. Signed by each subscriber of the Memorandum (who shall add his address, description
and occupation, if any) in the presence of at least 1 witness who will attest the signature
and likewise add his address, description and occupation, if any.

The Articles of Association printed on computer laser printer should be accepted by the
Registrar for registration of a company provided they are neatly and legibly printed (Press
Note, issued by the Department of Company Affairs, dated 22-6-1993).

Alteration Of Articles

Companies have been given very wide powers to alter their Articles. The right to alter the
Articles is so important that a company cannot any manner, either by express provision in the
Articles or by an independent contract, deprive itself of the power to alter its Articles. Any
clause in the Articles that restricts or prohibits alteration of Articles is invalid. If, for example,
the Articles of a company contain any restriction that the company shall not alter its Articles, it
will be contrary to the Companies Act and, therefore, inoperative.

Procedure of alteration (Sec. 31):

A company may, by passing a special resolution, alter its Articles any time. Again any Articles
may be adopted which could have been lawfully included originally. A copy of every special
resolution altering the Articles shall be filed with the Registrar within 30 days of its passing and
attached to every copy of the Articles issued thereafter. Any alteration so made in the Articles
shall, as valid as if originally contained in the Articles.

Limitations to alteration :
s

1. Must not be inconsistent with the Act:

65
The alteration of the Articles must not be inconsistent with, or go beyond, the provisions of the
Companies Act. For example, the Articles cannot be altered so as to give power to a company to
purchase its own shares.

2. Must not conflict with the Memorandum:

The alteration of the Articles must not exceed the power given by the Memorandum, or conflict
with the provisions of the Memorandum. If it does, it will be ultra vires and wholly void and
inoperative.

3. Must not sanction anything illegal:

The alteration must not purport to sanction anything which is illega1. But if it is legal and it is
not clearly prohibited by the Memorandum, it may be held to be valid even where it alters the
whole structure of the company.

4. Must be for the benefit of the company:

The alteration must be made bona fide for the benefit of the company as a whole. That the
power of alteration must be “exercised subject to those general principles of law and equity
which are applicable to all powers conferred on majorities and enabling them to bind
minorities.”
5. Must not in any way increase the liability of the existing members:
The alteration must not in any way increase the liability of the existing members to contribute to
the share capital of, or otherwise pay money to the company unless they agree in writing before
or after the alteration is made. But where the company is a club or association, the Articles may
be altered to provide for subscription or charges at a higher rate.
6. Alteration by special resolution only:
The alteration can be made only by a special resolution. Even clerical errors in the Articles
should be set right by a special resolution [Evans vs. Chapman, (1902) 18
L.T. 506].

7. Approval of Central Government when a public company is converted into a

private company:
The alteration in the Articles which has the effect of converting a public company into a private
company can be made only if it is approved by the Central Government. Where this alteration
has been approved by the Central Government, a printed copy of the Articles as altered shall be
filed by the company with the Registrar within 1 month of the date of receipt of order of the
approval.
8. Breach of contract:

66
A company is not prevented from altering its Articles even if such an alteration would result in
breach of some contract. The affected party may, however, file a suit for damages for the breach
of contract.
9. Must not result in expulsion of a member:
An assumption by the Board of directors of a company of any power to expel a member by
amending its Articles is illegal and void. Any provision in the Articles conferring such a power
on the Board of directors is repugnant to the various provisions in the Companies Act pertaining
to the rights of a member in a public limited company.

10. No power of the Court to amend Articles:

The Court has no power to amend or rectify the Articles even where there is a mistake or
drafting error which the Court would rectify in the case of any other contract [Evans vs.
Chapman. (1902) 18 L.T.R. 506]. The Court can only declare some clause to be ultra vires
[Scott vs. Frank Scott (London), Ltd .. (l940) Ch. 794].
11. Alteration may be with retrospective effect:
The Articles may be altered with retrospective effect and the fact that some members suffer a
detriment does not make it void.

Articles And Memorandum - Their Relation

The Articles are subordinate to Memorandum:

The Articles cannot give powers to a company which are not conferred by the Memorandum
nor can they purport to create rights which are inconsistent with the Memorandum. This is so
because the object of the Memorandum is to state the purpose for which the company has been
established, while the Articles provide the manner in which the internal management of the
company is to be carried.
The Memorandum must be read in conjunction with Articles:
This is the case when it is necessary-
a. to explain any ambiguity in the terms of the Memorandum, or
b. to supplement the Memorandum upon any matter about which it is silent except as
regards matters which must by Statute be provided by the Memorandum.
The Articles may explain or supplement the Memorandum, but cannot extend or enlarge its
scope.
The terms of the Memorandum cannot be modified or controlled by the Articles:
If, however, there is any ambiguity in the Memorandum, the articles may be referred to for
clarification. But so far as the fundamental conditions in the Memorandum are concerned, they
cannot be explained with the aid of the Articles.

67
Articles And Memorandum - Distinction

Memorandum of Association Articles of Association

It is the charter of the company indicating the They are the regulations for the internal
nature of its business, its nationality, and its management of the company and are subsidiary to
capital. It also defines the company’s the Memorandum.
relationship with outside world.
It defines the scope of the activities of the They are the rules for carrying out the
company, or the area beyond which the objects of company as set out in
actions of the company cannot go. Memorandum.
It, being the charter of the company, is the They are subordinate to Memorandum. If there is
supreme document. conflict between the Articles and the
Memorandum, the latter prevails.

Every company must have its Own A company limited shares need not have Articles
Memorandum. of its own. In such a case, Table A applies.

There are strict restrictions on its alteration. They can be altered by a special resolution, to any
Some of the conditions of incorporation extent provided they do not conflict the
contained in it cannot be altered except with Memorandum and Companies Act.
the sanction of the Company Law Board.

Any act of the company which is ultra vires Any act of the company which is ultra vires the
the Memorandum is wholly void and cannot be Articles (but is intra vires the Memorandum) can
ratified even by the whole body of be confirmed by the shareholders.
shareholders.

Constructive Notice Of Memorandum And Articles

Every outsider dealing with a company is deemed to have notice of the contents of the
Memorandum and the Articles of Association. These documents, on registration with the
Registrar, assume the character of public documents. This is known as constructive notice of
Memorandum and Articles.
Office of Registrar is a public office:
The Memorandum and the Articles are open and accessible to all. It is the duty of every person
dealing with a company to inspect these documents and see that it is within the powers of the
company to enter into the proposed contract. Likewise special resolutions, when registered with
the Registrar and particulars of charges registered with the Registrar, become public documents,
so that an outsider is on notice of their contents in the same way as he is the Articles and the
Memorandum [Irvine vs. Union Bank of Australia, (1877) 2 App. Cas. 366].

68
Presumption that outsider has read Memorandum and Articles. Lord Hatherley observed in this
regard in Mahony vs. East Holyford Mining Co., (1875) L.R 7 H.L. 869 as follows:
“But whether he actually reads them or not it will be presumed that he has read them. Every
joint stock company has its Memorandum and Articles of Association. open to all
who are minded to have any dealings whatsoever with the company and those who so deal with
them must be affected with notice of all that is contained in these two documents.”

Doctrine Of Indoor Management

There is one limitation to the doctrine of constructive notice of Memorandum and the Articles
of a company. The outsiders dealing with the company are entitled to assume that as far as the
internal proceedings of the company are concerned, everything has been regularly done. They
are presumed to have read these documents and to see that the proposed dealing is not
inconsistent therewith, but they are not bound to do more; they need not inquire into the
regularity of the internal proceedings as required by the Memorandum and the Articles. They
can presume that all is being done regularly. This limitation of the doctrine of constructive
notice is known as the “doctrine of indoor management” or the rule in Royal British Bank vs.
Turquand, or just Turquand Rule.
The doctrine of constructive notice protects the company against outsiders whereas the doctrine
of indoor management seeks to protect outsiders against the company.

Royal British Bank vs. Turquand, (1856) 6 E. & B. 327. The directors of a company had issued
a bond to T. They had the power under the Articles to issue such bond provided they were
authorised resolution passed by the shareholders at a general meeting of company. No such
required resolution was passed by the company. Held, T could recover the amount of the bond
from the company on the ground that he was entitled to assume that the resolution been passed.

The gist of the rule is that persons dealing with limited liability companies are not bound to
inquire into the regularity of the internal proceedings and will not be affected by irregularities of
which they had no notice.
The rule is based on public convenience and justice:
First, the Memorandum and the Articles are public documents. They are open to inspection by
everybody. But the details of internal proceedings are not open to public inspection. An outsider
is presumed to know the constitution of a company, but not what may or may not have taken
place within the doors that are closed to him.

Secondly, the lot of creditors of a limited liability company is not a particularly happy one: it
would be unhappier still if the company could escape liability by denying the authority of the
officers to act on its behalf.

Prospectus

69
Contents
 Definition
 Objects of registration of prospectus
 Contents of Prospectus
In order to finance its activities, a company needs capital which is raised by a public company
by the issue of a prospectus inviting deposits or offers for shares and debentures from the
public. A private company is prohibited from making any invitation to the public to subscribe
for any shares in, or debentures of, the company. Hence it need not issue a prospectus.

The central theme of a prospectus, from the money raising point of view, is that it sets out the
prospects of the company and the purpose for which the capital is required. The prospectus is
the basis on which the prospective investors form their opinion and take decisions as to the
worth and prospects of the company.

Definition

Sec. 2 (36) defines a prospectus as “any document described or issued as a prospectus and
includes any notice, circular, advertisement or other document inviting deposits from the public
or inviting offers from the public for the subscription or purchase of any shares in, or debentures
of, a body corporate.” In simple words, any document inviting deposits from the public or
inviting offers from the public for the subscription of shares or debentures of a company is a
prospectus.

Prospectus to be in writing:
A prospectus must be in writing. An oral invitation to subscribe for shares in, or debentures of, a
company, or deposits is not a prospectus. Likewise, an advertisement in television or a film is
not treated to be a prospectus.

Invitation to public:
A document is not a prospectus unless it is an invitation to the public to subscribe for shares in,
or debentures of, a company. But if the document satisfies the condition of invitation to the
public, it is a prospectus even though it is issued to a defined class of the
public [Nash vs. Lynde, (1929) A.C. 158]. Thus an advertisement which stated that “some
shares are still available for sale according to the terms of the company which may be obtained
on application” was held to be a prospectus as it invited the public to purchase shares [Pramatha
Nath Sanyal vs. Kali Kumar Dutt, A.I.R. (1925) Cal. 714]. If, however, the invitation is made to
a small circle of friends of the directors or the existing shareholders, it is not an offer to the
general public.

Offer to the public, i.e., public issue:

Whether shares have been ‘offered to the public’ is a matter of fact and will depend on the
circumstances of a particular case.

70
 Dating of prospectus (Sec. 55):

A prospectus issued by or in relation to an intended company, may be dated and that date is,
unless the contrary is proved, taken as the date of publication of the prospectus.

Signing of prospectus:
In case the prospectus is issued by intended company, it has to be signed by the proposed
directors of company or by their agents authorised in writing. In case of existing companies, the
prospectus has to be signed by every person who is named therein as director of the company or
by his agent authorised writing.

Registration of prospectus (Sec. 60):

A prospectus can be issued by or on behalf of a company only when a copy thereof has been
delivered to the Registrar for registration. The registration must be made on or before the date of
publication thereof. The copy must be signed by every person who is named therein as director
or proposed director of the company, or by his agent authorised in writing. Further, such a
prospectus must state on the face of it that a copy of it has been delivered to the Registrar for
registration on or before the date of its publication.

The prospectus must be issued within 90 days of the date on which a copy thereof is delivered
for registration. If a prospectus is not issued within this period, it is deemed to be a prospectus, a
copy of which not been delivered to the Registrar.

Penalty for non-registration of prospectus:

If a prospectus is issued without a copy thereof being delivered to the Registrar for registration,
or without the necessary documents or the consent of the experts, company and every person,
who is knowingly a party to the issue of prospectus, shall be punishable with fine which may
extend toRs.50,000.

Objects Of Registration Of Prospectus

The objects of registration prospectus are:

i.to keep an authenticated record of the terms and conditions of issue of shares or debentures, and
ii.to pinpoint the responsibility of the persons issuing prospectus for statements made by them in
the prospectus.

Information memorandum (Sec. 60-B) as inserted by the Companies (Amendment) Act, 2000]

A public company making an issue of securities may circulate information memorandum to the
public prior to filing of a prospectus. If the company invites subscription by this information
memorandum, it shall be bound to file a prospectus prior to the opening of subscription lists and

71
 the offer as a red-herring prospectus, at least 3 days before the opening of the offer. “Red-
herring prospectus” means a prospectus which does not have complete particulars on the price
of the securities offered and the quantum of securities offered.

Every variation in the information memorandum and the prospectus shall be individually
intimated to the persons invited to subscribe to the issue of securities.

Contents Of Prospectus

Prospectus is the window through which an investor can look into the soundness of a
company’s venture. The investor must, therefore, be given a complete picture of the company’s
intended activities and its position. This is done through prospectus which must secure the
fullest disclosure of all material and essential particulars and lay the same in full view of all
intending purchasers of shares.

Matters to be stated and reports to be set out in prospectus (Sec. 56):

Sec. 56 lays down that every prospectus issued
a. by or on behalf of a company
b. by or on behalf of any person engaged or interested in the formation of a company, shall
-
state the matters specified in Part I of Schedule II, and
set out the reports specified in Part II of Schedule II.

These provisions as stated above shall have effect subject to the provisions contained in Part III
of Schedule II.
The revised format of prospectus is given in Schedule II of the Companies Act, 1956. The
revised format is effective from 1st November, 1991. The format has been revised to provide
for greater disclosure of information regarding the company, its management, the project
proposed to be undertaken by the company, the financial performance of the company for the
last 5 years and management perception of risk factors so as to enable the investors to take an
informed decision regarding investment in shares or debentures offered through public issue.

The important contents of prospectus are as follows:

Part I of Schedule II:

I.General information:

Name and address of registered office of the company.

72
 Consent the Central Government for the present issue and declaration of the Central
Government about non-responsibility for financial soundness or correctness of statements.
Names of Regional Stock Exchange and other stock exchanges where application is made
for listing of present issue.
Provisions relating to punishment for fictitious applications
Declaration about refund of the issue if minimum subscription of 90 per cent is not received
within 90 days from closure of the issue.
Declaration about the issue of allotment/refund within a period of 10 weeks.
i.Date of opening of the issue. Date of closing of the issue. Date of earliest closing of the issue.
Name and address of auditors and lead managers.
Name and address of trustee under debenture trust deed (in case of debenture issue).
Rating from CRISIL (Credit Rating Information Services of India Limited) or any rating
agency obtained for the proposed debenture/preference share issue. If no rating has been
obtained, this fact should be stated.
Underwriting of the issue (Names and addresses of the underwriters and the amount
underwritten by them).
s

II. Capital structure of the company:

Authorised, issued, subscribed and paid-up capital.
Size of present issue giving separately reservation for preferential allotment to promoters and
others.
Paid-up capital:
after the present issue,
after conversion of debentures (if applicable).

Terms of the present issue.

Terms of payments.
Rights of the instruments holders.
How to apply - availability of forms, prospectus and mode of payment.
Any special tax benefits for company and its shareholders.

III. Particulars of the issue.

a. Objects,
b. Project cost,
c. Means of financing (including contribution of promoters).

73
 IV. Company, management and project:
i.History and main objects and present business of the company.
ii.Subsidiary (ies) of the company, if any.
iii.Promoters and their background.
.

Part II of Schedule II

A. General information:

i.Consent of Directors, Auditors, Solicitors/Advocates, Managers to Issue, Registrar of Issue,

Bankers to the Company, Bankers to the Issue and Experts.
ii.Experts’ opinion obtained, if any.
iii.Change, if any, in directors and auditors during the last 3 years and reasons thereof.
iv.Authority for the issue and details of resolution passed for the issue.
v.Procedure and time schedule for allotment and issue of certificates.
vi.Names and addresses of the Company Secretary, Legal Adviser, Lead Managers ,Co-managers,
Auditors, Bankers to the company, Bankers to the issue and Brokers to the issue.

B. Financial information:
1. Report by the auditors:
A report by the auditors of the company with respect to
a. its profits and losses (distinguishing items of non-recurring nature) and assets and
liabilities; and
b. the rates of dividends paid by the company during the preceding 5 financial years.

If, however, no accounts have been made up in respect of any part of the period of 5 years
ending on a date 3 months before the issue of the prospectus, the report shall contain a statement
of that fact. If the company has subsidiaries, the report shall, in addition, deal with either the
combined profits and losses and assets and liabilities of its subsidiaries or each of the
subsidiaries, so far as they concern the members of the company.

2. Reports by the accountants:

74
a. A report by the accountants (who shall be qualified under the Act for appointment as
auditor of a company and who shall be named in the prospectus) on the profits or losses of the
business for the preceding 5 financial years, and on the assets and liabilities of the business on a
date which shall not be more than 120 days before the date of the issue of the prospectus. This
report is required to be given if the proceeds of the issue of the shares or debentures are to be
applied directly in the purchase of any business.
b. A similar report on the accounts of a body corporate by an accountant (who shall be
named in the prospectus) if the proceeds of the issue are to be applied in the purchase of shares
of the body corporate so that that body corporate becomes a subsidiary of the acquiring
company.

c. Principal terms of loans and assets charged as security.

C. Statutory and other information

1. Minimum subscription.
2. Expenses of the issue giving separately fees payable to :
a. Advisers.
b. Registrars to the issue.
c. Managers to the issue.
d. Trustees for the debenture-holders.
Underwriting commission and brokerage.
Previous issue for cash.
Previous public or rights issue, if any (during last 5 years) :
. Date of Allotment: Closing Date:
Date of Refunds: Date of listing on the stock exchange :
b. If the issue is at premium or discount, the amount thereof.
c. Premium, if any, on each share which had been issued within the 2 years preceding the
date of the prospectus.
6. Commission or brokerage on previous issue.
7. Issue of shares otherwise than for cash.
8. Debentures and redeemable preference shares and other instruments issued by the
company outstanding as on the date of prospectus.
9. Option to subscribe.
10. Details of purchase of property : If the company proposes to acquire a business which
has been carried on for less than 3 years, the length of time during which the business has been
carried on.

75
11. Details of directors, proposed directors, whole-time directors, their remuneration,
appointment and remuneration of managing directors, interests of directors, their borrowing
powers and qualification shares.
12. Rights of members regarding voting, dividend, lien on shares and the process for
modification of such rights and forfeiture of shares.
13. Restrictions, if any, on transfer and transmission of shares/debentures.
14. Revaluation of assets, if any (during last 5 years).
15. Material contracts and inspection of documents.

Part III of Schedule II - Provisions applying to Parts I and II Schedule II:

1. Every person shall, for the purposes of this Schedule, be deemed to be a vendor who has
entered into any contract, absolute or conditional, for the sale or purchase of any property
to be acquired by the company in any case where –
a. the purchase money is not fully paid at the d the issue of the prospectus ;
b. the purchase money is to be paid or satisfied, wholly or in part, out of the proceeds of
the issue offer subscription by the prospectus ;
c. the contract depends for its validity or fulfilment on the result of that issue.

2. In the case of a company which has been carrying on business for less than 5 financial
years, reference to 5 financial years means reference to that number of financial years for which
business has been carried on.
3. Reasonable time and place at which copies of all balance sheets and profit and loss
accounts on which the report of the auditors is based, and material contracts and other
documents may be inspected.
4. Term ‘year’ wherever used herein earlier means financial year.

Declaration: That all the relevant provisions of the Companies Act, 1956 and the guidelines
issued by the Government have been complied with and no statement made in the prospectus is
contrary to the provisions of the Companies Act, 1956 and rules there under.
The prospectus shall be dated and signed by the directors.
Statements by experts (Secs. 57 to 59):
1. Experts to be unconnected with formation or management of company (Sec. 57):
Where a prospectus includes a statement made by an expert, he shall not be engaged or
interested in the formation, promotion or management of the company.
The expression ‘expert’ includes an engineer, a valuer, an accountant and any other person
whose profession gives authority to a statement made by him.
2. Expert’s consent to issue of prospectus containing statement by him (Sec. 58):
A prospectus including a statement made by an expert shall not be issued, unless:

76
a. he has given his written consent to the issue of the prospectus with the statement
included in the form and context in which it is included, and
b. a statement that he has given and has not withdrawn his consent as aforesaid appears in
the prospectus.
Sec. 58 lays down a wholesome rule intended to protect intending investors by making the expert a
party to the issue of the prospectus and making him liable for untrue statements.

Penalty [Sec. 59 (l)]:

If any prospectus is issued in contravention of Sec. 57 or 58, the company, and every person
who is knowingly a party to the issue thereof, shall be punishable with fine which may extend to
Rs.50, 000.

Directors
Contents
 Appointment of Directors
 Qualification of Directors
 Removal of Directors
 Duties of Directors

Directors are a body to whom the duty of managing the general affairs of the company is
delegated. Sec 2(13) of the Companies Act defines Director as “any person occupying the
position of director, by whatever name he may be called”.

A director is a person having control over the direction, conduct and management of the affairs
of a company. Only an individual can be appointed as a director. The main reason for
appointing individuals is that somebody must be held responsible for the acts of the company so
that the failure can be justified.
Number of Directors:

Every public company must have at least 3 directors and every other company must have at
least 2 directors. A company may limit the maximum number of directors by mentioning the
number in the Articles of Association of the company. For increasing the number up to 12, the
company must make changes in the Articles of Association and for increasing beyond that, the
Central government’s permission is required.

Appointment Of Directors

1. First Directors:
Articles of Association of the company usually name the First directors by their respective
names. If the Articles do not include such details, the subscribers of the Memorandum of
Association become the directors of the company.
2. Appointment by the company:

77
Directors must be appointed by shareholders in the general meetings. At least 1/3 rd of the total
number of directors must be permanent directors. The others retire by rotation at every general
meeting. This is a statutory requirement which cannot be avoided.

3. Appointment by directors:
In case of a public or a private company which is a subsidiary of a public company, if the office
of any director appointed by the company is vacant, the other directors can appoint some
individual as a director who shall hold the office till the next general meeting. Causal vacancies
may arise due to death, resignation, disqualification or failure of a person to accept directorship.
Sometimes additional directors may be appointed by the existing directors. The additional
directors will hold the post till the next annual general meeting. An alternate director may be
appointed to act on behalf of the original director during the original director’s absence.

4. Appointment by Central government:

In order to safeguard the interest of the company/shareholders, the Central government may
appoint directors who will hold the post for not more than 3 years.

5. Appointment by third parties:

1/3rd of the total number of directors may be appointed by third parties like banking/financial
institution, debenture holders or creditors of the company. Such appointment must be made
once in 3 years and the provision should be provided in the Articles.

6. Appointment by proportionate representation:

2/3rd of the directors are appointed by a single vote or cumulative votes and appointment is
made once in 3 years. This method of appointment ensures that even minority shareholders are
given right to vote on the board.

Qualification Of Directors

Share qualification refers to a specified number of shares, which a person must hold to qualify
himself for appointment as a director. A person willing to be appointed as a director must hold
at least 1 share in the company. If a person is appointed without the share qualification, within 2
months of the appointment he should buy the qualifying shares. The nominal value of the shares
must not exceed Rs.5,000.
Disqualification of a Director:
Following people are disqualified to act as directors:
1. A person who is insolvent
2. Person of unsound mind
3. Person who has applied for insolvency
4. Person who has been disqualified to act as a director by a court of
law.

Number of Directorships:

A person cannot act as director in more than 20 companies at a given time. If he is holding the
directorship in more than 20 companies, he is punishable with a fine for each company in
excess.

78
 Removal Of Directors

Directors can be removed by:

1. Shareholders:
Shareholders may pass an ordinary resolution at the general meeting to remove a director before
expiry of the period of his office. Shareholders cannot remove a person from directorship when
the appointment is by the Central Government or when the company follows the policy of
retiring 2/3rd of directors every year.
2. Central Government:
Central Government may remove a person from directorship on recommendation of the
Company Law Board. This can be done when the director has been fraudulent, negligent or
done business against company policies.

3. Company Law Board:

To prevent mismanagement and oppression, Company Law Board can remove a person from
directorship. The person involving in such acts and terminated from directorship for such
behaviour cannot sue the company for damages.

Duties Of Directors

Fiduciary Duties:
The directors must exercise their duties and powers honestly and for the purpose for which they
are appointed. The director must act in such a way that he avoids a conflict between his personal
interest and the interest of the company. All the activities of the director must be beneficial to
the company and he should not make any secret profits.

1. Duties of skill, knowledge, care and diligence:

Directors have to carry out their activities with utmost care. They are expected to exercise high
degrees of skills, knowledge, care and diligence while exercising their decisions and powers.

2. Other duties:
Directors are expected to attend meetings without fail and they should not delegate their
functions beyond the authorized limit. They should not disclose any information that will affect
the interest of the company.

Company Meetings, Resolutions And Minutes

79
 Contents

 Companies Meetings
 Requisites of a valid meeting

Company Meetings

The meetings are classified as follows:

I.Members’ meetings
a. Statutory Meeting
b. Annual general Meeting (AGM)
c. Extra-ordinary General Meeting
d. Class Meetings of Shareholders

II. Directors’ Meetings

a. Board Meeting
b. Committee Meeting

III. Creditors’ and Debenture-holders’ Meetings

a. Meeting during the life time of the company
b. Meeting at the time of winding up

I.Members’ Meetings:
a. Statutory Meeting:

This is the first meeting of the shareholders. This is held once in the life time of the company.
Every public limited company, limited by shares and by guarantee, should hold this meeting
within a period of not less than 1 month and not more than 6 months from the date of
commencement of business. A duly dated and signed copy of the statutory report along with the
notice for the meeting must be sent to all the members at least 21 days before the date of the
meeting. The main objective of this meeting is:
1. To put the shareholders in possession of all the facts regarding the nature of the company,
its incorporation, allotment of shares etc.
2. To enable the shareholders to discuss any of the matters mentioned above

80
 3. To approve any modification in the terms of the contract.

Procedure of the meeting:

When the meeting is commenced, the company secretary must produce a list showing the name
and addresses of all the members along with the details of the number of shares held by them.
This list is kept open and it is accessible by any member. The members at the meeting have the
right to discuss any matter mentioned in the notice but special resolution cannot be passed for
matters not mentioned in the notice.

Statutory Report:

It is a report which according to the Companies Act must be forwarded to the members at least
21 days before the meeting.

Contents of the Statutory Report:

The total cash received through the subscriptions

The number of shares allotted
An abstract of the receipts and payments
The list of directors and auditors
Particulars about the underwriting contract
Details regarding Calls-in-arrears
i.Percentage of commission and brokerage paid to the intermediaries. This report must
be verified and certified by at least 2 directors of the company.
b. Annual General Meeting:
Every company shall in each year hold in addition to any other meeting, a general meeting as its
Annual General Meeting. There shall not be an interval of more than 15 months between one
AGM and the other. The company may hold its first AGM within a period of 18 months from
the date of incorporation. In that case, the company need not hold the AGM in the year of
incorporation. In certain situations, the meeting may be extended by a period not exceeding 3
months. There should be at least one AGM in a year. The notice for an AGM shall be sent at
least 14 days before the date of meeting. It is necessary to hold the meeting during the business
hours of a working day and not on a public holiday. The meeting may be held at the Registered
Office of the company or at some other place in the same city or town where the Registered
Office is located. The AGM is a statutory requirement and it has to be called even when there is
no operation in the company for the particular year.

When an AGM convened on a particular date has to be cancelled due to certain reasons, the
Board of directors can cancel or postpone the holding of the meeting. If a company fails to hold
an AGM, any member can apply to the Company Law Board or to the Central Government to
call for the meeting. Every director who is responsible and is in default shall be punishable with
a fine.
The Central Government interferes in the conduct of the meeting, if the default is made by the
company and the matter has been referred to the Government. The fine may extend to Rs.50,000

81
 in case for not conducting the meeting and for continuous default, the officer responsible is
punishable with a fine of Rs.2,500, every day till the default continues.

c. Extra-ordinary General Meeting:

A statutory meeting and AGM are called ordinary meetings. Any meeting other than those are
called Extra-ordinary Meetings. This meeting is for transacting some special business or some
urgent matters which cannot be postponed till the next general meeting. It is convened by the
Board of directors or by the members on the failure of the board to call for the meeting. The
requisition from the members should be such that it comes from the members who hold 1/10 th of
the paid up capital.

d. Class meeting of shareholders:

When a company has more than one class of shareholders i.e., equity, preference and debenture
holders, separate meetings must be convened for each class of the members when any proposals
affects the particular type of shareholders. The Articles provides for the conduct of such
meetings and a special resolution is passed for bringing about any change in the rights of any
class of shareholder.

II. Directors’ Meetings:

a. Board Meetings:

The management and the administration of the affairs of the company lies in the hands of the
representatives called the directors. The directors meet at regular intervals to decide on the
policy matters and review the affairs of the company. The board meeting must be held once in 3
months i.e., at least 4 times in a year. The general business in the meeting include issue of
shares, allotment, calls, appointment, promotion and dismissal of the staff, deciding the
borrowing power, maintenance of the statutory book etc.

b. Committee Meeting:
The directors delegate their powers to the sub-groups of members to investigate and submit
report regarding the matter to the directors. In case the matter is permanent, permanent
committee is formed like Works Committee, Shares Transfer Committee etc.
Some committees may be set up for resolving the temporary issues like shares
allotment, committee, grievances committee etc.
The committees should meet periodically and investigate into various issues and submit a report
to the board.

III. Meetings of Creditors and debenture holders:

82
This meeting may be held for the purpose of getting support from the company when it goes for
reorganization, reconstruction or amalgamation or at the time of winding up. This meeting helps
to discuss the financial difficulties and the ways of overcoming it.

Requisites Of A Valid Meeting

1. Proper authority:
The meeting must be convened only by the board of directors by passing a special resolution.
The company’s secretary fixes the date in consultation with the chairman. In case, if the
directors fail to call for the meeting, then the members may convene a meeting.

2. Notice of the meeting:

A proper notice should be given to the members. At least 21 days notice must be given before
the meeting. The notice is deemed to be received after the expiry of 48 hours after posting the
letter. The notice must mention the date, place, time and the matters to be discussed in the
meeting

3. Chairman of the meeting:

A chairman is necessary to conduct the proceedings of the meeting. He will act as the presiding
officer of the meeting. The members, who are physically present for the meeting, elect one
amongst them as the chairman. He is responsible for the proper conduct of the meeting. He must
be aware of the transactions to be discussed in a meeting and also see that all the matters are
taken up for discussion. He should maintain discipline and decide on the incidental questions
arising from the discussions in a meeting.

4. Minutes of the meeting:

The secretary must record all the proceedings of the meeting. This record is known as Minutes.

5. Quorum:
Quorum means minimum number of members who must be present in order to constitute a
meeting and transact the business. The Quorum is 5 members for a public company and 2 for
any other company.

Minutes
Whenever a meeting is held, the secretary must record all the proceedings of the meeting. This
record is known as Minutes. The minutes will contain in brief all the issues that are discussed

83
during a particular meeting. It has to be signed by all the members who attended that particular
meeting. Minutes of the previous meeting should be read at the beginning of a meeting.

Resolutions
The important decisions taken during a meeting are known as resolutions. Resolutions are also
passed for bringing about changes in the existing rules or other issues of an organisation.
Resolutions can be either Ordinary Resolutions or Special Resolutions as per the requirements.

Glossary/Key Words: Memorandum of Association, Articles of Association, Prospectus,

Meeting, Oppression, Mismanagement

UNIT-IV

THE NEGOTIABLEINSTRUMENTS ACT 1881

Negotiable Instruments

84
Meaning: As per Section 13(a) of the Act, “Negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer, whether the word “order” or “ bearer”
appear on the instrument or not.”

Characteristics of Negotiable Instruments

Negotiable Instruments Act: The law relating to “Negotiable Instruments” is contained in the
Negotiable Instruments Act, 1881, as amended up-to-date. It deals with three kinds of negotiable
instruments, i.e., Promissory Notes, Bills of Exchange and Cherubs. The provisions of the Act also
apply to “hands” (an instrument in oriental language), unless there is a local usage to the contrary.

Other documents like treasury bills, dividend warrants, share warrants, bearer debentures, port trust
or improvement trust debentures, railway bonds payable to bearer etc., are also recognized as
negotiable instruments either by mercantile custom or under other enactments like the Companies
Act, and therefore, Negotiable Instruments Act is applicable to them.

Definition of Negotiable Instruments:

The word “Negotiable” means “Transferable by delivery”, and the word “Instrument” means “A
written document by which a right is created in favor of some person”. Thus, the term “Negotiable
instrument” literally means “a written document transferable by delivery”.

As per Section 13(a) of the Act, “Negotiable instrument means a promissory note, bill of exchange
or cheque payable either to order or to bearer, whether the word “order” or “ bearer” appear on the
instrument or not.”

The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cherubs and
declares that to be negotiable they must be made payable in any of the following forms:

A) Payable to order:

A note, bill or cheque is payable to order which is expressed to be “payable to a particular person or
his order”.

But it should not contain any words prohibiting the transfer, e.g., “Pay to A only” or “Pay to A and
none else” is not treated as “payable to order” and therefore such a document shall not be treated as
the negotiable instrument because its negotiability has been restricted.

There is, however, an exception in favor of a cherub. A cheque crossed “Account Payee only” can
still be negotiated further; of course, the banker is to take extra care in that case.

B) Payable to bearer:

“Payable to bearer” means “payable to any person whom so ever bears it.” A note, bill or cheque is
payable to bearer which is expressed to be so payable or on which the only or last endorsement is an
endorsement in blank.

Important characteristics of Negotiable Instruments are:

85
 1. Property: The possessor of negotiable instrument is acknowledged to be the owner of
property contained therein. Negotiable instrument does not simply give ownership of the
instrument but right to property as well. The property in negotiable instrument can be moved
without any formality. In the case of bearer instrument, the possessions pass by meager
delivery to the transferee. In case of order instrument, endorsement & delivery are necessary
for transfer of property.
2. Title: The transferee of negotiable instrument is called ‘holder in due course.’ A genuine
transferee for value is not affected by any flaw of title on the part of transferor or of any of
the previous holders of instrument.
3. Rights: The transferee of negotiable instrument can take legal action in his own name, in
case of dishonour. A negotiable instrument can be reassigned any number of times till it is
attains maturity. The holder of instrument need not give notice of transfer to the party
legally responsible on the instrument to pay.
4. Presumptions: Certain presumptions are applicable to all negotiable instruments i.e., a
presumption that deliberation has been paid under it. It is not essential to write in promissory
note the words ‘for value received’ or alike expressions for the reason that the payment of
consideration is acknowledged. The words are typically included to generate additional
substantiation of consideration.
5. Prompt payment: A negotiable instrument facilitates the holder to anticipate prompt
payment because dishonour refers to the ruin of credit of all persons who are parties to the
instrument.

Examples of Negotiable Instruments:

The following instruments have been recognized as negotiable instruments by statute or by usage or
custom:

 Bills of exchange;
 Promissory notes;
 Cheques;
 Government promissory notes;
 Treasury bills;
 Dividend warrants;
 Share warrants;
 Bearer debentures;
 Port Trust or Improvement Trust debentures;
 Hindus, and;
 Railway bonds payable to bearer, etc.

Examples of Non-negotiable Instruments:

These are:

 Money orders;
 Postal orders;
 Fixed deposit receipts;
 Share certificates, and;
 Letters of credit.

Promissory Note

86
A promissory note is a written and enforceable agreement in which a borrower promises to pay a
lender a sum of money on demand, or within a specified period of time. The note records
information about how much was lent (the principal amount), interest rates, when the payment is
due (maturity date), when and where it was issued, and signatures.

A promissory note is also referred to as a:

 Debt Note
 Demand Note
 Commercial Paper
 Notes Payable

1. When to Use a Promissory Note

If you’re borrowing or lending money, you should create a promissory note that addresses payment
details, interest rates, collateral, and late fees. There are many types of promissory notes that can be
used for several purposes, such as:

 Personal loans between family members, friends, and colleagues

 Student loans
 Real estate loans, property down payments, or mortgages
 Automobile, vehicle, or car loans
 Bank, commercial, business, or investment loans

In general, you should use a promissory note for more straightforward loans with basic repayment
structures, and a loan agreement for more complex loans.

2. How to Write a Promissory Note

A legal promissory note should contain the following details and clauses:

1. Full names of parties (“borrower” and “lender”)

A standard promissory note should name who is receiving money or a line of credit (the
“borrower”) and who will be repaid (the “lender”). Only the borrower must sign the promissory
note, but it’s good practice to also include the lender’s signature.

 The lender may also be called a “payee”, “seller”, “issuer”, or “maker”.

 The borrower may also be called a “payer” or “buyer”.

2. Repayment amount (“principal” and “interest”)

All promissory notes, no matter how simple, should clearly state the amount of money being
borrowed (the “principal” amount) that needs to be paid back. You also need to decide whether or
not to charge interest, and how often it will be compounded (monthly or yearly).

For example, in California and Texas, a promissory note’s interest rate cannot exceed 10%. In
comparison, Florida promissory notes can incur an interest rate of 18% (for amounts less than
$500,000), or 45% (for loans greater than $500,000). Make sure you check the interest requirements
in your state before drafting your loan notes.

87
Payments on the note are usually applied first toward the interest with the remainder applied toward
the principal amount.

4. Payment plan

The promissory note should clearly spell out how the money will be paid back to the lender. For
instance, depending on how the promissory note is structured, the borrower must pay back the
lender by a certain date (known as a “maturity date”). If there is no date or if the date has already
passed, it is “payable on demand” or “due on demand.” For all of the repayment options, refer to the
table below.

Four Types of Repayment Options

Due on Specific Due on Demand

Installment Installments with Final
Date (“Payable on
Payments Balloon Payment
("Lump Sum") Demand”)

Specific due date Specific due date Specific due date No specific due date

Payments for interest only

Entire amount Entire amount owed
Payments for principal and are made at regular
owed, including is due whenever the
interest are made at regular intervals, principal
interest, is paid all lender wants his or
intervals amount due on maturity
at once her money back
date

Example: $1,500 monthly Example: $10,000

Example: $500 monthly Example:
payment actually consists of loan for a friend's
payment is applied only $10,000 loan for a
$500 towards the outstanding small business is due
towards interest and full friend’s small
principal and $1,000 towards at any time or
$10,000 loan amount is business is due on
the interest with $1,500 due whenever financially
due on the maturity date a specific date
on the maturity date feasible

5. Consequences of non-payment (“default” and “collection”)

If the borrower is unable to pay back the money on time and defaults on the note, the lender can
enforce the promissory note and demand the full amount be paid, or collect on the collateral. If the
borrower refuses to pay, the promissory note provides strong evidence if the lender wishes to
initiate legal action. In the event that the borrower loses the lawsuit, they would also be responsible
for paying any reasonable costs associated with the collection of debts, including attorney fees.

In the event that a borrower enlists a professional collection agency, they’ll be charged either a flat
fee or a percentage of the outstanding debt. As a result, it’s sometimes in the lender’s interest to
negotiate a debt settlement agreement with the borrower, and accept less than the original amount
owed.

6. Notarization (if necessary)

Typically, a promissory note does not need to be notarized. However, always consult your local and
state laws to verify signature and witness requirements.

88
7. Other common details

A promissory note may include these additional provisions:

 Acceleration: can the lender demand immediate payment from the borrower?
o Possible events of acceleration include:
 if the borrower becomes bankrupt
 if the borrower fails to make payments
 if the borrower passes away (i.e., death)
 if the borrower wants to pay off the note early
 if the borrower sells of a large or material portion of their assets
 Amendment: any changes made to the note (must be done in writing)
 Collateral: if the borrower defaults, the lender can keep the designated collateral property
 Governing Law: which state’s laws apply
 Joint and Several Liability: all co-borrowers share responsibility
 Late Charges: a penalty is charged if the amount is paid back late
 Prepayment: the borrower can pay off the debt and interest early
 Right to Transfer: the lender can transfer the promissory letter to a different party

BILL OF EXCHANGE

According to Section 5 of the Negotiable Instruments Act 1881, the bill of exchange is “An
instrument in writing containing an unconditional order signed by the maker, directing a certain
person to pay a certain sum of money only to the order of the certain person or to the bearer of the
instrument.” When this order is accepted in writing it becomes a valid bill of exchange.

Meaning of Bills of Exchange

Bill of exchange means a bill drawn by a person who directs another person to pay the specified
sum of money to another person.

A bill of exchange is of actual use if it is accepted by the person directed to pay the amount.

For example, Mr. X orders Mr. Y to pay ₹ 60,000 for 90 days after the date and Mr. Y accepts such
order by signing his name, then it will be a bill of exchange.

Parties to Bills of Exchange

A bill of exchange has the following parties namely:

 Drawer: Drawer is the person who makes or writes the bill of exchange. Normally, he is the
seller.
 Drawee: Drawee is the person on whom the bill of exchange is drawn for his acceptance.
Normally, he is the buyer. He has to pay the amount of the bill of exchange to the drawer on
the due date.
 Payee: The payee is the person to whom the amount of bill of exchange is to be paid. The
payee can be the drawer himself or the creditor of the drawer.
 Endorser: Endorser is the person who transfers rights of payment.
 Endorsee: Endorsee is the person in whose favor the bill of exchange is endorsed by the
drawer.

89
  Bearer: Bearer is the person in possession of the bearer bill of exchange.

Types of Bills of Exchange

Bills of exchange facilitate trade transactions involving sale or purchase of goods. But this
mechanism of the bill of exchange can also be of use in raising finance.

Type of bill of exchange depends on its object or purpose. From the accounting point of view, Bills
of exchange are of two types:

1. Trade bill: Where the bill of exchange is drawn and accepted to settle a trade transaction, it
is called Trade bill. This bill of exchange is drawn by the seller of the goods and is accepted
by the buyer.
2. Accommodation bill: Where a bill of exchange is drawn and accepted for mutual help, it is
called Accommodation bill. This bill is for mutual benefit without a trade transaction. It
does not involve a sale or purchase of any goods or services. This bill carries an agreement
between two parties for the purpose of giving financial support to others.

State the type of bill in the following cases?

1. Suppose Mr. X sells goods worth ₹ 75,000 to Mr. Y. Mr. y is not in a position to pay the
amount immediately. So, Mr. X the seller draws a bill on Mr. Y the buyer and Mr. Y accepts
such a bill.
2. If Mr. A is in need of money, he draws a bill on his friend Mr. B who accepts it. Mr. A then
discounts this bill with bank i.e. bank will pay money before the due date. Mr. A and Mr. B
share the money between them. On the due date, Mr. B pays to the bank and Mr. A pays to
Mr. B his share.

Ans.

1. Trade bill
2. Accommodation Bill

The Negotiable Instruments Act 1881 governs the provisions for bills of exchange. According
to Section 5 of this act, the bill of exchange is defined as “An instrument in writing containing
an unconditional order signed by the maker, directing a certain person to pay a certain sum
of money only to the order of the certain person or to the bearer of the instrument.” When
such order is accepted in writing it becomes a valid bill of exchange. Meaning of Bill of
Exchange

Bill of exchange means a bill drawn by a person directing another person to pay the specified sum
of money to another person. A bill of exchange is of real use if it is accepted by the person directed
to pay the amount.

For example, X orders Y to pay ₹ 50,000 for 90 days after date and Y accepts this order by signing
his name, then it will be a bill of exchange.

In general practice, the seller gives a credit period to the buyer on selling goods or on providing
services.

90
But sometimes, the seller is not in a position to offer credit period to purchaser and purchaser also
will not be in a position to pay immediately.

In such a case, the seller will like that the purchaser shall give a promise in writing to pay the
amount on a certain date.

This written promise then turns into valuable instruments of credit when this written promise are
made in proper form and is properly stamped.

These written instruments are often accepted by banks and we can advance money against them.
Also, we can endorse this instrument i.e. can pass to another person.

Features of Bills of Exchange

The following are the features of bills of exchange:

 A bill of exchange an instrument in writing.

 It is drawn and signed by the maker i.e. drawer of the bill.
 It is drawn on a specific person i.e. drawee, to pay the specified amount.
 Contains an unconditional order to a person i.e. drawee.
 To make an instrument of value the drawee must accept it.
 The specified amount is payable to the person whose name is mentioned in the bill or to his
order or to the bearer.
 It specifies the date by which amount should be paid.
 Payment of the bill must be in the legal currency of the country.
 It must be properly stamped.
 It must bear a revenue stamp.

Following are the advantages of the bill of exchange:

1. Purchase and sale of goods on credit.

2. Discounting facility.
3. Easy to recover the amount.
4. Proof of debt.
5. Easily transferred.
6. Safely transferred.
7. Endorsable to other parties.
8. Certainty as to payment.

Dishonor and Discharge of Bills

A bill of exchange is a negotiable instrument in writing under the Negotiable Instrument Act, 1881.
It is an unconditional order requiring a certain person to pay a certain sum of money on a specific
date. There are three parties to a bill of exchange i.e. Drawer, Drawee, and Payee. The drawer is the
person who draws or makes the bill and sends it to the drawee or the payer for the acceptance. The
bill is also endorsable to another person who then becomes the holder of the bill. On the due date,
the holder of the bill presents it to the drawee for receiving the payment. When the drawee makes
the payment it is known as the Discharge of bills.

91
Dishonor and Discharge of Bills

The drawer can deal with the bill in the following ways:

1. Retain till maturity

2. Discount with the bank
3. Endorse in favor of another person
4. Send it for collection to the bank

Discounting of Bills

A drawer or the seller draws a bill of exchange on the drawee or the purchaser in order to ensure
that the latter will pay him the amount due. However, if the holder or the drawer of the bill of
exchange needs funds or money before the due date or the maturity date of the bill, he may opt for
Discounting of Bills.

Discounting of Bills

The drawer may discount the bill with the bank before the due date. The bank charges discounting
charges from the drawer at a certain rate.

Thus, at the time of discounting the bank deposits the net amount after charging such amount of
discount in the account of the holder of the bill.

The discount is an expense for the holder of the bill. Whereas, it is a gain or income for the bank.

Renewal of Bill

Sometimes, it may so happen that the drawee realizes that he will be unable to pay the amount of
bill to the drawer on the maturity date. In this case, he may request the drawer to cancel the old bill.
When the drawer agrees to it, he cancels the old bill and draws a new bill along with the amount of
interest on the drawee. This process is known as Renewal of Bill.

Renewal of Bill

The drawee may pay some amount of the old bill in cash and accept the new or fresh bill for the
balance amount.

Also, he has an option to either pay the amount of interest on the new bill in cash or include the
amount of interest in the bill.

Thus, the amount of new bill = Amount of old bill – cash paid + interest amount.

CHEQUE

A Cheque is a document which orders a bank to pay a particular amount of money from a person’s
account to another individual’s or company’s account in whose name the cheque has been made or
issued. The cheque is utilised to make safe, secure and convenient payments. It serves as a secure
option since hard cash is not involved during the transfer process; hence the fear of loss or theft is
minimised.

92
There are different modes of financial payments which are successfully used by individuals, firms
and corporate organisations. Out of these varied options, a cheque does act as an important
negotiable instrument, which can also be transferred by simple delivery options.

Essentials of a Cheque

There are certain essentials related to a cheque which should be known and understood before using
this payment mode for money transfer. Some of the important pointers related to a cheque are:

 A cheque is an unconditional order.

 A cheque is always drawn on a particular Bank.
 Signatureon exchequer is a mandate and only by the maker.
 The amount is always a certain sum of moneyof one’s account.
 A cheque is always payable on demand.
 A cheque’s payment is always in cash.
 This cash amount is to be paid to the person mentioned there in, or order, or the bearer.

Number of Parties involved with a Cheque

Under the cheque mode of fund payment, there are three parties which are involved for on-track
movement of money through a written paper source.

a) Drawer or Maker

He/she is the customer or account holder who issues the cheque.

b) Drawee

It is basically the bank on which the cheque is drawn and is called the “Drawee”. Always remember
that a cheque is always drawn on a particular banker.

c) Payee

The individual who is named in the cheque for getting the payment is known as the “Payee”.
Interestingly, the drawer and the payee can be the same individual in a particular case.

Depositing vs. Cashing a Cheque

If you are still stuck with questions like ‘What is cheque?’, or ‘How is it useful?’, then the
knowledge about depositing and cashing should be understood for gaining a better insight into this
payment system:

 Cashing a cheque means that you’ll be offered the cash in hand. One can simply walk away
with the complete amount of the payment and can spend that money as per his/her
requirements andwithout any restriction.

93
  On the other hand, depositing a cheque basically means adding that amount to your bank
account or credit union. Under the deposit process, you might need to wait a couple of days
until the full amount is available for withdrawal or spending.

Steps for filling Cheque

correct way to write a cheque, by avoiding mistakes:

1. Omit the words ‘OR BEARER’ and Add ‘A/C Payee’ at the top left corner of the
Cheque

Cutting the words ‘Or Bearer’ and writing ‘A/C Payee’ to the top left corner of the cheque will
ensure that no one apart from the individual in whose favour this cheque is drawn can acquire the
stated amount. In case you do not omit the words ‘Or Bearer’, it can be acknowledged as a Bearer
cheque and any person possessing the cheque can claim the money.

2. Avoid Leaving Spaces

Always make sure that you do not leave spaces between the words PAY and the Name of the
Receiver. Also, avoid leaving spaces between the name and surname. This practice is important
since it doesn’t offer anyone a chance to fill in alphabets before or after the name to claim the
money.

3. Always write ‘ONLY’ after mentioning the amount in words in the ‘RUPEES’ column with
using the symbol ‘/-‘ at the end.

It is important to write the words ‘ONLY’ after you fill the amount in words. Further, after writing
the numbers always put a ‘slash’ followed by a hyphen. Moreover, just like writing the Name; do
not maintain any space before writing the particular amount in words along with the numbers. If
this tip isn’t followed; the amounts can be altered by any individual, creating a difficult situation for
you

4. Don’t Sign On the MICR Band

MICR band is the bank’s related numeric at the bottom of the cheque. For everyone who is
accessing the cheque mode of payment to manage transactions, it is quite crucial to know that
signing in the MICR Band is considered as a WRONG practice. This is one of the prime reasons
that can get your cheque defiled. Whenever you try to fill a cheque be careful to sign on the space
provided right above the Name of the Account Holder or Authorized Signatory text.

5. Fill the Correct Date

Writing a cheque without adding the date can be a dangerous practice. This permits anyone to put
any date and pull out cash using the cheque at their will. Further, a cheque with a post- or pre-date
is another issue that can lead to dishonouring of the cheque. Moreover, a wrongly written date, for
example, the wrong year or a month would also lead you in a problem.

6. Never Ever Overwrite

94
When you are writing a cheque, make sure there is no sort of overwriting. It means, no scribbling or
cancellation of text would be entertained by the banks. The person has to rewrite on a new
cheque, if there is any overwriting mistake with the earlier cheque.

7. Keep Actual Records of your Cheques

What is cheque’s safety? It basically points to the careful preservation or proper maintenance of all
your cheque records. One should manage a record of the cheque details comprising the cheque
number, issuer name, and date for future safety reference. Do not forget to mention the payment
amount with every cheque that is issued. Usually, cheque books do consist of a section for all such
information at the extreme back. However, try to keep this information handy in order to avoid any
kind of confusion, suspicious activity, or possible fraud.

Common Safety Measures for Writing a Cheque

 One needs to destroy all cancelled cheques until and unless they are used for any particular
purpose of submission for ECS.
 Make sure you do not hand over a cheque without the presence of date, amount of cheque in
numbers and words and Payee name.
 Keep your signature clear and if needed sign twice to ensure that the cheque is not bounced
due to signature mismatch.
 Further, mention the credit card number, mobile number, connection number etc., on the
reverse side of the cheque while you make payments towards bills for utilities.
 It is strictly prohibited to staple, disfigureor fold cheque or any sort of damage of MICR
Band.

Different banks across India have stated specific guidelines regarding the proper filling of cheques.
It is important to go through your bank’s guidelines for acquiring proper awareness. Further, do not
miss to check out conditions for cheque bounce; this would make you more alert during the cheque
filling process.

Crossing of Cheque

Definition: Crossing of a cheque is nothing but instructing the banker to pay the specified sum
through the banker only, i.e. the amount on the cheque has to be deposited directly to the bank
account of the payee.

Hence, it is not instantly encashed by the holder presenting the cheque at the bank counter. If any
cheque contains such an instruction, it is called a crossed cheque.

The crossing of a cheque is done by making two transverse parallel lines at the top left corner across
the face of the cheque.

Types of Crossing

The way a cheque is crossed specified the banker on how the funds are to be handled, to protect it
from fraud and forgery. Primarily, it ensures that the funds must be transferred to the bank account
only and not to encash it right away upon the receipt of the cheque. There are several types of
crossing

95
1. General Crossing: When across the face of a cheque two transverse parallel lines are drawn
at the top left corner, along with the words & Co., between the two lines, with or without
using the words not negotiable. When a cheque is crossed in this way, it is called a general
crossing.

2. Restrictive Crossing: When in between the two transverse parallel lines, the words ‘A/c
payee’ is written across the face of the cheque, then such a crossing is called restrictive
crossing or account payee crossing. In this case, the cheque can be credited to the account of
the stated person only, making it a non-negotiable instrument.

3. Special Crossing: A cheque in which the name of the banker is written, across the face of
the cheque in between the two transverse parallel lines, with or without using the word ‘not
negotiable’. This type of crossing is called a special crossing. In a special crossing, the
paying banker will pay the sum only to the banker whose name is stated in the cheque or to
his agent. Hence, the cheque will be honoured only when the bank mentioned in the crossing
orders the same.

4. Not Negotiable Crossing: When the words not negotiable is mentioned in between the two
transverse parallel lines, indicating that the cheque can be transferred but the transferee will

96
 not be able to have a better title to the cheque.

5. Double Crossing: Double crossing is when a bank to whom the cheque crossed specially,
further submits the same to another bank, for the purpose of collection as its agent, in this
situation the second crossing should indicate that it is serving as an agent of the prior
banker, to whom the cheque was specially crossed.

The crossing of a cheque is done to ensure the safety of payment. It is a well-known mechanism
used to protect the parties to the cheque, by making sure that the payment is made to the right
payee. Hence, it reduces fraud and wrong payments, as well as it protects the instrument from
getting stolen or encashed by any unscrupulous individual.

BOUNCING OF CHEQUES

With the advent of the digital payment system, life has become easier for most of us. Banking
transactions are simpler and faster. Yet, cheques have continued to be a preferred mode of financial
transactions for many.

For years, cheques have been considered a safe mode of transferring funds and making purchases.
However, with the use of cheques, comes the risk of a ‘bounce’ or ‘dishonour’. The risk entails
fines, penalties, and even imprisonment.

What is a dishonoured cheque?

A cheque is usually a written commitment made by the payer to the payee against a sum of money.
The payee, also known as the drawee, deposits this cheque in the bank. In an ideal situation, the
payer’s bank transfers the funds from the payer’s account to the payee.

However, there are times when the payer’s bank or the payee’s bank refuses to honour this

97
commitment. The reasons for this ‘decline’ may vary. In such a case, the cheque bounces and is
called a ‘dishonoured cheque’.

A cheque can be dishonoured for a host of reasons. It could be because the issuer of the cheque did
not have sufficient balance in the account or the signature on the cheque did not match exactly. At
times, cheques are dishonoured if account numbers fail to match. Disfigured and damaged cheques
may also be dishonoured by the bank.

A cheque may bounce if it has expired or if there is a problem with the date of issuing it.
Sometimes, the issuer may choose to stop the payment. In that case, too, the cheque is considered as
dishonoured. There could be various other reasons for a bank to dishonour a cheque.

What are the consequences of dishonoured cheque?

A dishonoured cheque attracts penalty on the issuer of the cheque. It depends on the reason for the
bounce.

If a cheque is dishonoured because funds in the payer’s account were insufficient, it is a criminal
offence under the Negotiable Instruments Act of 1881. The payer may be prosecuted for issuing a
cheque against an account with insufficient funds. The payee may choose to prosecute the payer or
allow the payer to re-issue a cheque within three months. The payer may end up in jail for up to two
years for issuing a dishonoured cheque.

Apart from this, banks also charge penalty for dishonour of cheque. The penalty varies from bank
to bank. Banks may have different penalty slabs for the amounts for which a dishonoured cheque is
issued.

Go digital, avoid cheque dishonour charges

An efficient way of avoiding cheque dishonour charges is to bank digitally. Instead of issuing a
cheque, choose to transfer funds online. Use NetBanking or Mobile Banking to transfer funds to
third-party accounts. You can also make transfers within your accounts using the digital payment
system. you have to issue a cheque, here are a few things to keep in mind;

1.Make sure you issue an account payee cheque.

2.Use the signature that is registered with the bank.

3.Ensure that there is sufficient balance in your account.

4. Fill in details on the cheque carefully.

HOLDER AND HOLDER IN DUE COURSE

A holder is a person who legally obtains the negotiable instrument, with his name entitled on it, to
receive the payment from the parties liable. A holder in due course (HDC) is a person who
acquires the negotiable instrument bonafide for some consideration, whose payment is still due.

Difference Between Holder and Holder in Due Course (HDC)

98
While talking about negotiable instruments such as cheques, bills of exchange and promissory note,
we came across the terms holder and holder in due course, quite commonly. Holder refers to a
person; we mean the payee of the negotiable instrument, who is in possession of it. He/She is
someone who is entitled to receive or recover the amount due on the instrument from the parties
thereto.

On the other hand, the holder in due course i.e. HDC implies a person who obtains the instrument
bonafide for consideration before maturity, without any knowledge of defect in the title of the
person transferring the instrument.

Definition of Holder

As per Negotiable Instrument Act, 1881, a holder is a party who is entitled in his own name and has
legally obtained the possession of the negotiable instrument, i.e. bill, note or cheque, from a party
who transferred it, by delivery or endorsement, to recover the amount from the parties liable to meet
it.

The party transferring the negotiable instrument should be legally capable. It does not include the
someone who finds the lost instrument payable to bearer and the one who is in wrongful possession
of the negotiable instrument.

Definition of Holder in Due Course (HDC)

Holder in Due Course is defined as a holder who acquires the negotiable instrument in good faith
for consideration before it becomes due for payment and without any idea of a defective title of the
party who transfers the instrument to him. Therefore, a holder in due course.

When the instrument is payable to bearer, HDC refers to any person who becomes its possessor for
value, before the amount becomes overdue. On the other hand, when the instrument is payable to
order, HDC may mean any person who became endorsee or payee of the negotiable instrument,
before it matures. Further, in both the cases, the holder in both the cases he must acquire the
instrument, without any notice to believe that there is a defect in the title of the person who
negotiated it.

Holder in due course is a person who takes a negotiable instrument for the value receivable by him
in good faith and taken due care and caution while taking such instrument and he had no suspicion
or reason to believe any defect existed in the title of the person, from whom he derived title
possession of the instrument. Thus, a person claim to be a ‘holder in due course’ should satisfy the
following conditions.
1. He must acquire the instrument for a consideration.
2. The instrument acquired should be before it is matured for payment. An instrument payable
on demand is treated as current, subject to it has not been in circulation for the unreasonable
length of time.
3. It is most important that the holder in the course had no cause to believe that any defect
existed in the title of a person from whom he has acquired the instrument.
4. A person accepting an inchoate (incomplete) instrument cannot be a holder in due course.
5. The instrument should be complete and regular while taking its possession.
6. Forged signature conveys no title; as such there cannot be a holder in due course under
forged endorsement.

99
PRIVILEGES OF / RIGHTS OF HOLDER IN DUE COURSE

Section 36 of NI ACT1881 reads the rights of Holder in due course.

“Every prior party to a negotiable instrument is liable thereon to a holder in due course until the
instrument is duly satisfied.”
In the above section;‘Every prior party’ means the maker or drawer, the acceptor, and intervening
endorser/s.Duly satisfied means if the liability of all the parties is extinguished and the instrument is
discharged.
Privileges granted to a 'holder in due course' under the Negotiable Instruments are given
below:

 He gets a better title than that of the transferor: ...

 Privilege in case of inchoate stamped instruments
 Liability of prior parties: ...
 Privilege in case of Fictitious bills

Key Differences Between Holder and Holder in Due Course

The significant differences between holder and holder in due course are discussed in the following
points:

1. A person who legally obtains the negotiable instrument, with his name entitled on it, to
receive the payment from the parties liable, is called the holder of a negotiable instrument. A
person who acquires the negotiable instrument bonafide for some consideration, whose
payment is still due, is called holder in due course.
2. A holder can possess negotiable instrument, even without consideration. As opposed to a
holder in due course, possess the negotiable instrument for consideration.
3. A holder cannot sue all the prior parties whereas a holder in due course, has the right to sue
all the prior parties for payment.
4. A holder may or may not have obtained the instrument in good faith. On the other hand, the
holder in due course must be a bonafide possessor of the negotiable instrument.
5. A holder in due course as against a holder enjoys more privileges in many situations like in
the case of inchoate instruments, fictitious bills and so on.
6. A person can become a holder, before or after the maturity of the negotiable instrument. On
the contrary, a person can become a holder in due course, only before the maturity of the
negotiable instrument.

Comparison Chart
Basis for
Holder Holder in Due Course (HDC)
Comparison

A holder in due course (HDC) is a

A holder is a person who legally obtains
person who acquires the negotiable
the negotiable instrument, with his name
Meaning instrument bonafide for some
entitled on it, to receive the payment
consideration, whose payment is still
from the parties liable.
due.

100
Basis for
Holder Holder in Due Course (HDC)
Comparison

Consideration Not necessary Necessary

A holder in due course can sue all prior

Right to sue A holder cannot sue all prior parties.
parties.

The instrument may or may not be The instrument must be obtained in good
Good faith
obtained in good faith. faith.

Privileges Comparatively less More

A person can become holder, before or A person can become holder in due
Maturity after the maturity of the negotiable course, only before the maturity of
instrument. negotiable instrument.

NEGOTIATION:TYPES OF ENDORSEMENTS
Meaning and Definition of Negotiation -
According to Section 14 of Negotiable Instrument Act 188 "When a promissory note, bill of
exchange or cheque is transferred to any person, so as to constitute the person the holder thereof,
the instrument is said to be negotiated.

Modes of Negotiations

Negotiation may take place (i) by delivery (ii) by endorsement and delivery.

(i) Negotiation by Delivery -

According to Section 47 Subject to the provisions of Section 58 of the Negotiable Instrument
Act, 1881 a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery
thereof.

Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to
take effect except in a certain event is not negotiable (except in the hands of a holder for value
without notice of the condition) unless such event happens.

Illustration -

(a) A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep
for B. The instrument has been negotiated.

(b) A, the holder of a negotiable instrument payable to bearer, which is in the hands of A’s
banker, who is at the time the banker of B, directs the banker to transfer the instrument to B’s credit
in the banker’s account with B. The banker does so, and accordingly now possesses the instrument
as B’s agent. The instrument has been negotiated, and B has become the holder of it.

101
(ii) Negotiation by Endorsement and Delivery -

According to Section 48 of the said Act Negotiation by endorsement, Subject to the provisions of
Section 58, a Promissory Note, bill of exchange or cheque payable to order, is negotiable by the
holder by endorsement and delivery thereof.

Difference between Transferability and Negotiability

No

Transferability Negotiability

1 Transferability is a characteristic of Negotiability is also a characteristic of

any Property. any Property.

2 Transferability gives the right to the Negotiability also gives a right to the
possessor of the property to transfer it possessor of the property to transfer it
to anyone with or without to anyone but for consideration. The
consideration, provided that he can Negotiator is not required to establish
establish that he is a true owner and in his credentials. In negotiability, the
that capacity, he has exercised his property is accepted in good faith.
right of transfer.

3 Transferability rights need a lawful In Negotiation even if the owner is not

and unchangeable title. having a good title, it does not affect
the rights and title of the negotiation.

4 Transfer is just process. Negotiation is an expression of faith

and confidence.

102
 5 Transferability is complete in itself. Transferability is the part of
negotiability

6 Transferability is only exchange of Negotiation without transfer either by

hands, which is an act and which simple delivery or by endorsement
needs performance. stands meaningless.

7 ‘Not Transferable’ marked documents ‘Not Negotiable’ marked documents

can also be transferred to the person lose all essential features of
whose name is mentioned therein. negotiability.

Endorsement:

Section 15 defines endorsement as follows: “When the maker or holder of a negotiable instrument
signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face
thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper
intended to be completed as negotiable instrument, he is said to endorse the same, and is called the
endorser.”

Thus, an endorsement consists of the signature of the holder usually made on the back of the
negotiable instrument with the object of transferring the instrument. If no space is left on the back
of the instrument for the purpose of endorsement, further endorsements are signed on a slip of paper
attached to the instrument. Such a slip is called “along” and becomes part of the instrument. The
person making the endorsement is called an “endorser” and the person to whom the instrument is
endorsed is called an “endorse.”

Kinds of Endorsements:

Endorsements may be of the following kinds:

1. Blank or general endorsement: If the endorser signs his name only and does not specify
the name of the indorse, the endorsement is said to be in blank. The effect of a blank
endorsement is to convert the order instrument into a bearer instrument which may be
transferred merely by delivery.

103
 2. Endorsement in full or special endorsement: If the endorser, in addition to his signature,
also adds a direction to pay the amount mentioned in the instrument to, or to the order of, a
specified person, the endorsement is said to be in full.
3. Partial endorsement: Section 56 provides that a negotiable instrument cannot be endorsed
for a part of the amount appearing to be due on the instrument. In other words, a partial
endorsement which transfers the right to receive only a partial payment of the amount due
on the instrument is invalid.
4. Restrictive endorsement: An endorsement which, by express words, prohibits the indorse
from further negotiating the instrument or restricts the indorse to deal with the instrument as
directed by the endorser is called “restrictive” endorsement. The indorse under a restrictive
endorsement gets all the rights of an endorser except the right of further negotiation.
5. Conditional endorsement: If the endorser of a negotiable instrument, by express words in
the endorsement, makes his liability, dependent on the happening of a specified event,
although such event may never happen, such endorsement is called a “conditional”
endorsement.

In the case of a conditional endorsement, the liability of the endorser would arise only upon
the happening of the event specified. But they endorse can sue other prior parties, e.g., the
maker, acceptor etc. if the instrument is not duly met at maturity, even though the specified
event did not happen.
Glossary/Key Words: Promissory Note, Bill of Exchange, Cheques, Holder in Due
Course, Negotiation, Endorsements

Descriptive & Short Questions

Unit-1:The Indian Contract Act 1872

Q1-What are the essentials of a valid contract?

Q2-Explain the effect of mistake, misrepresentation, and undue influence respectively on the
validity of an agreement.

104
 Q3-Write a short note on the Proposal and invitation to the proposal.
Q4-‘To create a contract there must be a common intention of the parties to enter into legal
obligation’. Discuss.
Q5-Define ‘Consideration’ according to the Indian Contract Act, and bring out the difference if any,
between the concept of consideration’ under Indian Law and the concept of consideration in English
Law. Examine also, the proposition: ‘Past consideration is no consideration at all’ with particular
reference to India Law.
Q6-Define consideration. Discuss that consideration and objects are unlawful under the Indian
Contract Act, 1872?
Q7-What conditions are necessary for converting a proposal into a promise; a promise into an
agreement and an agreement into a contract? Illustrate your answer.
Q8-“Acceptance is to an offer what a lighted match is to a train of gun powder”. Explain with
reference to its conditions and incidents as dealt with in English and Indian laws.
Q9-All contracts are agreements, but all agreements are not contracts. What conditions have been
laid down in the Indian Contract Act for an agreement to become a contract?
Q10-“Every promise is an agreement.” Examine the validity of this statement in light of the relevant
provisions of the Indian Contract Act, 1872.
Q11-In what cases the consideration and object of an agreement are said to be unlawful? Illustrate
with examples.
Q12-What are unlawful objects and when consideration is deemed to be unlawful?
Q13-What is contract of Guarantee? What are its characteristics? Distinguish between a contract of
guarantee and a contract of indemnity?
Q14-Explain contract of indemnity. Discuss the rights of indemnity holder and indemnifier.
Q15- Explain the term consideration and state the exceptions to the rule: No consideration, no
contract.

Unit-II: The Sale of Goods Act,1930

Q1-Explain the nature of a contract of sale of goods and bring out clearly the distinction between a
sale and an agreement to sale.
Q2-What do you mean by condition and warranty? Explain with examples. And under what
circumstances can a breach of condition be treated as a breach of warranty?
Q3- What are the essentials of Contract of Sale
Q4-Explain in detail the classification of Goods
Q5- What is the Concept of Doctrine of Caveat Emptor.
Q6- What are the primary rules to transfer the property.
Q7- Explain the stages of performance in Sale of Goods Act in detail.
Q8- It is important to pass the ownership from seller to buyer in sale of goods Act- Why?
Q9- What are the types of Delivery explain in detail.
Q10- Explain the rights of an Unpaid seller as per Sale of Goods Act.
Q11- Explain with case law that the goods are of qualities but not fit for the purpose.
Q12- Discuss the doctrine of caveat Emptor is there any exception to it state in brief if any.
Q13- What do you mean by the doctrine of ‘Nemo dat quod non habet‘.
Q14- How a good title of the goods sold by a person other than legal owner can be
transferred to the purchaser, explain with illustrations.
Q15- Write notes on any two of the following refer case law to justify your answer
(a) Rules Relating to Delivery of goods
(b) Distinction between ‘sale‘ & Hire purchase agreement
(c) Unpaid seller & his rights.

Unit-III:The Companies Act 2013

105
Q1-What is a Memorandum of Association? What are its contents? When and how may it be
altered?
Q2- What do you mean by Corporate Veil? What are the circumstances when Corporate Veil Can
be lifted?
Q3- Explain the procedures for registration of a company u/s-25 of Company’s Act, 1956.
Q4-What are Pre-Incorporation Contracts & Provisional Contracts? Distinguish between them.
Q5-What do you mean by ‘Ultra Vires’? What are its effects?
Q6-Explain the provisions of the Company’s Act, 1956 regarding ‘Red-herring prospectus’ &
‘Information Memorandum’.
Q7- Define prospectus and who is liable for misstatement in prospectus Civil and Criminal liability
Q8- What is e-filling? State its benefits.
Q9-What do you know about the ‘Doctrine of Indoor Management’? State its exceptions.
Q10-How the directors of a public company appointed and how they are removed?
Q11-Define in detail the winding up process and voluntary winding up of a company.
Q12-In what way does Company’s Act, 1956 regulate ‘Minimum Subscription’ & ‘Maximum
Subscription’?
Q13- Define share and kinds of share. Also explain the procedure for allotment of share and
procedure for transfer of shares.
Q14- What is oppression and mismanagement. Explain in detail
Q15-Explain the provisions of Company’s Act, 1956 regarding issue of ‘Sweat equity shares’.

Unit-IV:The Negotiable Instruments Act 1881

Q1- State briefly the deticiency m the definition of the term "holder'' in the Nl Act. 1881. To what
extent the recommendations of Law Commission of India on the point is helpful in this regard.
Q2- "Negotiable Instrument should be negotiable as apparent on its face without reference to secret
title to it.'' Reflect upon the statement with reference to· holder-in-due course u/s 9 and case laws.
Also bring out, if any, difference between holder and the real creditor.
Q3- Explain the standard of care expected of a collecring banker to enable it to claim the protection
of Section 131 of the Negotiable Instruments Act, 1881. What are the other requirements of that
Section· ? Support your answer with · 7950 relevant case laws.
Q4- List the instruments covered under negotiable instruments Act in India?
Q5-How would you interpreted the word “Banker” negotiable instruments Act in India
Q6-Define promissory Note. Give example of two statements which can be considered as
Promissory Note.
Q7-Explain Bill of Exchange in your own words
Q8-What is a cheque as per negotiable instruments Act in India
Q9-What do you mean by ” A cheque in electronic form”
Q10-How will you explain the term “a truncated cheque”
Q11- What do you mean by crossing of cheque? Why it is preferable?
Q12- What are the circumstances in which a gets dishonored by bank.
Q13- Discuss the privileges available to a holder in due course.
Q14- Explain all the types of crossing of cheque with specimen for each type
Q15- Write in detail about the Features of a Negotiable Instruments

106
 Multiple Choice Questions

Unit-1:The Indian Contract Act 1872

1. According to Section 2 of the Indian Contract, 1872, when one person signifies to another
his willingness to do or to abstain from doing anything, with a view to obtain the assent of that
other to such act or abstinence, he is said to make a:

107
(a) Promise
(b) Consent
(c) Proposal
(d) Communication

Ans. C

2. A proposal, when accepted becomes:

(a) An acceptance
(b) A promise
(c) A consideration for the promise
(d) An agreement

Ans.B

3. A patient in a lunatic asylum, who is at intervals of sound mind–

(a) May not contract
(b) May contract
(c) May contract during those intervals when he is of sound mind
(d) May contract only after he becomes completely of sound mind

Ans.C

4. A bid at an auction sale is:

(a) An implied offer to buy
(b) An implied acceptance of the offer to buy
(c) An express offer to buy
(d) An express acceptance of the other to buy

Ans.A

5. A void agreement means:

(a) Agreement not enforceable by law
(b) Agreement illegal in nature
(c) Agreement not acceptable to Court of law
(d) Agreement violating legal procedure

Ans.A

6. The provision that an agreement not enforceable by law is said to be void, is contained In:
(a) Section 2(j)
b) Section 2 (f)
(c) Section 2 (g)
(d) Section 2 (i)

Ans.C

7. Number of ingredients of ‘Promise’ is-

(a) Two
b) Three

108
(c) Four
d) Five

Ans.A

8. The communication of an acceptance, as against the acceptor, is complete :

(a) When it is put in a course of transmission so as to be out of the
power of the accepter
(b) When the proposer says that he received the acceptance to the
proposal
(c) When it comes to the knowledge of proposer
(d) When the acceptor decides to accept proposal and communicate it

Ans.C

9. The communication of a revocation, a against the person who makes it, is complete:
(a) When it is put into a course of transmission so as to be out of the
power of the person who makes it
(b) When it comes to the knowledge of the person to whom it is being
made
(c) When the person to whom it is being made, signifies his assent
thereto
(d) All of the above

Ans.A

10. “A” took his wife “B” to England for vacations. Due to some business emergency A had to
go back to his place of work immediately while leaving B in England owing to her ill-health. A
promised to pay B 300 pounds per week as maintenance during her stay in England, butfailed
to pay. If A is sued by B then.”
(a) A is liable for breach of contract
(b) A is not liable because he cannot be presumed to have any intention
to enter into a contract with his wife
(c) A is not liable because of the lack of consideration on the part of B
(d) A is liable because a promise to one’s wife result in a binding
contract even in the absence of a consideration for the promise

Ans.B

11. A promises his son to buy him a Maruti Car if he stands first in his tenth class Board
examination, On the faith of the promise the son worked hard and stood first in the exam. In
this case:
(a) The son can sue A for the car as there was a contract between him
and his father A
(b) The son cannot sue A as the contract was voidable at the option of A
(c)The son can sue A because he worked hard on the faith of A’s
promise and performed his part of the contract
d) The son cannot sue A because in the household domestic setting like
this such promises are not made with the intention to bind the parties
into a valid contract

109
Ans.D

12. A” offered to sell his house to “B” which B instantly accepted.

Under these circumstances:
(a) A can revoke his offer anytime before the actual sale of the house
b) A can revoke his offer with the consent of B
(c) A cannot revoke his offer at all
(d) A can revoke his offer even without the consent of B

Ans.C

13. “A” telegraphed “B”, “Will you sell your house, telegraph the lowest cash price.” B also
replied by telegram, “lowest price for the house of Rs. 15,00,000/- This is a:
(a) Complete Agreement.
(b) Complete Contract
(c) No Contract
(d) Voidable Contract

Ans.C

14. Consensus ad idem means ……

(a) theme of contract
(b) common object
(c) meeting of minds upon the same thing in the same sense
(d) None of the above

Ans.C

15. An agreement is:

(a) Every promise and every set of promises forming the consideration
for each other
(b) Every promise to do something or to abstain from doing something
(c) Signification by one person of the intention to abide by the promise
(d) Promise against a promise

Ans.A

16. A notice in the newspaper is

(a) A proposal
(b) A invitation to proposal
(c) A promise
(d) An invitation for negotiation

Ans.B

17″. A catalogue of books, listing price of each book and specifying the place where the listed
books are available is:
a) A promise to make available the book at the listed price
(b) An offer

110
(c) An invitation to visit the book shop
(d) An invitation to offer

Ans.D

18 A proposal when accepted –

(a) Becomes a promise
(b) Becomes an agreement
(c) Becomes a contract
(d) Becomes a consideration

Ans.A

19. In which of the following statement there is a valid contract:

(a) A promises to pay Rs. 5,000/- to B who saved “A” from drowning in a river
(b) A promises to pay Rs. 5,000/- to B if India loses in a India-Pakistan cricket match
(c) A promises to pay Rs. 5,000/- to B if B cross through mount Himalayas within 3 days on his feet
(d) A promises to pay Rs. 5,000/- to B if B works for A in his smuggling business

Ans.A

20. A agrees to serve B as B’s housekeeper and also to live in adultery with him at a fixed
salary of Rs. 500/- per month. In this situation:

(a) The whole agreement is unlawful and thus it is void

(b) The agreement is lawful and valid as adultery is not an offence in Indian Contract Act
(c) This first portion of the agreement, being lawful, is a contract whereas the latter portion is void
(d) The agreement as a whole is void as the lawful portion is not
severable from unlawful portion

Ans. A

Unit-II: The Sale of Goods Act,1930

1. Condition is a stipulation which is

A. Essential to the main purpose of contract
B. Collateral to the main purpose of contract
C. Not essential to the main purpose of contract
D. Collateral to the main purpose of contract
Ans: A

2. The sale of goods Act deals only with goods which are ______________ in nature
A. Immovable
B. Movable
C. Specific
D. All of the above
Ans: B
3. Goods that are identified at the time of contract of sale is called ________________ goods

111
A. Specific Goods
B. ascertained goods
C. clear Goods
D. both a & b
Ans: D
4. _________________ is a Stipulation which is Collateral to purpose of contract
A. Condition
B. Warranty
C. Guaranty
D. Collateral Contract
Ans: B
5. __________________________ is the concept of “LET THE BUYER BEWARE”.
A. Information Center
B. Unfair Trade Practices
C. Caveat Emptor
D. Buyer Kingdom
Ans: C.
6. ___________________ and _______________ are the two parties involved in Contract of
sale
A. Seller & Buyer
B. Agent & Principle
C. Customer & Sales man
D. Customer and supplier
Ans: A
7. It is a standard rule that risk follows ____________________
A. Seller
B. buyer
C. property
D. Possession
Ans: C.
8. The sale of Goods Act enforces in the year
A. 1935
B. 1930
C. 1945
D. 1955
Ans: B
9. The subject matter of the contract under Sale of goods Act must be
A. Money
B. Goods
C. Immovable Goods
D. All of the above
Ans: B
10. Sale under Sale of goods Act is a/an ____________________ contract
A. Executory
B. Executable
C. Executed
D. None of the above
Ans: C.
11. In sale the transfer of property in goods from the seller to the buyer takes place
A. At the end of contract

112
B. Immediately
C. In a future Date
D. Both a&b
Ans: D
12. In Agreement to sell the transfer of property in goods from the seller to the buyer takes
place
A. At the end of contract
B. Immediately
C. In a future Date
D. Both b&c
Ans: C.
13. Which of the following is not a subject matter in a Sale of goods Act
A. Trade mark
B. Good will
C. Money
D. Water
Ans: C.
14. As per Sale of goods Act Movable goods does not include
A. Gas
B. Growing crop
C. Electricity
D. Money
Ans: D
15.The goods must be ________ goods for transferring the property in the goods
A. Ascertained
B. Unascertained
C. Future
D. All of the above
Ans: A
16. The subject matter of the contract must necessarily be _____________
A. Sale
B. Product
C. Service
D. Goods
Ans: A
17. A consideration in contract of sale must be ______________ only
A. Goods
B. movable only
C. price
D. Purchase
Ans: C.
18. Transfer or agree to transfer the _____________ of the goods is the purpose of sale of
goods Act
A. Property
B. Possession
C. Value
D. Usage
Ans: B
19. A sale is a ______________ contract
A. Implied

113
B. Executed
C. Agreed
D. Executory
Ans: B
20. An agreement to sell is a ______________ contract
A. Implied
B. Executed
C. Agreed
D. Executory
Ans: D
Unit-III:The Companies Act 2013

1. Section 12 of Companies Act 1956, deals with

a. Incorporation

b. Share capital

c. Number of Directors

d. Share holders

Ans. a

2. Minimum number of members required to apply for incorporation certificate in a public

ltd company is

a. 3

b. 2

c. 7

d. 50

Ans. C

3. The application for registration of a company should be presented to the registrar of the
state in which the _______________ of the company is to be situated

a. Manufacturing plant

b. first branch

c. business office

d. any of the above.

Ans. c

114
4. The application for registration of a company should be presented to the _______________
of the state appointed under Companies Act 1956

a. Controller

b. registrar

c. Governor

d. registration officer

Ans. b

5. Number of documents to be submitted, by a public ltd company, to the registrar while

applying for incorporation of the company is

a. 3

b. 2

c. 7

d. 50

Ans. C

6. The address of the registered office of the company must be notified to the registrar within
_________ days of registration, if it is not done at the time of incorporation

a. 15

b. 30

c. 60

d. 45

Ans. b

7. Among the following which documents are not mandatory to be submitted to the registrar
along with incorporation application by a private company.

a. Address of Registered office & undertaking

b. Undertaking and statement of capital

c. statement of capital & list of directors

d. list of directors and statement of capital

115
Ans. A

8. A statement of nominal capital must be given at the time of incorporation by the company
when the share capital is less than

a. 50 Lakh

b. 1 crore

c. 10 Lakh

d. 25 Lakh

Ans. d

9. If the proposed nominal capital is more than 25 lakh at the time of incorporation then the
company needs to submit ________________ along with the application

a. statement of capital

b. certificate of incorporation

c. certificate of capital

d. certificate of incorporation

Ans. C

10. The certificate of capital will be issued by

a. Registrar of companies Act

b. Controller of companies Act.

c. Registrar of capital issues

d. controller of capital issues

Ans. d

11. The articles of association needs to be signed by

a. all proposed directors

b. registrar

c. subscribers of memorandum

d. none of the above

116
Ans. c

12. The company will be considered as separate person and different from its members from
the date (when the) _____________

a. start of business

b. Apply for registration

c. receive incorporation certificate

d. mentioned in certificate

Ans. d

13. Number of clauses in Memorandum of Association is

a. 5

b. 6

c. 7

d. 8

Ans. b

14. Which of the following is not a clause of memorandum of association

a. situation

b. capital

c. subscription

d. directors

Ans. d

15. If a company is instructed to change its name which resembles the name of an existing
company then the company can change the name by

a. Passing a special resolution

b. obtaining permission from central government

c. Passing an ordinary resolution

d. Both a & b

117
Ans. C

16. Which of the following clause of Memorandum of Association cannot be altered

a. Name

b. Object

c. situation

d. liability

Ans. D

17. When the registered office of a company is changed within a city then it has to be
intimated to the registrar within ________ days of such change

a. 60

b. 45

c. 30

d. 7

Ans. C

18. “Men may come and men may go but the company exist”- this explains which
characteristics of the company as per companies Act 1956

a. Separate legal entity

b. Perpetual Succession

c. Capacity to sue

d. None of the above

Ans. B

19. The liability of the members of the company can be limited by

a. Share

b. Guarantee

c. Both a & b

d. Neither a nor b

118
Ans. C

20. The shares of a _______________ company can be freely transferable

a. Private ltd

b. Public ltd

c. Partnership

d. all of the above

Ans. B

Unit-IV:The Negotiable Instruments Act 1881

1) When did the Negotiable Instruments Act come into force?

A) 1 April 1882
B) 1 March 1936
C) 01 May 1989
D) 01 March 1882

Answer –D

2) Which section of the Negotiable Instruments Act,1881 deals with Partial failure of
consideration not consisting of money?

A. Section 21 of the Negotiable Instruments Act,1881

B. Section 45 of the Negotiable Instruments Act,1881
C. Section 4 of the Negotiable Instruments Act,1881
D. Section 20 of the Negotiable Instruments Act,1881

Answer B

3)Which section of the Negotiable Instruments Act,1881 deals with Promissory note__ ?

A. Section 4 of the Negotiable Instruments Act,1881

B. Section 24 of the Negotiable Instruments Act,1881
C. Section 3 of the Negotiable Instruments Act,1881
D. Section 6 of the Negotiable Instruments Act,1881

Answer – A

4)Section 35 of the Negotiable Instruments Act,1881 deals with_______?

A. Liability of indorser
B. Suretyship
C. Liability of the maker of note and acceptor of a bill
D. Negotiation by delivery

119
Ans-A

5)Liability of legal representative signing is provided in section____ of the Negotiable Instruments

Act,1881

A. Section 41 of the Negotiable Instruments Act,1881

B. Section 11 of the Negotiable Instruments Act,1881
C. Section 29 of the Negotiable Instruments Act,1881
D. Section 21 of the Negotiable Instruments Act,1881

Ans- C

6)Section 25 of the Negotiable Instruments Act,1881 provides _?

A. . When the day of maturity is a holiday

B. Liability of drawer
C. Agency
D. Liability of drawee of the cheque

Ans- A

7)Which section of the Negotiable Instruments Act,1881 deals with Rules as to compensation?

A. Section 21 of the Negotiable Instruments Act,1881

B. Section 31 of the Negotiable Instruments Act,1881
C. Section 117 of the Negotiable Instruments Act,1881
D. Section 29 of the Negotiable Instruments Act,1881

Answer – C

8)Section 18 of the Negotiable Instruments Act,1881 deals_______?

A. Where the amount is stated differently in figures and words

B. Presentment for acceptance.
C. Dishonour by non-acceptance
D. Payment for honour

Ans- A

9) Which section of the Negotiable Instruments Act,1881 deals with Presumption in favour of
holder. ?

A. Section 122 of the Negotiable Instruments Act,1881

B. Section 139 of the Negotiable Instruments Act,1881
C. Section 143 of the Negotiable Instruments Act,1881
D. Section 145 of the Negotiable Instruments Act,1881

Answer B

10) Section 123 of the Negotiable Instruments Act,1881 deals with_______?

120
A. Cheque crossed specially
B.. Set of bills.
C. Cheque crossed generally
D. Cognizance of offences

Answer- C

11)The Court trying an offence under section 138 may order the drawer of the cheque to pay
interim compensation to the complainant, which shall:

a. Not exceed ten per cent of the amount of the cheque

b. Not exceed fifteen per cent of the amount of the cheque
c. Not exceed twenty per cent of the amount of the cheque
d. Not exceed twenty five per cent of the amount of the cheque

Answer-C

12) In the case of any conviction in a summary trial under section 143, it shall be lawful for
the Magistrate to pass a sentence of imprisonment for a term:

a. not exceeding two year and an amount of fine exceeding five thousand rupees.
b. not exceeding one year and an amount of fine exceeding five thousand rupees:
c. not exceeding six month and an amount of fine exceeding five thousand rupees:
d. not exceeding one month and an amount of fine exceeding five thousand rupees.

Answer-B

13) With respect to multicity cheque dishonor the offence under section 138 shall be inquired
into and tried only by a court within whose local jurisdiction:

a. if the cheque is presented for payment by the payee or holder in due course, otherwise
through an account, the branch of the drawee bank where the drawer maintains the account,
is situated.
b. if the cheque is delivered for collection through an account, the branch of the bank where
the payee or holder in due course, as the case may be, maintains the account, is situated.
c. Both the options A and B are correct.
d. None of the above.

Answer-C

14) For invoking section 138 of NI Act, the payee or the holder in due course of the cheque, as
the case may be, shall have to make a demand for the payment of the said amount of money
by giving a notice, in writing, to the drawer of the cheque, of the receipt of information by him
from the bank regarding the return of the cheque as unpaid:

a. Within five days

b. Within ten day
c. Within fifteen days
d. Within twenty days.

121
Answer-C

15)What are the conditions for availing statutory protections available to a banker under
section 131:

a. The payment is received for a customer of the Bank.

b. Cheque is crossed generally or specially before it is presented to the paying bank.
c. Banker has in good faith and without negligence received payment.
d. All of the above.

Answer-D

16)The protection to paying bank for crossed cheque is covered under which section of N I
Act:

a. Section 138
b. Section l31
c. Section 128
d. Section 85

Answer-C

17) Section 118 of the N I Act deals with the presumptions as to negotiable instruments until
the contrary is proved. Which among the following is NOT such presumption:

a. As to stamps-that a lost promissory note, bill of exchange or cheque was not duly stamped.
b. As to date-that every negotiable instrument bearing a date was made or drawn on such date.
c. As to time of acceptance-that every accepted bill of exchange was accepted within a
reasonable time after its date and before its maturity.
d. As to time of transfer-that every transfer of a negotiable instrument was made before its
maturity

Answer-A

18) Under which section a paying banker is protected where a cheque payable to order
purports to be endorsed by or on behalf of the payee, the drawee bank is discharged by
payment in due course:

a. Section 131
b. Section 86
c. Section 85A
d. Section 85

Answer-D

19) Who can make negotiation of a negotiable instrument:Which is not the right of a holder:

a. All of several joint makers, drawers, payees or indorsees.

b. Sole maker, drawer, payee or indorsee.
c. Both A and B are correct.

122
 d. None of the above.

Answer-C

20) Where an endorsement by express words, restrict or exclude the right of further
negotiability of the instrument, it is called:

a. Blank endorsement
b. Partial endorsement
c. Conditional endorsement
d. Restrictive endorsement

Answer-D

References/Suggested/Additional Readings
 Kuchhal M.C. and Vivek Kuchhal,(4th Ed,2014) Business Law, Vikas Publishing House,
New Delhi.
 Pathak A.(6thEd.2014),Legal Aspect of Business, McGraw Hill Education.
 Dr. Maheshwari, S.K. & Dr. Maheshwari S.N. (6thEd.2015),A Manual of Business Law
Himalaya Pub. House
 Singh, Avtar, Business Law, (1thEd.2015),Eastern Book Company, Lucknow.
 N.D.Kapoor, (1thEd.2013) , “Business Law” Sultan Chand, New Delhi.
 Bulchandani K.R. (8thEd.2014),Business Law for Management,Himalaya Pub.House-

123
New Delhi.

124
125
126
127