Business Law Self-Learning Manual

Law and Business Section
Notes
1
Ignorance of law excuses no man: Not that all men know the law, but because it is an excuse every man will plead, and no man can tell how to refute him. John Seldon STRUCTURE
1.1 1.2 1.3 1.4 1.5 Law and Society. Meaning of law. Branches of law. What is business law? Sources of business law in India.
Self-Learning Material 3
1.1 Law and Society

Notes Law pervades almost every part of human life. Without law there will be chaos and confusion in society. No games, be it cricket, football or hockey can be played without rules to govern the players. Traffic rules are important to regulate traffic. Knowledge of law is, therefore, necessary for all persons who live in a society. Moreover, there is a familiar maxim ignorantia juris non excusat (ignorance of law is no excuse).
1.2
What is Law?
The Oxford English Dictionary defines the word Law as the rule made by authority for the proper regulation of a community or society or for correct conduct in life. The term law has been defined by some of the legal scholars in the following words: A law is a rule of conduct imposed and enforced by the sovereign. Austin Law is the body of principles recognised and applied by the state in the administration of justice. Salmond Law in its most general and comprehensive sense signifies a rule of action and is applied indiscriminately to all kinds of actions whether animate or inanimate, rational or irrational. Blackstone Law is rule of external human actions enforced by Sovereign Political authority. Holland Hence law is a set of rules laying down rights and obligations, which the state enforces. It includes rules and principles, which regulate our relations with other individuals and with the state.
1.3
Branches of Law
With the growth of civilisation, human beings social and economic behaviour has assumed many facets. It is therefore essential that multi-dimensional human activities should be controlled through different set of rules and principles. Almost all civilised societies, therefore, provide and enforce different set of rules and guiding principles for different kinds of social, economical, and political objectives. Hence, there are several branches of law, such as International Law, Constitutional Law, Criminal Law, Civil Law, Business or Mercantile Law.
1.4
What is Business Law?
The terms Business, Commercial, and Mercantile, in relation to law, are used in the same sense. Business Law is that branch of law, which comprises laws concerning trade, industry and commerce. Business law refers to those rules and regulations, which govern the formation and execution of business transactions made by various persons in the society. These provisions comprise the legal environment of business. Business law is intended to infuse the much needed certainty in commercial dealings. Business law includes laws relating to contract, sale of goods, negotiable instruments, partnership, company and many other economic laws having a bearing on trade, industry, and commerce.
1.5
Sources of Business Law in India
The main sources of business law in India are shown in the table and briefly discussed thereafter:
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Sources of Business Law in India Notes
English Law
Judicial Decisions or Case Law
Customs and Usages
Indian Statutes
English Common Law
Equity
Law Merchant or Maritime Usage
Statutes Law
1.5.1 English Law

Indian business law is modelled on the lines of English mercantile law, as India was under British rule before its independence. The differences in the laws of India and England are primarily on account of their different business environment, customs, and trade practices. The sources of business law in India are generally the English laws which, in turn, have their roots in the following: a) English Common Law: It refers to a system of law based upon English customs, usages, and traditions, which were developed over centuries by the English Courts. These are unwritten or the non-statutory laws. These are found in the reported decisions of the courts of law. Equity: It refers to that branch of the English Law, which was developed separately from the common law. It is based on the principle of fairness, and concepts of justice developed by the judges whose decisions became precedents. Law Merchant or Maritime Usage: It refers to the usages or customs of merchants and traders that have been ratified by the courts of law. The object is to protect the interest of trade. The courts in these cases assume that the parties have dealt with each other on the footing of customs or usages prevailing generally. This law, thus, gets incorporated into the common law and the courts honour it. Statute Law: The statute law refers to the law laid down in the Acts of Parliament. It is superior to and overrides any rules of the common law, equity or law merchant. The courts of law interpret the meaning of such enactments and apply them.
b)
c)
d)
1.5.2 Judicial Decisions or Case Law

The judicial decisions, usually referred to as precedents, are binding on all courts having jurisdiction lower to that of the court, which gave the judgement. This is also called judge made law.
Check Your Progress

1. Define Law 2. What is Business Law? 3. What are the different Branches of Law? 4. From where does the Indian Business Law is derived from?
1.5.3 Customs and Usages

Customs or usages of a particular trade also guide the courts in deciding disputes arising out of mercantile transactions. Such a custom or usage must be widely known, certain and reasonable, and must not be opposed to any legislative enactment. But, where a statute specifically provides that the rules of law contained therein are subject to any well-recognised custom or usages of trade, the latter may override the statute law.
1.5.4 Indian Statutes

Notes The constitution of India confers power to enact law on its parliament and legislatures of states. When a bill is passed by the parliament/state legislatures and assented to by the President or Governor of a state, it becomes an Act or Statute. The bulk of Indian Mercantile Law is statute law. The Indian Contract Act, 1872, The Negotiable Instruments Act, 1881, The Sale of Goods Act, 1930, The Indian Partnership Act, 1932, The Companies Act, 1956 are instances of the statute law.
1.5.5 Business Law and Managers

Knowledge of relevant aspects of law is necessary for proper functioning of any business. Managers may face a variety of situations that would involve legal issues. A broad understanding of business law or legal aspects of business is necessary for managers. Knowledge of business law enables them to arrive at correct decisions, and this is one of the essential functions of managers. Thus, law is a major factor in decision making. Therefore, it is necessary that all managers have a working knowledge of the important business laws and the legal system.
Summary
Law permeates every part of human activity. No civilised society can exist without a legal order. Ignorance of law is no excuse for any human being. Law is a rule of conduct imposed and enforced by authority. There are various branches of law like International Law, Constitutional Law, Criminal Law, Civil Law, Business Law or Mercantile Law. The terms Business, Commercial or Mercantile Law are used in the same sense. Business law refers to rules and regulations concerning Trade, Industry, and Commerce. The main sources of business law in India are English law, Judicial decisions (or Case law), Customs and Usages, and Indian statutes. Knowledge ofbusiness law is necessary so that various managerial decisions, which managers are required to take in their dayto-day activities, are within the boundaries of law.
Review Questions
True or False
State with reasons whether the following statements are True or False: 1. 2. 3. 4. 5. 5. What do you understand by statute law? How law and business are related? 6. 7. 8. 9. 10. Law is the body of Principles enforced by Judiciary. Business Law in India is primarily an adaptation of the English Law. Business Law is applicable to businessmen only. Business Law is one of the branches of law. Business Law relates to trade only. Customs and Usages are an important source of Business Law. Statutes are the only source of Business Law. There is no difference between a Bill and an Act. Managers can function effectively without any knowledge of law. Managers can come to proper decisions when they have working knowledge of law.
Check Your Progress
6.
Test Questions
1. 2. 3. 4. 5. What is Law? What is teh need for the knowledge of law? Elaborate different sources of law. What is the scope of Business or Mercantile law? What does the term Business Law include? How does English Law affect Business Law in India? Notes
Short Questions
1. 2. 3. 4. 5. Law and business are closely related disciplines. Comment. Ignorance of law is no excuse. Give your views on this statement. Discuss the different sources of business law in India. Define Law. What is the need for managers to know about Law? What is Business Law? How it is relevant for managers?
Answers to True or False

1. True, 2. True, 3. False, 4. True, 5. False, 6. True, 7. False, 8. False, 9. False, 10. True
Answers to Check Your Progress

Following are the answers to Check Your Progress, indicating respective paragraphs for reference. 1) 1.2 2) 1.4 3) 1.3 4) 1.5 5) 1.5.4 6) 1.5.5
Notes
Law of Contract Section
Notes
2
No cause of action arises from a bare promise. Legal Maxim STRUCTURE
2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 Introduction to the law of contract. Basis and extent of the law of contract. Meaning of a contract. What is an agreement? What is enforceability of an agreement? Essential elements of a valid contract. Classification of contracts. Proposal (offer) and Acceptance. Communication of proposal, acceptance and revocation.
2.10 Consideration. 2.11 Capacity of parties. 2.12 Free consent. 2.13 Legality of object and consideration. 2.14 Void agreement. 2.15 Contingent contract. 2.16 Quasi contract. 2.17 Performance of contract. 2.18 Discharge of contract. 2.19 Remedies for breach of contract. 2.20 Indemnity and guarantee. 2.21 Bailment and Pledge. 2.22 Agency
2.1 Introduction
Notes The law of contracts is the basis upon which the super structure of all business is built. It affects every person in one way or the other, as all of us enter into some kind of contract every day. All contracts are based on agreements, which are either express or implied. Everyone of us enters into a number of contracts almost everyday. Most of the time we do so without realising what we are doing from the view point of law. A person seldom realises that when he gives clothes for drycleaning, or when he buys milk, bread or biscuits, or when he goes to the auditorium to see a movie, he is entering into a contract. In business transactions, normally, first promises are made followed by performance. If parties were free to go back on their promises without incurring any liability, it would be impossible to carry on any trade, industry or commerce. Hence, the law of contract was made laying down rules for performance and discharge of a contract, and the remedies available to the aggrieved party in case of breach of contract. Explaining the object of law of contract, Sir William Anson observes that The law of contract determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. It is intended to ensure that what a man has been led to expect shall come to pass, and that what has been promised to him shall be performed. Besides, the law of contract furnishes the basis of the other branches of Business Law. The enactments relating to sale of goods, negotiable instruments, monopolies, restrictive trade practices, and intellectual property are all founded upon the general principles of contract law. That is why the study of the law of contract precedes the study of all other laws relating to trade and industry.
2.2
Basis and Extent of The Law of Contract
In India, the law of contract is contained in the Indian Contract Act, 1872, hereinafter referred to as the Act. It extends to whole of India except the State of J&K and came into force on the first day of September, 1872. The Act is not exhaustive. It does not deal with all the branches of the law of contract. There are separate Acts which deal with contracts relating to negotiable instruments, transfer of property, sale of goods, partnership, insurance, etc.
2.3 Meaning of Contract

The word contract is derived from the Latin Contractum meaning drawing together. According to the Act, An Agreement enforceable by law is a contract1. Some authors have defined contract in the following words: Every agreement and promise enforceable at law is a contract. An agreement creating and defining obligations between the parties. Sir Frederick Pollock Salmond
A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others. Sir William Anson An analysis of these definitions would show that a contract must have the following two elements: (a) (b) An agreement, and Its enforceability (legal obligation) Contract = An agreement + its enforceability Now the question arises, what is an agreement? and what is enforceability of an agreement?
In the form of an equation, it can be shown as under:
2.4 What is an Agreement?

According to the Act, Every promise and every set of promises forming the consideration for
each other, is an agreement.2 Now the question is, What is a Promise? According to the Act, A proposal when accepted becomes a promise3. Example - Ram offers to sell his car to Shyam for Rs. 2,00,000/-. Shyam accepts the offer. This offer after acceptance becomes promise and this promise is treated as an agreement between Ram and Shyam. Thus an agreement consists of a proposal (offer) by one party and its acceptance by the other. In the form of an equation it can be shown as under: Agreement = Proposal (or Offer) + Acceptance of Proposal (or Offer) An analysis of the definition of the term agreement shows the following two characteristics of agreement: (a) (b) Plurality of Person: There must be two or more persons to make an agreement. Consensus-ad-idem: Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time. 3. 2. Notes
Check Your Progress

1. Why the law of contract precedes the study of any branch of law? Is the ICA, 1872 enforceable throughout India? Define a Contract.
2.5 What is an Enforceability of Agreement?

An agreement is enforceable by law if it creates some Legal Obligation. In other words, the parties to an agreement must be bound to perform their promises. In case of social or domestic agreements, the usual presumption is that the parties do not intend to create legal relations.
Example - Madhur invites his friend Vidur to a dinner and Vidur accepts the invitation. If Vidur fails to turn up for dinner, Madhur cannot go to the Court to claim his loss. In commercial or business agreements the usual presumption is that the parties intend to create legal relations. Example - Vikreta offers to sell his car to Kreta for Rs. 1 lakh. Kreta accepts the offer. Such an agreement is a contract because it creates legal obligation, i.e. a duty enforceable by law. From this, it will be clear that all contracts are agreements, but all agreements are not contract. Salmond has rightly observed The Law of Contracts is not the whole law of agreements, nor is it the whole law of obligations. It is the law of those agreements which create obligations and those obligations which have their source in agreements.
2.6 Essential Elements of A Valid Contract

We have seen that a contract is an agreement enforceable by law. To be enforceable by law, an agreement must possess the essential elements of a valid contract. The Act (sections 10, 29 and 56) provides that all agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration, with a lawful object, are not expressly declared to be void, and where necessary, satisfy the requirements of any law as to writing or registration. The essential elements of a valid contract are the following: a) c) e) f) Proposal (offer) and Acceptance Lawful Considerations Free Consent Lawful Object b) Intention to Create Legal Relations d) Capacity of Parties
g) Writing and Registration h) Certainty i) j) Possibility of Performance Agreement not expressly declared void
2.6.1 Proposal and Acceptance

Notes There must be a lawful proposal and a lawful acceptance of that proposal, thus resulting in an agreement. The word lawful before offer and acceptance signifies that proposal and acceptance must satisfy the requirements of the law of contract. There must be two parties to an agreement, i.e. one party making the proposal and the other party accepting it. The terms of the proposal must be definite and the acceptance of the proposal must be absolute and unconditional. The acceptance must also be according to the mode prescribed and must be communicated to the proposer.
2.6.2 Intention to Create Legal Relations

There must be an Intention among the parties that the agreement should be attached by legal consequences and create legal obligations or legal relationship. If there is no such intention on the part of the parties, there is no contract between them. Agreements of a social or domestic nature do not contemplate legal relationship. As such they are not contracts.
Illustration:
A husband promised to pay his wife a household allowance of $30 every month. Later the parties separated and the husband failed to pay the amount. The wife sued for the allowance. Held, agreements such as these were outside the realm of contract altogether.4 In commercial and business agreements, an intention to create legal relations is presumed. But this presumption is rebuttable, which means that it must be shown that the parties did not intend to be legally bound.
Illustration:
There was an agreement between R Company and C Company by means of which the former was appointed as the agent of the latter. One clause in the agreement was: This agreement is not entered into... as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts. Held, there was no binding contract as there was no intention to create legal relationship.5
2.6.3 Lawful Consideration

An agreement must be supported by lawful considertion. Consideration means an advantage or benefit moving from one party to the other. It is the essence of a bargain. In simple words, it means something in return. The agreement is legally enforceable only when both the parties give something and get something in return. A promise to do something, getting nothing in return, is usually not enforceable by law. Consideration need not necessarily be in cash or kind. It may be an act or abstinence (abstaining from doing something) or promise to do or not to do something. It may be past, present or future. But it must be real and lawful {Secs. 2(d), 23 and 25}. Consideration must be lawful, i.e. not forbidden by law. (This has been elaborated in paragraph 2.10)
2.6.4 Capacity of Parties

The parties to an agreement must be competent to contract, otherwise it cannot be enforced by a court of law. In order to be competent to contract the parties must be of the age of majority and of sound mind and must not be disqualified from contracting by any law to which they are subject.6 This has been discussed in paragraph 2.11.
2.6.5 Free Consent

It is essential to the creation of every contract that there must be a free and genuine consent of the parties to the agreement. The consent of the parties is said to be free when they are of the same mind on all the material terms of the contract. The parties are said to be of the same mind when they agree about the subject-matter of the contract in the same sense and at the same time.7 Consent is said to be free when it is not caused by (i) Coercion, (ii) Undue influence, (iii) Fraud, (iv) Misrepresentation, or (v) Mistake.8 (See paragraph 2.12). Notes
Check Your Progress

4. What are the essential elements of a valid contract? What do you understand by Possibility of Performance? Are orally made contracts enforceable by law? When the consent is said to be free?
2.6.6 Lawful Object

The object of an agreement must be lawful. The object is considered lawful unless it is forbidden by law or is fraudulent or involves or implies injury to the person or property of another or is immoral or is opposed to public policy.9 Thus, when a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover the rent through a court of law. (See paragraph 2.13). 5.
2.6.7 Writing and Registration

A contract may be oral or in writing. As regards the legal effects, there is no difference between a contract in writing and a contract made by word of mouth. It is, however, in the interest of the parties that the contract should be in writing. There are some other formalities also which have to be complied with in order to make an agreement legally enforceable. In some cases, the document in which the contract is incorporated is to be stamped. In some other cases, a contract, besides being a written one, has to be registered. Thus where there is a statutory requirement that a contract should be made in writing or in the presence of witnesses or registered, the required statutory formalities must be complied with.10 Example, the law requires that an agreement to pay time barred debts, or arbitration agreement must be in writing. Similarly, the law makes it compulsory for all agreements relating to transfer of immovable property to be registered.
6.
7.
2.6.8 Certainty
In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain. If it is vague and it is not possible to ascertain its meaning, it cannot be enforced. Example - Amar agrees to sell Bharat hundred tons of oil. This agreement is void on the ground of uncertainty because it is not clear what kind of oil is intended to be sold.
2.6.9 Possibility of Performance

An agreement to do an impossible act is void (Sec. 56). Example - X agrees with Y to enclose some areas between two parallel lines and Y agrees to pay Rs. 1000/- to X. This agreement is void because it is an agreement to do an impossible act.
2.6.10 Agreement not Expressly Declared Void

The agreement must not have been expressly declared to be void, under the Act11. Example Agreement in restraint of marriage, agreement in restraint of trade, agreement in restraint of legal proceedings and agreement by way of wager have been expressly declared void. (See paragraph 2.14)
2.7
Notes
Classification of Contracts
Contacts may be classified as follows:
2.7.1 On the Basis of Enforceability

a) b) Valid Contracts: Contracts which satisfy all the essential elements of a valid contract,12 are enforceable in a court of law. Void Contract: A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.13 A void contract is a nullity from its inception. No rights accrue thereunder. Voidable Contract: An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.14 A contract is voidable when one of the parties to the contract has not exercised his free consent. One of the essential elements of a formation of a contract is free consent. All voidable contracts are those which are induced by coercion, undue influence, fraud or misrepresentation. Illegal Contracts: It is contrary to law and hence void ab initio. Unenforceable Contracts: An unenforceable contract is a valid contract in law, but due to the fact that it is incapable of proof, or because of some technical defect therefore it cannot be enforced in a Court of Law.
c)
d) e)
2.7.2 On the Basis of Mode of Creation

a) b) Express Contract: When the terms of a contract are reduced in writing or are agreed upon by spoken words at the time of its formation, the contract is express. Implied Contract: The terms of a contract are inferred from the conduct or dealings between the parties. When the proposal or acceptance of any promise is made otherwise than in words, the promise is said to be implied. Such an implied promise leads to an implied contract. Example - A boards a bus. It is implied from his conduct that A has entered into an implied promise to purchase a ticket. Quasi Contract: Constructive or Quasi contracts arise out of obligations enjoyed by one person from the voluntary acts of the other which are intended to be performed only on the happening of some future uncertain event.(See paragraph 2.16)
c)
2.7.3 On the Basis of the Extent of Execution

a) Executed Contract: Where both the parties have performed their obligations, it is an executed contract. Even when one party to the contract has performed his share of the obligation, the contract is executed, though the other party is still under an outstanding obligation to perform his part of the promise. Executory Contract: Where neither party to the contract has performed his share of the obligation, i.e. both the parties have yet to perform their promises, the contract is executory. Contingent Contract: A contingent contract is one in which a promise is conditional and the contract shall be performed only on the happening of some future uncertain event. (See paragraph 2.15)
b) c)
2.8
Proposal (Offer) and Acceptance

Notes
2.8.1 Meaning of Proposal

Proposal of the Act is synonymous with the term offer of the English Law. The words proposal and offer are used inter-changeably. When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.15 The first step towards creating a contract is that one person shall signify or make a proposal to the other, with a view to obtaining the assent or acceptance of that another to that act or abstinence. A proposal is then said to be made. In order to constitute a contract, a person should offer to do something. This offer must be sufficiently communicated to the person for whom he intends to do something with a view to obtaining his assent to it. The person who makes such an offer or proposal is called the Offerer or Proposer, the person to whom the proposal or offer is made is called the Proposee or Offeree and the person accepting it is called the Promisee or Acceptor.
2.8.2 Essentials of a Proposal

The definition of the word proposal given in the Act reveals the following three essentials of a proposal. a) b) c) The expression of willingness to do or to abstain from doing something. This expression must be to another person. This must be made with a view to obtaining the assent of the other person.
2.8.3 Legal Rules Regarding a Valid Proposal

A valid proposal must be in conformity with the following rules: a) Express or Implied: A proposal may be made either by words or by conduct. A proposal which is expressed by spoken or written words, is an express proposal and the one which is inferred from the conduct of a person or the circumstances of the case is called an Implied Proposal.
Illustration:
i. A says to B that he will sell hs car to him for Rs. 80,000. This is an express proposal.
ii. The Delhi Transport Corporation (D.T.C) runs Omni buses on different routes to carry passengers at the scheduled fares. This is an implied proposal by the DTC. b) Terms Certain & Not Loose or Vague: If the terms of a proposal are vague or indefinite, its acceptance cannot create any contractual relationship.
Illustration:
i. X says to Y I will sell you a car. X owns three different cars. The proposal is not definite.
ii. T offered to take a house on lease for three years at $ 285 per annum if the house was put into thorough repair and drawing rooms handsomely decorated
Notes c)
according to the present style. Held, the proposal was too vague to result in a contractual relation.16 To give Rise to Legal Consequences and be Capable of Creating Legal Relations: A proposal will not become a promise even after it has been accepted unless it was made with a view to create legal relations, e.g. invitation to a dinner which has no intention to create legal relationship. An Invitation to Proposal is not a Proposal: Display of goods by a shopkeeper in his window, with prices marked on them, is not an offer but merely an invitation to the public to make a proposal to buy the goods at the market price. Likewise, quotations, catalogues, advertisements in a newspaper for sale of an article, or circulars sent to potential customers do not constitute a proposal. They are instead an invitation to the public to make a proposal. Similarly, a declaration by a person that he intends to do something gives no right of action to another. May be Specific or General: A proposal is specific when it is made to a definite person or persons. Such a proposal can be accepted only by the person or persons to whom it is made. On the other hand, proposal is general when it is made to the world at large or public in general and may be accepted by any person who fulfills the requisite conditions.
d)
e)
Illustration:
The leading case on the subject of general offer is that of Carlill vs. Carbolic Smoke Ball Co. In the above case, the Carbolic Smoke Ball Co. issued an advertisement in which the Company offered to pay 100 to any person who contracts influenza, after having used their Smoke Balls three times daily for two weeks, according to the printed directions. Mrs. Carlill, on the faith of the advertisment, bought and used the Balls according to the directions but she, nevertheless, subsequently suffered from influenza. She sued the company for the promised reward. The company was held liable.17 f) Communicated to the Proposee: A proposal is effective only when it is communicated to the proposee. As Lord Lindlay puts it, A state of mind not communicated cannot be regarded as dealings between man and man. This is applicable to both specific as well as general offers.
Illustration:
The defendants nephew absconded from home. He sent his servant, the plaintiff, in search of the boy. After the servant had left, the defendant announced a reward of Rs. 501 to anybody giving information relating to the boy. The servant, before seeing the announcement, had traced the boy and informed the defendant. Later, on reading the notice of reward, the servant claimed it. His suit was dismissed on the ground that he could not accept the offer, unless he had knowledge of it.18 g) Should not Contain a Term the Non-compliance of Which Would Amount to Acceptance: A proposer cannot say that if acceptance is not communicated up to a certain date, the proposal would be presumed to have been accepted. If the proposee does not reply, there is no contract, because no obligation to reply can be imposed on him, on the grounds of justice. Can be Made Subject to Any Terms and Conditions: A proposer may attach any terms and conditions to the proposal he makes. He may even prescribe the mode of acceptance. The proposee will have to accept all the terms and conditions of the proposal. Two Identical Cross-offers do not Make a Contract: When two parties make identical offers to each other, in ignorance of each others offers, the offers are crossoffers. They do not constitute acceptance of ones offer by the other and as such there is no completed agreement.
h)
i)
2.8.4 Lapse and Revocation of Proposal

A proposal lapses and becomes invalid in the following circumstances: a) b) c) d) e) f) g) An offer lapses after stipulated or reasonable time.19 A proposal lapses by not being accepted in the mode prescribed, or if no mode is prescribed, in some usual and reasonable manner.20 A proposal lapses by rejection by the proposee. A proposal lapses by the death or insanity of the proposer or the proposee before acceptance. A proposal lapses by recovation by the proposer before acceptance.21 Revocation by non-fulfillment of a condition precedent to acceptance.22 A proposal lapses by subsequent illegality or destruction of subject matter. Notes
2.8.5 Acceptance
A contract as already observed, emerges from the acceptance of an offer. Acceptance is defined when the person to whom a proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal when accepted becomes a promise.23 The person making the proposal is called the Promisor, and the person accepting the proposal is called the Promisee.24 Performance of the conditions of a proposal, the acceptance of any consideration for reciprocal promise which may be offered with a proposal is an acceptance of the proposal (Sec. 8). An acceptance need not always be expressed in words. Performance of the conditions of a proposal is an acceptance of the proposal. In order that there must be a binding contract, there must be absolute and unconditional acceptance of the terms of a proposal.
Illustration:
A offers to sell his house for Rs. 2,50,000 to B. B accepts the offer to purchase the house for Rs. 2,50,000. This is acceptance.
2.8.6 Essentials of a Valid Accptance

Sections 7 and 8 of the Act lays down following rules to convert a proposal into a promise: a) Acceptance Must be Absolute and Unqualified: Acceptance of a proposal with conditions, variations and reservations is no acceptance at all. Acceptance with variations is a counterproposal and there is no contract until this counter proposal is accepted by the original proposer. To constitute a valid acceptance, it should be unqualified. This means that the parties to the contract must be consenses-ad-idem that is, consenting on the same thing in the same sense. Conditions imposed by the offerer that the proposal shall be accepted only on payment of deposit or earnest money or on executing a certain document will lapse the proposal, if such a condition is not accepted by the offeree. Acceptance Must be Expressed in Some Usual and Reasonable Manner - Mode of Accept ance: Acceptance may be made either by words or by conduct. It may also be expressed by post or by telegram. If the proposer prescribes the manner in which the proposal is to be accepted and the acceptance is not made in such manner, the proposer may, within a rea sonable time after the acceptance is communicted to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so; he accepts the acceptance. Usual and reasonable manner would mean the parties intended to perform the contract in the ordinary course of trade or business. The proposer has the right to prescribe the manner in which the proposal can be accepted but not the manner in which it may be refused.
Check Your Progress 8. What are the essential

elements of a proposal? 9. Discuss the significance of communication in proposal.
b)
c) Notes
Mental Acceptance is not Sufficient in Law: Silence cannot amount to acceptance. Mere uncommunicated or mental acceptance is not enough. Acceptance to be complete must be communicated by words or conduct by an offeree to the proposer. There must be some external manifestation (overt act) of that intent by speech, writing or other act.
Illustration:
A tells B that he intends to buy Cs office, but does not tell anything to C of his intention. This is no contract. d) Acceptance Must be Communicated to the Proposer: It should be signified and communicated to the proposer himself. If the acceptance is not communicated to the proposer, no contract is created. Intentions must be communicated. A draft agreement relating to the supply of coal was sent to the manager of a Railway Company for his acceptance. The Manager wrote the words approved on the agreement but by oversight, the document remained in the drawer. It was held that there was no contract. Acceptance and intimation of acceptance are both necessary to result in a binding contract. In the case of proposal and acceptance by telephone conversation, contract is made at a place where acceptance is received. Acceptance Must be Given Within Reasonable Time and Before the Proposal Lapses and/ or is Revoked: To be legally effective acceptance must be given within the specified time limit, if any, and if no time is stipulated, acceptance must be given within a reasonable time. Again, the acceptance must be given before the proposal is revoked or lapses by reason of proposees knowledge of death or insanity of the proposer. Acceptance of the Proposal: Acceptance of the proposal is the acceptance of all the terms even though the proposee is ignorant of some of the terms of the proposal, except where the terms are not apparent on the face and no resonable cautionis taken to draw attention of the acceptor, e.g. a ticket issued by the Railways with the terms and conditions printed over leaf. Even if the proposee does not read the terms and conditions, it will be assumed that the proposee has accepted the terms and conditions of travel, provided the terms and condi tions are legible and if reasonable notice thereof is given.
e)
f)
Illustration:
A who travels by a ship sustains injury on account of the negligence of the crew. The Shipping Company raised a plea that the terms and conditions were printed overleaf and the liability of the company was limited in various ways. However, the clause limiting the liability of the Shipping Company was obscured by the words stamped across in red ink. The company did not take reasonable care to make the conditions legible and therefore, A was entitled to recover damages. If the terms and conditions had not been so obliterated, then the company would not have been held liable. g) Acceptance of the Proposal Need not Always be Expressed in Words: Performance of the conditions of a proposal is an acceptance of the proposal. 25 Where the insurance company accepts the cheque as per the terms of the proposal towards the premium, encashment of cheque is a sufficient acceptance of the proposal.26 Acceptance Must be by a Certain Person: A proposal may be made to an unascertained number or to the world at large but no contract can arise until it has been accepted by a certain person who first gives information either by words or by conduct. Such an offer is called a general offer. The general offer is closed as soon as it is accepted by a definite person.
h)
Illustration:
A gives an advertisement in the newspaper offering Rs. 10,000 to one who gives information of his lost son. B gives the information. B is entiled to the reward of Rs. 10,000. i) If the Act is done in Ignorance of the Proposal, it is no Acceptance of the Proposal: Act done in ignorance of the proposal is no acceptance, because to anuncommunicated offer, there can be no consent or assent. Notes
Illustration:
A advertises a reward of Rs. 10,000 to anyone who gives information of his lost son: B gives the information but is ignorant of the reward. After some time, he claims the reward. It was held that B is not entitled to the reward as he gave the information without being aware of the offer.
2.9 Communication of Proposal, Acceptance and Revocation

The communication of proposal and acceptance must complete so as to bind the concerned parties because as soon as the communication is complete the parties loose the right of withdrawal or revocation. The legal provisions relating to the communication of proposal, acceptance and revocation are as under: a) Communication of an Proposal: The communication of proposal is complete when it comes to the knowledge of the person to whom it is made, i.e. when the letter containing the proposal reaches the proposee. Communication of an Acceptance: The communication of acceptance is complete at dif ferent times for the proposer and acceptor. The communication of acceptance is complete: i. as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor, i.e. when the letter of acceptance is duly posted.
b)
ii. as against the acceptor, when it comes to the knowledge of the proposer i.e. when the letter of acceptance is received by the proposer. c) Communication of a Revocation: The term revocation means taking back or withdrawal. The communication of revocation is complete: i. as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person revoking, i.e. when the letter of revocation is posted, and
ii. as against the person to whom it is made, when it comes to his knowledge, i.e. when the letter of revocation is received by him. d) Time During Which an Offer or Acceptance can be Revoked: A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards.
2.10 Consideration
2.10.1 Meaning of Consideration
Consideration is one of the essential elements of a valid contract. When a person promises to do
Notes
something, he must get something in return. If he does not get something in return, the contract is, generally, not valid. This something is known as consideration. In other words, consideration is the price for which the promise of the other party is bought. The Act defines consideration as when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.27
llustration:
A agrees to sell his house to B for Rs. 5,00,000. Here As promise to sell his house is for Bs consideration to pay Rs. 5,00,000. Similarly, Bs promise to pay Rs. 5,00,000 is for As consideration to sell his house to B. Thus the essential condition for the enforceability of the contract is consideration. The rule is expressed by the Latin maxim ex nudo-pacto non-oritur actio, i.e. out of a bare promise no cause of action can arise. Therefore, a gratuitous promise, such as a promise to make a gift or charity for no return is not supported by consideration. Hence it is unenforceable by the promisee. The basis of consideration is that of reciprocity. A promisee would be able to enforce the promise only if he has given or promised to give or unless the promisor has obtained or has been promised something in exchange of it. The word consideration implies something in return for the promise or the price of promise or quid pro quo. According to Sir Frederick Pollock, an act or forbearance of one party of the promise thereof, is the price for which the promise of the other is bought and the promise thus given for value is enforceable. Blackstone defines consideration as the recompense given by the party contracting to the other.
2.10.2 Essentials of a Valid Consideration

The essentials of consideration are as follows: a) Consideration Must Move at the Desire of the Promisor: The act or abstinence forming the Consideration must be done at the desire or request of the promisor. If it is done at the instance of the third party or without the desire of the promisor it is not consideration. Example - Amar sees Bhushans house on fire and helps in extinguishing it. Amar cannot demand payment for his services because Bhushan never asked him to come for help. Consideration May Move from the Promisee or any other Person: The consideration need not move from the promisee alone but may proceed from any third person. Thus, as long as there is a consideration for a promise, it is immaterial who has furnished it. This means that even a stranger to the consideration can sue on a contract, provided he is a party to the contract. This is also called as Doctrine of Constructive Consideration. For example - X by a deed of gift transferred certain property to her daughter Y with a direction that Y should pay Z an annuity. Y executed a deed in writing in favour of Z and agreed thereby to pay the annuity. Later Y refused to pay annuity on the plea that no consideration had moved from Z. It was held that Z was entitled to maintain suit because a consideration need not necessarily move from the promisee, it may move from any other person (i.e. X in the present case).28 Consideration may be past, present or future. Consideration Must be Something of Value (The consideration need not be adequate to the promise but it must be of some value in the eye of the law). Consideration must be legal. Consideration may be doing something, or abstaining from doing something (positive or negative act) or a promise to do something.
b)
Check Your Progress

10. How can a proposal be revoked? 11. Are there any exceptions to the rule - No Consideration No Contract? 12. When the consideration is said to be valid?
c) d) e) f)
2.10.3 No Consideration No Contract

The general rule is that an agreement made without consideration is void. But there are a few exceptions to this rule. These exceptions are as follows: a) Agreement Made on Account of Natural Love and Affection: An agreement made without consideration is enforceable if, it is i. Made on account of natural love and affection. ii. Between parties standing in a near relation to each other. iii. Expressed in writing. iv. Registered as per law. b) c) Agreement to Compensate for past Voluntary Service: Example - A finds Bs purse and gives it to B. B promises to give A Rs. 100/-. This is a Contract. Agreement to Pay a Time Barred Debt: Where there is an agreement, made in writing and signed by the debtor or his authorised agent, to pay wholly or in part a debt barred by the law of limitation, the agreement is valid even though it is not supported by any consideration. Completed Gift: A completed gift does not require consideration in order to be valid. Contract of Agency: No consideration is necessary to create an agency.29 Remission by the Promisee, of Performance of the Promise: For compromising a due debt, i.e. agreeing to accept less than what is due, no consideration is necessary.30 Contribution to Charity: A promise to contribute to charity, though gratuitous, would be enforceable, if on the faith of the promised subscription, the promisee takes definite steps in furtherance of the object and undertakes a liability, to the extent of liability incurred, not exceeding the promised amount of subscription. Notes
d) e) f) g)
2.11 Capacity of Parties

2.11.1 Who is Competent to Contract?
According to the Act31 every person is competent to contract, who: a) b) c) is of the age of majority, according to the law to which he is subject, is of sound mind, and is not disqualified from contracting by any law to which he is subject.
2.11.2 Who is a Minor?

As per the Indian law,32 a person domiciled in India, who is under 18 years of age is a minor. Accordingly every person who has completed the age of 18 years becomes a major. Only when a person is under the guardian ship of court of wards or under a person appointed under the Guardians and Wards Act, then he attains majority on completion of 21 years of age.
2.11.3 Position of Agreements by Minor

The law regarding minors agreements may be summed up as under: a) An Agreement by a Minor is Absolutely Void and Inoperative as Against Him: Law protects the rights of the minors, because their mental faculties are not mature -they donot possess
Notes
the capacity to judge what is good or bad for them. In the leading case of Mohori Bibi vs. Dharam das Ghose,33 a minor executed a mortgage for Rs. 20000/- and received Rs. 8000/from the mortgagee. The mortgagee filed a suit for the recovery of his mortgage money and for sale of the property in case of default. It was held that an agreement by a minor was absolutely void as against him and therefore the mortgagee could not recover the mortgage money nor could he have the minors property sold under his mortgage. b) No Restitution Except in Certain Cases: A minor cannot be ordered to make compensation for a benefit obtained under a void agreement. However, under the Specific Relief Act, 196334, a minor may be asked to restore any benefit which he may have received from other party. Beneficial Agreements are Valid Contracts: Any agreement which is of some benefit to the minor and under which he is required to bear no obligation, is valid. In other words, a minor can be a beneficiary. No Ratification on Attaining the Age of Majority: Ratification means the subsequent adoption and acceptance of an act or agreement. A minors agreement being a nullity and void ab-initio, has no existence in the eyes of law. It cannot be ratified by the minor on attaining the age of majority. The Rule of Estoppel does not Apply to a Minor: A minor is not estopped from pleading minority in a suit against him, even in those cases, where he had earlier misrepresented himself as a major to the other party. Minors Liability for Necessaries: Minors property is liable for reimbursing the person who has supplied necessaries to a minor (Sec. 68). Specific Performance: Specific performance means the actual carrying out of the contract as agreed. Only a contract entered on behalf of a minor, by his guardian is binding on the minor and can be specifically enforced by or against the minor. Other than this, no other minors agreement can be ordered for a specific performance. Minor Agent: A minor can be an agent.35 He binds his principal by his acts but is not liable to him in any manner for losses suffered by the principal. Minor Partner: A minor being incompetent to contract cannot be a partner in a partnership firm. But he can be admitted as a partner for the benefits of partnership (only for sharing of profits and not losses). Minor and Insolvency: A minor cannot be declared insolvent as he is not competent to contract. Contract by Minor and Adult Jointly: Where a minor and an adult jointly enter into an agreement with another person, the minor has no liability but the contract as a whole can be enforced against the adult. Surety for a Minor: When an adult stands surety for a minor, the adult is liable under the contract, and the minor is not. Position of Minors Parents: The parents of a minor are not liable for agreements made by a minor, whether the agreement is for the purchase of necessaries or not. The parents can be held liable only when the child is contracting as an agent for the parents. Minor Shareholder: A minor, being incompetent to contract, cannot be a shareholder of the company. A company can also refuse to register transfer of shares in favour of a minor unless the shares are fully paid, and articles of association of the company do not prohibit minor to hold shares.
c)
d)
e)
f) g)
h) i)
j) k)
l) m)
n)
2.11.4 Persons of Unsound Mind

For a valid contract, it is necessary that each party to it must have a sound mind. Notes
2.11.5 What is a Sound Mind?

The Act provides 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 judgement as to its effects 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.36
2.11.6 Position of Agreement with Persons of Unsound Mind

a) Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other personal experience. He suffers from intermittent intervals of sanity and insanity. He can enter into contracts during the period when he is of sound mind. Idiots: An idiot is a person who has completely lost his mental powers. Idiocy is permanent whereas lunacy denotes periodical insanity with lucid intervals. An agreement of an idiot is void. Drunken/Intoxicated Persons: A drunken or intoxicated person suffers from temporary incapacity to contract, i.e. at the time when he is so drunk or intoxicated that he is incapable of forming a rational judgement. The position of a drunken or intoxicated person is similar to that of a lunatic. Agreements Entered into by Persons of Unsound Mind are Void: However, there is one exception. Persons of unsound mind are liable for necessities supplied to them or to anyone whom they are legally bound to support. But even in such cases, no personal liability attaches to them. It is only their estate (property) which is liable.37
b)
c)
d)
2.11.7 Persons Disqualified by Law

The third type of incompetent persons are those who are disqualified from contracting by any law to which they are subject. They are: a) Alien Enemies: An alien (citizen of a foreign state) is a person who is not a citizen of India. When there is a war between India and another country, that countrys citizen becomes an alien enemy and cannot enter into contract. Foreign Sovereigns and Ambassadors: They can enter into contracts and enforce those contracts in our courts but they cannot be sued in our courts without the sanction of the Central Government unless they choose to submit themselves to the jurisdiction of our courts. Convict: A convict is one who is found guilty by a court and is undergoing sentence of imprisonment. During the period of his imprisonment, he is incompetent to contract and also to sue on contract made before conviction. Company or Corporation: A company/corporation is an artificial person created by law. It cannot enter into contract outside the powers, conferred upon it by its Memorandum of Association (object clause) or by the provisions of its Special Act. Insolvents: When a persons debts exceed his assets, he is adjudged insolvent and his property stands vested in the Official Receiver or Official Assignee appointed by the court. Such a person cannot enter into contracts relating to his property.
b)
c)
d)
e)
2.12 Free Consent

Notes
2.12.1 Meaning of Consent Check Your Progress

13. When can a minor be said to be competent to contract? 14. Which persons are disqualified by law to be competent to contract? Consent means an act of assenting to an offer. Two or more persons are said to consent when they agree upon the same thing in the same sense.38
2.12.2 Free Consent

Consent is said to be free when it is not caused by: a) b) c) d) e) Coercion, or Undue Influence, or Fraud, or Misrepresentation, or Mistake.39
2.12.3 Effect of Absence of Free Consent

When there is consent but it is not free (caused by coercion, undue influence, fraud or misrepresentation), the contract is voidable, at the option of the party whose consent was so caused. When consent is caused by bilateral mistake as to a matter of fact essential to the agreement, the agreement is void.
2.12.4 Coercion
Coercion means compelling a person to enter into a contract under a pressure or a threat. The Act defines Coercion as follows: Coercion is the committing or threatening to commit, any act forbidden by the Indian Penal Code, 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.40 Example - A Hindu widow was forced to adopt a boy under threat that her husbands dead body would not be allowed to be removed if she does not adopt the boy, She adopted the boy. Here, Widows consent has been obtained by co-ercion because preventing the dead body from being removed for cremation is an offence under section 297 of the Indian Penal Code. (Ranganayakamma V. Alwar Setti).
2.12.5 Essentials of Co-ercion

To constitute coercion the following are the essential features: a) b) c) Coercion may proceed from any person and it is not necessary that it must be exercised by a party to the contract. It may be directed against any person and not necessarily against the other contracting party. Coercion may be an act causing physical hardship or unlawful detention of property belonging to another. It may also include those cases where the party is subjected to mental agony.
2.12.6 Undue Influence

The Act defines the term Undue Influence as follows:
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.41 The Act further lays down that a person is deemed to be in a position to dominate the will of another. a) b) c) If he holds a real or apparent authoring over the other (e.g. the relationship between father and son, or master and servant). If he stands in a fiduciary relation to the other (e.g. the relationship between doctor and patient, spiritual guru and disciple, lawyer and client). Where 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 (e.g. old illiterate persons).42
Notes
2.12.7 Distinction Between Coercion and Undue Influence Distinction Points of Distinction
1. Basis
Coercion
Consent is obtained by threat of an offence. In this, the person is forced to give his consent. It is mainly of physical character. It is of violent character.
Undue Influence
Consent is obtained by the dominating will of the other. Consent is given in good belief, but under moral influence. Confidence is reposed but betrayed. It is moral character.
2. Nature
3. Character
It is most subtle in Character.
2.12.8 Fraud
According to the Act, Fraud means and includes any of the following acts committed by the party to a contract, or with his convinance, or by his agents, with intent to deceive another party there to or his agent, or to induce him to enter into the contract: a) b) c) d) e) The suggestion as a fact, of that which is not true, by one who does not believe it to be true; The active concealment of a fact by one having knowledge or belief of the fact; A promise made without any intention of performing it; Any other act fitted to deceive; and Any such act or ommission as the law specially declares to be fraudulent.43
2.12.9 Essential Elements

Essential elements of fraud are as follows: a) b) c) d) e) The fraud must be committed by a party to a contract or by anyone with his connivance or by his agent. There must be a false representation and it must be made with the knowledge of its falsehood. The representation must relate to a fact. The fraud must have actually deceived the other party. The party acting on the representation must have suffered loss.
2.12.10 Misrepresentation
Notes The Act, defines the term misrepresentation, as follows: Misrepresentation means and includes a) b) The positive assertion, in a manner not warranted by the information to the person making it, of that which is not true, though he believes it to be true. Any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone claming under him, by misleading another to his prejudice or to the prejudice of anyone claiming under him. Causing, however innocently, a party to an agreement, tomake a mistake as to the substance of the thing which is the subject of the agreement.44
c)
2.12.11 Essential Elements

Essential Elements of misrepresentation are as follows: a) b) c) d) e) By a Party to a Contract: The representation must be made by a party to a contract or by anyone with his connivance or by his agent. False Representation: These must be a false representation and it must be made without knowledge of its falsehood. Representation as to Fact: The representation must relate to a fact. In other words, a mere opinion, a statement of expression or intention does not amount to misrepresentation. Object: The representation must be made with a view to inducing the other party to enter into contract but without the intention of deceiving the other party. Actually Acted: The other party must have acted on the faith of the representation.
2.12.12 Distinction between Misrepresentation and Fraud Distinction Points of Distinction

1. Intention to deceive 2. False Statement 3. Belief of the person making statement 4. Effects of breach
Misrepresentation
There is no intention to deceive. A false innocent statement without any intention to deceive is misrepresentation. The person making the statement believes it to be true. It makes contract voidable at the option of the party injured.
Fraud
There is intention to deceive. A fasle statement deliberately made to deceive is fraud. The person making the statement does not believe it to be true. Besides making the contract voidable at the option of the party injured, it gives right to an independent action in tort. This plea can not be raised in case of fraud, except in cases when silence amounts to fraud.
5. Effect of discovering the truth
The contract cannot be avoided if the party whose consent was so caused, had the means of discovering the truth with ordinary diligence.
2.12.13 Mistake
The Act does not define the term mistake. Mistake is an erroneous belief concerning something. The types of mistake are shown below : Notes
Type of Mistake
Mistake of Fact
Mistake of Law
Of Indian Law As to Subject Matter
Of Foreign Law
Bilateral
Unilateral
As to Possibility Performance
Identity of Persons
Nature of Contract
2.12.14 Mistake of Indian Law

Does not vitiate a contract because everyone is supposed to know the law of his country. The maxim ignorance of law is no excuse applies.
2.12.15 Mistake of Foreign Law

Is treated as mistake of fact, i.e. the contract is void if both the parties are under a mistake as to a foreign law because one cannot be expected to know the law of other country.
2.12.16 Mistake of Fact - Bilateral

Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.45
2.12.17 Mistake of Fact - Unilateral

A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to matter of fact.46
2.12.18 Remedies Available

Where a contract is caused by a mistake which is void, the remedies available are: a) b) Any person who has received any advantage under the agreement is bound to restore it.47 A person to whom money has been paid or anything delivered by mistake must repay or return it.48
2.13 Legality of Object and Consideration

The object and the consideration of an agreement must be lawful, otherwise the agreement is void. According to the Act, the consideration or the object of an agreement is unlawful in the following cases: a) If it is Forbidden by Law: An act, action or thing is said to be forbidden (i.e. prohibited) by
Notes b) Track Your Learning 15. Why insurance is not a wagering agreement? c)
law when it is punishable under any enactment. For example -Rangeela, a Hindu already married and his wife alive, entered into a marriage agreement with Kumari an unmarried girl. This agreement is void because the second marriage is forbidden by Hindu Law. If it is of such a Nature that, if Permitted it would Defeat the Provisions of any Law: Such an agreement is void. For example - Nirdhan borrowed Rs. 1 lakh from Kuber and agreed not to raise any objection as to the limitation and that Kuber may recover the amount even after the expiry of limitation period (i.e. three years). This agreement is void as it defeats the provisions of Limitation Act. If it is Fraudulent: An agreement whose object or consideration is to defraud others, in unlawful and hence void. For example - A, B and C enter into an agreement of the division among them of gains acquired by them by fraud. The agreement is void, as its object is unlawful. If it Involves or Implies Injury to a Person or Property of Another: If the object or consid eration of an agreement is injury to the person or property of another, it is void, being an unlawful agreement. Example - An agreement to put certain property to fire is unlawful and void. If the Court Regards it as Immoral or Opposed to Public Policy: If the object or considera tion of an agreement is immoral or opposed to public policy, the agreement is void. Any agreement which interferes with marital relations of persons is regarded as immoral. When ever an agreement is harmful to the public welfare or any established interest of society, it would be void as being against public policy.49
d)
e)
Example - 1
X gave Rs. 1 lakh to Y a married woman to obtain a divorce from her husband. X agreed to marry her as soon as she obtained a divorce. It was held that X could not recover back the amount because the agreement was void as its object was immoral.
Example - 2
A agrees to pay B, a major in the Army, Rs. 50,000 if he will assist his brother to desert the army. The object of the agreement is opposed to public policy and hence void.
2.14 Void Agreement

An agreement not enforcable by law is said to be void50. Thus a void agreement does not give rise to any legal consequences and is void ab-initio.
2.14.1 Void Agreement Already Discussed

The following type of void agreements have already been discussed: a) b) c) d) e) f) Agreements by or with a person incompetent to contract. (paragraph 2.11) Agreements made under a bilateral mistake of fact material to the agreement. (paragraph 2.12.15) Agreements made without consideration. (paragraph 2.10) Agreements the meaning of which is uncertain. (paragraph 2.6.8) Agreements of which the consideration or object is unlawful. (paragraph 2.13) Agreements to do impossible acts. (paragraph 2.6.9)
2.14.2 Expressly Declared Void Agreements

One of the essential elements of a valid contract is that it must not be one which is expressly declared to be void under the Act. The following agreements have been expressly declared to be void: a) Agreements in Restraint of Marriage: Every individual enjoys the freedom to marry. According to the Act, Every agreement in restraint of the marriage of any person, other than a minor, is void.51 The restraint may be general or partial. An agreement agreeing not to marry at all, or a certain person, or a class of persons, or for a fixed period is void. A promise to marry a particular person, does not imply any restrain of marriage and is a valid contract. For example - Preeti agrees with Sambandh for good consideration that she will not marry Kurup. It is void agreement. Agreements in Restraint of Trade: The constitution of India guarantees the freedom of trade and commerce to every citizen. According to the Act, Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent, void52. There are some exceptions to this rule like sale of goodwill, partners agreements, trade combinations or negative stipulations in service agreements where in some reasonable restrictions on trade are permitted in law. Agreements in Restraint of Legal Proceedings: According to the Act53, the following agreements amount to restraint of legal proceedings and are thus void to that extent: Agreements Restricting Enforcement of Rights: An agreement by which any party is restricted absolutely from enforcing his legal rights under or in respect of any contract is void to that extent. Example - A clause in a contract provided that no action should be brought upon it in case of breach. Such a clause is void because it restricts both the parties from enforcing their legal rights. Agreements Limiting the Period of Limitation: An agreement which limits the time within which an action may be brought so as to make it shorter than that prescribed by the law of limitation, is void. For example - A clause in a contract provides that no action should be brought after two years. Such a clause is void because it limits the period of limitation to two years which is less than the period of limitation (i.e. three years) prescribed by the law of limitation. Notes
b)
c) i.
ii.
Exceptions - Agreements or clause referring the dispute to arbitration or subject to one courts jurisdiction are valid. d) Wagering Agreements: The word wager means a bet. A wagering agreement is an agreement between two persons under which money or moneys worth is payable, by one person to another on the happening or non-happening of a future uncertain event. Example - X promises to pay Rs. 1,000 to Y if it rained on a particular day, and Y promises to pay Rs. 1,000 to X if it did not. Such agreement is a wagering agreement and thus void.54 i. There must be a promise to pay money.
The essentials of wagering agreements are: ii. Promise must be conditional on event happening or not. iii. The event must be an uncertain, i.e. not in their hands. iv. Each party must stand to win or loose. v. No party should have a proprietary interest in the event. An insurance contract which seems to have a trace of speculation is not a wagering contract. There is an insurable interest in an insurance contract while there is no such interest in a wagering contract.
2.14.3 Distinction Between Insurance and Wagering Agreements

Notes
Distinction Points of Distinction

1. Insurable Interest 2. Interest of the Parties
Insurance Agreement
There is an insurable interest Both parties are interested in the subject matter.
Wagering Agreements
There is no insurable interest. Neither party has any interest in the happening or nonhappening of an event. These are void agreements as they are opposed to public policy. These are conditional contracts.
3. Validity
These are valid contracts.
4. Types of contract
These are contracts of indemnity except life insurance contracts which are contingent contracts.
2.15 Contingent Contract

2.15.1 Meaning
A contingent contract is a contract to do or not to do something, if some event collateral to such contract does or does not happen.55 Example - A contracts to indemnify B upto Rs. 20,000 in consideration of B paying Rs. 1,000 annual premium, if Bs factory is burnt. This is a contingent contract. Contracts of insurance and contracts of indemnity and guarantee are other examples of contingent contracts.
2.15.2 Essentials of Contingent Contract

The essential features of a contingent contract are as follows: a) b) c) Dependence on a Future Event: The performance of a contingent contract depends upon the happening or non happening of some future event. Collateral Event: The event must be collateral (i.e. incidental) to the contract. Uncertain Event: The event must be uncertain.
2.15.3 Rules Regarding Contingent Contracts

a) Enforcement of Contracts Contingent on Happening of a Future Uncertain Event:56 Contingent contracts to do or not to do anything if an uncertain future event happens can be enforced only when the event happens.
Illustration:
A makes a contract with B to buy Bs house if A survives C. This contract cannot be enforced by law unless and until C dies in As life time.
b)
Enforcement of Contracts on the Non-happening of a Future Uncertain Event:57 Contingent contracts to do or not to do anything if an uncertain future event does not happen can be enforced only when the happening of the event becomes impossible, and not before.
Notes
Illustration:
A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks. c) Contracts Contingent on Future Conduct of a Living Person:58 If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under future contingencies.
Illustration:
A agrees to pay B a sum of money if B marries C. C married D. The marriage of B to C must now be considered impossible although it is possible that D may die and that C may afterwards marry B. d) Contracts Contingent on a Specified Event Happening Within a Fixed Time: 59 Contracts contingent to do or not to do anything if a specified uncertain event happens within a fixed time would become void if, at the expiration of the time fixed, such event does not happen or if before the time fixed, such event becomes impossible.
Illustration:
A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year. e) Enforcement of Contingent Contracts on Specified Event not Happening Within a Fixed Time: 60 Contingent contracts to do or not to do anything if a specified uncertain event does not hapen within a fixed time, may be enforced when such event has not happened, or shall not happen within the time fixed.
Illustration:
A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year. f) Agreements Contingent on Impossible Events: 61 Contingent agreements to do or not to do anything if an impossible event happens, are void.
Illustration:
A agrees to pay B Rs. 1,000 if B will marry As daughter, C.C was dead at the time of the agreement. The agreement is void.
2.15.4 Distinction Between a Contingent Contract and Wagering Contract

Notes

1. Mutual promise as a basis
Contingent Contracts
Wagering Contracts
It is not necessary that there should be mutual promises. All contingent contracts are not wagers. For examples, insurance contracts, contracts of indemnity and guarantee. Determination of an uncertain event is not the sole condition of the contingent contract. A contingent contract is not void
It is agreement by mutual promises each of them conditional on the happening or not happening of an unknown event. all wagers are contingent but all contingent contracts are not wagers. There must be determination of an uncertain event as the sole condition of the contract. Wagering contract is void.
2. Sole Condition
3. Void agreement 4. Interest of the parties
These are contracts of indemnity except life insurance contracts which are contingent contracts. The future event is merely collateral or incidental to the contract.
The parties are not intersted in the occurance or non-occurrence of the event. The future event is the sole determining factor of the contract.
5. Future event
2.16 Quasi-Contract
2.16.1 Meaning of Quasi-Contract
A Quasi-Contract is not a contract at all because the essential elements for the formation of a contract are absent. It is an obligation imposed by law upon a person for the benefit of another even in the absence of a contract. It is based on the principle of equity (i.e. fairness, moral justice or ethics), which means no person shall be allowed to unjustly enrich himself at the expense of another. Such obligations are called quasi-contracts or implied contracts because the outcome of such obligations resemble those created by a contract.
2.16.2 Kinds of Quasi-Contracts

The various kinds of quasi contract (or quasi-contractual obligations) are given below: a) Claim for Necessaries Supplied to a Person Incapable of Contracting or on his Account: If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be re-imbursed from the property of such incapable person.62 [Refer to paragraphs 2.11.3(f) and 2.11.5(d)] Example - A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from Bs property.
b)
Reimbursement of Person Paying Money due by Another, in Payment of Which he is Interested: A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be re-imbursed by the other.63 For example - A, sub-tenant pays the arrears of rent due by the tenant to the landlord, in order to save the tenancy from forefeiture. The subtenant is entitled to recover from the tenant, the amount paid by him to the landlord, although there is no contract between the two. Obligation of Person Enjoying Benefit of Non-gratuitous Act: Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.64 For example-A, a tradesman, leaves goods at Bs house by mistake. B treats the goods as his own. B is bound to pay A for them. Responsibility of Finder of Goods: A person who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee.65 For example - X a guest found a diamond ring on a birthday party of Y. X told Y and other guests about it. He has performed his duty to find the owner. If he does not able to find the owner he can retain the ring as bailee. Liability of Person to Whom Money is Paid, or Thing Delivered by Mistake or Under Co-ercion: A person to whom money has been paid, or anything delivered by mistake or under co-ercion, must repay or return it.66 For example - A and B jointly owe Rs. 1000 to C. A alone pays the amount to C, and B, not knowing this fact, pays Rs. 1000 over again to C. C is bound to repay the amount to B.
Notes
c)
d)
e)
2.16.3 Distinction Between a Contract and Quasi Contract Distinction Points of Distinction
1. Purpose
Contract
Contract results from the will of the parties expressed with a view to create an obligation. A contract is an agreement. The contract has certain essential elements. It is a full-fledged contract and is binding.
Quasi Contract
Quasi contract is an obligation resembling that created by a contract. There is no agreement at all. Essentials for formation of a contract are absent. A quasi contract resembles a contract. It is not a full fledged contract. It is an implied contract, but its results resemble those created by a contract.
2. Agreement 3. Essential Elements 4. Nature
2.17 Performance of Contracts

2.17.1 Meaning of Performance
Performance of contract means fulfilling of the terms of the contract by the respective parties to the contract. The Act lays down The parties to a contract must either perform, or offer to perform, their respective promises, unless performance is dispensed with or excused under the provisions of this Act, or of any other law.67 It means that the performance may be either actual - by fulfilling all
Notes
obligations by the parties under the contract or attempted where an offer to perform ones obligations has been made by the promisor, but the performance is not complete unless the offer of performance is accepted by the promisee. Such offer to perform ones obligation under a contract is called tender. The second part of the definition lays down that the parties are excused from performance under the provisions of this Act or any other law. For example, an insolvent is excused from performing his part of the contract by law. Promises bind the legal representatives of the promisors in case of death of such promisors before performance, unless a contrary intention appears from the contract. The liability of the legal representative is limited to the extent of the value of the property inherited from the deceased.
Illustration:
a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that day. As representatives are bound to deliver the goods to B and B is bound to pay Rs. 1,000 to As representatives. A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by As representatives or by B.
b)
2.17.2 Who Can Demand Performance?

It is only the promisee who can demand performance of the promise. The general rule is that a person cannot acquire rights under a contract to which he is not a party.68
2.17.3 Who Should Perform the Promise?

a) b) In case of personal contract by the promisor personally. In case of non-personal contract i. By the promisor personally. ii. By a third person on behalf of the promisor. iii. In the event of the death of promisor - by his legal representatives. c) In case of Joint promisor - by the promisors jointly or third person on behalf of the promisors or their legal representatives.
2.18 Discharge of Contract

2.18.1 Meaning
Discharge of a contract means discontinuation of the contractual relations between the parties. When the rights and obligations arising out of a contract are extinguished, the contract is said to be discharged or terminated.
2.18.2 Mode of Discharge

A contract may be discharged in any of the following ways: a) Discharge by Performance: A contract can be discharged by performance, which can be: i. Actual - When the parties to the contract perform their promises in accordance with the terms of the contract.
ii. Attempted - When the promisor has made an offer of performance to the
promisee but the offer has not been accepted by the promisee. b) Discharge by Mutual Consent or Agreement: Since a contract is created by mutual agreement, it can also be discharged by mutual agreement. Discharge by mutual agreement can be done in any of the following ways: i. Novation 69 - Novation means the substitution of a new contract for the original contract either between the same parties or between different parties. Notes
ii. Rescission69 - Recission means cancellation of the contract by any party or all the parties to a contract. iii. Alteration 69 - Alteration means a change in the terms of a contract with the mutual consent. Alteration discharges the original contract and creates a new contract. iv. Remission 70 - Remission is the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made. v. c) Waiver - Waiver means intentional relinquishment of a right under the contract. Cases where the doctrine of supervening impossibility applies i. Destruction of subject matter. ii. Death or personal incapacity of promisor. iii.Outbreak of war. iv. Change of law. v. Non-existence or non-occurrence of a particular state of things (failure of ultimate purpose). 2. Cases not covered by supervening impossibility i. Difficulty of performance or less profitable. ii. Commercial impossibility. iii.Default of a third person. iv. Strikes, lockouts and civil disturbances. v. Partial impossibility or failure of one of the objects. d) Discharge by Lapse of Time - A contract is discharged if it is not performed or enforced within a specified period, called period of limitation. The Limitation Act, 1963 has prescribed the different periods for different contracts , e.g. period of limitation for exercising right to recover a debt is 3 years. Discharge by Operation of Law: i. By death of the promisor. ii. By insolvency. iii. By merger. iv. By unauthorised material alteration. f) Discharge by Breach of Contract - A contract is said to be discharged by breach of contract if any party to the contract refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. A breach of contract may occur in the following two ways: i. Anticipatory breach of contract - It occurs when the party declares his intention of not performing the contract before the performance is due.
Discharge by Subsequent or Supervening Impossibility or Illegality: 1.
e)
ii. Actual breach of contract - It can occur either on due date of performance or during the course of performance.
2.19 Remedies for Breach of Contract

Notes
2.19.1 Meaning of Breach of Contract

A breach of contract occurs if any party refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. In case of breach, the aggrieved party (i.e. the party not at fault) is relieved from performing his obligation and gets a right to proceed against the party at fault. As stated earlier [Refer to paragraph 2.18.2(f)] a breach of contract may either be anticipatory or actual.
2.19.2 Remedies of Breach of Contract

A remedy is the courses of action which are available to an aggrieved party for the enforcement of a right under a contract. The various remedies available are: a) Rescission of Contract71: Rescission means a right not to perform obligations. Incase of breach of a contract, the promisee may put an end to the contract. In such a case, the aggrieved party is discharged from all the obligations under the contract and is entitled to claim compensation for the damage which he has sustained because of the non-performance of the contract. Suit for Damages: Damages are monetary compensation allowed for loss suffered by the aggrieved party due to breach of contract. Damages may be of five kinds: i. Ordinary or General or Compensatory Damages: (i.e. damages arising naturally from the breach).
b)
ii. Special Damages: (i.e. damages in contemplation of the parties at the time of contract). iii. Exemplary, Punitive or Vindictive Damages: (i.e. damages which are in the nature of punishment). iv. Nominal Damages: (i.e. awarded only for the name sake). v. Liquidated Damages: means a sum fixed up in advance, which is a fair and genuine pre-estimate of the probable loss that is likely to result from the breach.
c)
Suit for Specific Performance: means demanding the courts direction to the defaulting party to carry out the promise according to the terms of the contract. For example - X agreed to sell an old painting to Y for Rs. 50000. Subsequently X refused to sell the painting. Here, Y may file a suit against X for the specific performance of the contract. Suit for Injunction: means demanding courts stay order Injunction means an order of the court which prohibits a person to do a particular act. For example -W agreed to sing at Ls theatre only during the contract period. During the contract period, W made contract with Z to sing at another theatre and refused to perform the contract with L. It was held that W could be restrained by injunction from singing for Z. Suit for Quantum Meruit: Quantum - meruit means as much as is earned. In this suit, claim is made to compensate for the work already done. For example -C an owner of a magazine engaged P to write a book to be published by instalments in his magazine. After a few instalments were published, the publication of the magazine was stopped. It was held that P could claim payment for the part already published.
Check Your Progress

17. In what ways can a contract be discharged? 18. What remedies are there to a breach of contract? 19. What is Quantum meruit? 20. What kinds of damages are covered under breach of contract?
d)
e)
2.20 Indemnity and Guarantee

Notes
2.20.1 Contract of Indemnity 2.20.1A Meaning

The term Indemnity means to make good the loss or to compensate the party who has suffered some loss. A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity.72 For example - A and B go into a shop. B says to the shopkeeper Let A have the goods, I will see you paid. The contract is one of Indemnity.
2.20.1B Parties
The person who promises to make good the loss is called the Indemnifier (promisor), and the person whose loss is to be made good is called the Indemnified or Indemnity holder (promisee).
2.20.2 Contract of Guarantee 2.20.2A Meaning

A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.73 For example - A and B go into a shop. A says to the shopkeeper, C, Let B have the goods, and if the does not pay, I will. This is a contract of guarantee.
2.20.2B Parties to a Contract of Guarantee

There are three parties to a contract of gaurantee. i. ii. iii. Principal Debtor: The person in respect of whose default the guarantee is given is called the principal debtor. In the above example B is the principal debtor. Creditor: The person to whom the guarantee is given is called the creditor. C is the creditor in the above said example. Surety: The person who gives the guarantee is called the surety A is the surety in the above said example.
2.20.2C Kinds of Guarantee

Guarantee may be classified under the following two categories: a) Specific Guarantee: A guarantee which extends to a single debt or specific transaction is called a specific guarantee. The liability of the surety comes to an end when the guaranteed debt is duly discharged or the promise is duly discharged. Continuing Guarantee: A guarantee which extends to a series of transactions is called a continuing guarantee. A suretys liability continues until the revocation of the guarantee.
b)
2.20.2D Discharge of Surety from Liability

A surety is said to be discharged when his liability as surety comes to an end. A surety is freed from his obligation under a contract of guarantee under any of the following circumstances:
a) Notes b)
Notice of Revocation: A specific guarantee cannot be revoked once it is acted upon. But a continuing guarantee may at any time, be revoked by the surety as to future transactions by giving notice to the creditor.74 Death of Surety75: In case of a continuing guarantee the death of a surety also discharges him from liability as regards transactions after his death, unless there is a contract to the contrary. Variance in Terms of Contract76: Any variance made without the suretys consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. Release or Discharge of Principal Debtor77: The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act of omissions of the creditor, the legal consequence of which is the discharge of the principal debtor. Arrangement by Creditor with Principal Debtor without Suretys Consent78: A contract between the creditor and principal debtor, by which creditor makes a composition with, or promises to give time to, or not to sue the principal debtor, discharges the surety, unless the surety assents to such contract. Creditors Act or Omission Impairing Suretys Eventual Remedy79: If a creditor does any act which is inconsistent with the rights of the surety, or omits to do any act, which is his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged. Loss of Security80 :If the creditor loses (by negligence or carelessness) or without the consent of the surety, parts with security given to him, the surety is discharged from liability to the extent of the value of security. Invalidation of the Contract of Guarantee: (In between the creditor and the surety) A surety is also discharged from liability when the contract of guarantee (in between the creditor and the surety) is invalid. A contract of guarantee is invalid where such a contract has been obtained by means of misrepresentation or fraud or keeping silence as to material part of the transaction, by the creditor or with creditors knowledge or assent81. Failure of co-surety to join a surety also makes the guarantee invalid.82
c)
d)
e)
f)
g)
h)
2.20.3 Distinction Between a Contract of Indemnity and a Contract of Guarantee Distinction Points of Distinction
1. Number of parties 2. Object or purpose 3. Number of contracts
Indemnity
There are two parties -the indemnifier and the indemnity holder. For the reimbursement of loss. Only one contract between the indemnifier and the indemnified.
Guarantee
There are three parties the creditor, the principal debtor and the surety. For the security of a debt or good conduct of an employee. Three contracts - one between the principle debtor and creditor, the second between creditor and the surety, and the third between the surety and the principal debtor.

4. Nature of liability
Indemnity
The liability of the indemnifier is primary in nature.
Guarantee
The liability of the surety is secondary, i.e. the surety is liable only on default of the principal debtor. It is necessary that the surety should give the guarantee at the request of the debtor. There is an existing debt or duty, the performance of which is guaranteed by the surety. The surety, after he discharges the debt owing to the creditor, can proceed against the principal debtor in his own right.
Notes
5. Request by the debtor
The indemnifier acts independently without any request of the indemnity holder or the third party. In most cases, there is no existing debt or duty.
6. Existing debt or duty
7. Right to sue
The indemnifier cannot sue the third party for loss in his own name, because there is no privity of contract. He can do so only, if there is an assignment in his favour.
2.21 Bailment and Pledge

2.21.1 Meaning of Bailment
The word Bailment is derived from the French word baillier which means to deliver. According to the Act. A 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.83 The person delivering the goods is called the bailor. The person to whom the goods are delivered is called the bailee.
2.21.2 Essential Features of Bailment

A bailment has the following characteristic features: a) b) c) It is the delivery of movable goods. The goods are delivered for some purpose. Return of specific goods - The goods which form the subject matter of a bailment must be returned to the bailor or otherwise disposed of according to the directions of the bailor, after the accomplishment of purpose or after the expiry of period of bailment.
2.21.3 Kinds of Bailment

Bailment may be classified from the point of view of benefit or reward. The benefit may be exclusive to the bailor or bailee or mutual. Bailment on the basis of reward may be: a) Gratuitous: Neither the bailor nor the bailee is entitled to any remuneration i.e. loan of
Notes
book to a friend, depositing of goods for safe custody. It is for the exclusive benefit of the bailor or bailee. b) c) Non Gratuitous: Here the goods are given for reward, remuneration or for some consideration, e.g. car let out on hire, goods given for repairs or tailoring for charges. Pawn or Pledge: Goods delivered to another as a security for money borrowed is called Pledge.
2.21.4 Bailment, Sale and License

In Sale the ownership is transferred to the buyer, whereas in the bailment the ownership in goods is not transferred. In a contract of License, one party is permitted to place his goods in the premises belonging to other person. Thus in a contract of license, the goods are not delivered to the licensor, while in bailment the goods are delivered to the bailee for safe custody.
2.21.5 Duties of Bailee

His duties are as follows: a) b) c) d) e) f) To take reasonable care of goods delivered to him. Not to make unauthorised use of goods entrusted to him. Not to mix goods bailed with his own goods. To return the goods. To return accretions to the goods. Not to set up any adverse title.
2.21.6 Duties of Bailor

His duties are as follows: a) b) c) d) e) To disclose faults / defects in goods bailed. To repay necessary expenses in case of gratuitous bailment. To repay any extra ordinary expenses in case of non-gratuitous bailment. To indemnify bailee. To receive back the goods.
2.21.7 Rights of Bailee Check Your Progress

21. Who is a surety? 22. Does the contact of guarantee hold good in case of death of surety and loss of security? 23. What is pledge? His rights are as follows: a) b) c) d) Enforcement of bailors duties. To deliver goods to one of several joint bailors. To deliver goods, in good faith, to bailor without title. Lien - is of two types - general or particular. Bailee has particular lien unless the contract provides otherwise. Particular lien means the right to retain that particular property in respect of which the charge is due. General lien means the right to retain all the goods of the other party until all the claims of the holder against the party are satisfied.
2.21.8 Rights of Bailor

His rights are as follows:
a) b) c)
Enforcement of bailees duties. To terminate bailment if the bailee uses the goods wrongfully. To demand return of goods at any time in case of gratuitous bailment. Notes
2.21.9 Pledge or Pawn

The bailment of goods as security for payment of a debt or performance of a promise is called pledge. The bailor in this case is called the pawner. The bailee is called the pawnee.84 Pledge is therefor a kind of bailment.
2.21.10 Distinction between Pledge and Bailement Distinction Points of Distinction

1. Purpose
Pledge
It is a bailement for a specific purpose, i.e. to provide a security for a loan. The pledge has a right of sale, on default after giving notice to the pledgor. The pledge has no right of using the goods pledged.
Bailment
Goods may be bailed for any purpose , i.e. for repairs, safe custody etc. No such right of sale to the bailee.
2. Right of sale
3. Right of using the goods
No such restriction exists for the bailee if the nature of transaction so requires.
2.22 Agency
2.22.1 General
It is not always possible for a person to do everything himself, hence it becomes necessary to delegate some of the acts to be performed by another person. Such other person is called an agent.
2.22.2 Definitions of Agent and Principal

An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is represented, is called the principal.85 The contract which creates the relationship of principal and agent is called an agency. For example - X appoints Y to buy ten bags of wheat on his behalf, X is the principal, Y is the agent and the contract between the two is agency.
2.22.3 General Rules of Agency

There are two important general rules regarding agency, viz: a) What one person can himself lawfully do, can as well get it done by any other person. This rule is of course, subject to some exceptions, e.g. in case of acts required to be performed personally like marriage. What a person does by another, he does by himself. In other words the acts of the agent are, for all legal purposes, the acts of the principal.
b)
2.22.4 Who May Employ an Agent?

Notes Any person who is competent to contract may employ an agent. A minor or a person of unsound mind cannot employ an agent.86
2.22.5 Who May be an Agent?

The Act lays down that as between the principal and third persons any person may become an agent. Thus even a minor or a person of unsound mind can be appointed as agent, but in such a case the principal shall be liable.87
2.22.6 No Consideration is Necessary

No consideration is necessary to create an agency.88
2.22.7 Creation of Agency

An agency may be created in any one of the following ways: a) Agency by Express Agreement: An agency by express agreement is created when by spoken or written words an express authority is given to an agent. For example - X who owns a shop, appoints Y to manage his shop by executing a power of attorney in Ys favour. Agency by Implied Agreement: Implied agency arises when agency is inferred from the circumstances of the case, or from the conduct of the parties on a particular occasion, or from the relationship between parties.89 Implied agency includes the following: i. Agency by Estopped: Agency by estopped arises where a person by his words or conduct induces third persons to believe that a certain person is his agent. The person who induces as such is estopped or prevented from denying the truth of agency.90 For example - X tells Y in the presence and hearing of Z that he (X) is Zs agent. Z does not contradict this statement. Later on Y enters into a contract with X believing that X is Zs agent. In such a case, Z is bound by this contract and in a suit between Z and Y, Z cannot be permitted to say that X was not his agent, even though X was not actually his agent.
b)
Check Your Progress

24. What is a lien? 25. Define an agent. 26. Does agency need consideration? 27. In what ways, an agency can be terminated? c)
ii. Agency by Holding Out: This is a type of agency by estopped. Such agency arises when a person by his past affirmative and positive conduct leads third person to believe that person doing some act on his behalf is doing with authority. For example - X allows Y, his servant to purchase goods for him on credit from Z, and later on pays for them, one day X pays cash to Y to purchase goods. Y misappropriates the money and purchases goods on credit from Z. Z can recover the price of goods from X because X had held out before Z that Y is his agent. iii. Agency by Necessity: Agency by necessity arises under the following two conditions: a. b. There is an actual and definite necessity for acting on behalf of the principal, and It is impossible to obtain the consent of the principal. For example - X consigned some vegetables from Delhi to Mumbai by a truck. The truck met with an accident. The vegetables being perishable were sold by the transporter. This sale is binding on X. In this case the transporter became an agent by necessity.
Agency by Ratification: Where acts are done by one person on behalf of another, but with out his knowledge or authority, the latter may elect to ratify (adopt and accept) or to disown
such acts. If he ratifies them, the same effect will follow as if they had been performed by his authority.(Section 196) Ratification may be express or implied in the conduct of person on whose behalf the acts are done. For example - A, without authority, buys goods for B. After wards B sells them to C on his own account. Bs conduct implies a ratification of the purchases made for him by A. d) Agency by Operation of Law: Agency by operation of law is said to arise where the law treats one person as an agent of another. For example - on formation of a partnership, every partner becomes the agent of other partners. Such agency is said to arise by operation of law.
Notes
2.22.8 Meaning of Sub Agent

A sub-agent is a person employed by, and acting under the control of, the original agent in the business of the agency.91 Thus a person employed by an agent is called sub-agent.
2.22.9 Meaning of Substituted Agent

An agent names or appoints a substituted agent at the request of the principal and thereafter drops out altogether from the scene. Such person is an agent of the principal.92
2.22.10 Duties of Agent

An agent has the following duties towards the principal: a) b) c) d) e) f) g) h) To follow principals directions or customs. To carry out the work with reasonable skill and diligence. To render accounts. To communicate, in case of difficulty. Not to deal on his own account in the business. Not to make any profit out of his agency except his remuneration. On termination of agency by principals death or insanity to protect and preserve the interests entrusted to him. Not to delegate authority.
2.22.11 Right of Agent

An agent has the following rights against the principal: a) b) c) d) e) f) g) To receive remuneration. Retainer - out of any sums received on account of the principal. Lien - to retain goods. Agent has a particular lien unless the contract provides otherwise. To be indemnified against consequences of lawful acts. To be indemnified against consequences of acts done in good faith. To compensation for injuries sustained by him due to principals neglect or want of skill. Stoppage of goods in transit.
2.22.12 Duties of Principal

The duties of principal are indirectly the rights of an agent.
2.22.13 Rights of Principal

Notes The rights of principal are indirectly the duties of an agent.
2.22.14 Termination of Agency Termination of Agency

By Operation of Law Completion of Business of agency Expiry of time Death of Principal or Agent Renunciation by the Agent Insolvency of the Principal Destruction of the subject matter Principal or Agent becoming alien enemy Dissolution of Company
By Act of Parties Agreement Revocation by the Principal
Summary
Contract
A contract is an agreement made between two parties and enforceable by law. An agreement consists of a proposal by one party and its acceptance by the other party. Two or more parties who enter into an agreement must agree upon the subject matter in the same sense and at the same time, i.e. consensus ad idem. An agreement, in order to be a contract, must give rise to legal consequences and remedies in the Law Court in case of its breach. Essentials of a Contract: There must be 1. an agreement i.e. proposal and acceptance 2. an intention to create legal relations 3. Lawful consideration 4. parties competent to contract 5. free consent 6. lawful object 7. certainty 8. possibility of performance 9. not expressly declared void, and 10. in writing or registered / stamped where there is such a requirement by law. Classification of Contract: Contract can be classified as below: Valid - enforceable by law. Void - Not enforceable by law. Voidable - Enforceable at the option of one party only. Illegal - Contrary to law Unenforceable - Due to lack of proof or some technical defect cannot be enforced in a Court of law. Executed - Performed by both the parties or by one party.
Executory - Performance by both the parties is yet to take place. Partly Executed, partly executory - One party has performed but the other party has yet to perform. Contingent - Contract is performed only on happening of some future uncertain event. This is also called conditional contract. Quasi-Contract - an obligation created by law. Meaning of Proposal: When one person signifies to another his willingness to do or to abstain from dong anything, with a view to obtaining the assent of that other to such act or abstinence he is said to make a proposal. Legal Rules Regarding a Valid Proposal: 1. A proposal must be made by express words spoken or written or implied when it is inferred from the conduct of the proposer or from the circumstances of the case 2. The terms must be certain and not loose or vague 3. Must give rise to legal consequences and be capable of creating legal relations 4. It must be distinguished from invitation to proposal 5. May be specific or general 6. Must be communicated to the proposee 7. Should not contain a term, the non-compliance of which would amount to acceptance 8. Can be made subject to any terms and conditions, and 9. Two identical cross-offers donot make a contract. Revocation and Lapse of Proposal: A proposal lapses under circumstances like after stipulated or reasonable time, by not being accepted in the mode prescribed, by rejection, by death or insanity of either party, by rejection, before acceptance, and by destruction of the subject matter. It is revoked by non fulfillment of a condition precedent to acceptance. Acceptance: A contract emerges from the acceptance of a proposal. The proposal is said to be accepted when the person to whom the proposal is made signifies his assent thereto. Essentials of a Valid Acceptance: 1. Must be absolute and Unqualified 2. Expressed in some usual and reasonable manner 3. Mental acceptance is not sufficient 4. Acceptance must be communicated to the proposer 5. Acceptance must be given within reasonable time and before the proposal lapses and / or is revoked 6. It is acceptance of the terms and conditions of the proposal 7. It can be implied 8. It must be made by the person to whom the proposal is made. General offer way be accepted by anyone 9. If the act is done in ignorance of the proposal, it is no acceptance. Communication of Proposal, Acceptance and Revocation: The Communication of a proposal is complete when it come to the knowledge of the person to whom it is made. The communication of an acceptance is complete - as against the proposer when it is put in a course of transmission to him, so as to be out of the power of the acceptor; and as against the acceptor when it comes to the knowledge of the proposer. The communication of a revocation is complete as against the person who makes it, when ti is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person revoking; and as against the person to whom it is made, when it comes to his knowledge. Consideration - Meaning: Consideration means something in return. When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstain from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. Essentials of a Valid Consideration: 1. Consideration must move at the desire of the promisor 2. It may move from the promisee or any other person 3. Consideration may be past, present or future 4. It must be something of value 5. It must be legal 6. Consideration is doing something or abstaining from doing something. No Consideration no Contract: An agreement made without consideration is void. No consideration is required in case of 1. An agreement made on account of natural love and affection 2. Agreement to compensate for past voluntary service 3. Agreement to pay a time barred debt 4. Completed gift 5. Contract of agency 6. Remission by the promisee, of performance of the promise, and 7. Contribution to charity. Capacity of Parties: Every person is competent to contract who is of the age of majority according
Notes
Notes
to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. Minor: A minor is one who has not completed the age of 18 years. The position of agreements by a minor is 1. Absolutely void and inoperative as against him 2. That there is no restitution 3. Agreement beneficial to a minor is valid 4. No ratification on attaining the age of majority 5. The rule of estoppel does not apply 6. Minors property is liable for necessaries 1. Minor can be an agent 8. Minor can be admitted in partnership only for profit 9. Minor can be admitted in partnership ony for profit 9. Minor cannot be declared insolvent 10. Specific performance can not be ordered for minors agreement 11. Surety for a minor is liable 12. A minor cannot be a shareholder of the company, unless the shares are fully paidup and the articles of association donot prohibit. Persons of Unsound Mind: Agreemetns entered in by person of unsound mind are void. A Lunatic or a Drunken or Intoxicated person can enter itno a contract when he is of sound mind. Agreements of an idiot are void. Persons of unsound mind are liable (only their property) for necessaries supplied to them or their legal dependants. Persons disqualified by law: Such persons are - 1. Alien enemy 2. Foreign sovereigns and ambassadors 3. Convict 4. Company beyond the objects contained in its memorandum of association 5 Insolvents. Free Consent: two or more persons are said to consent when they agree upon the same thing in the same sense. Contracts in order to be valid must be made by the free consent. Consent is said to free when it is not casued by 1. Coercion, or 2. Undue influence, or 3. Fraud, or 4. Misrepresentation, or 5. Mistake. When Consent is not free, the contract is voidable at the option of the party whose consent was so caused. Coercion: Coercion is the committing or threatening to commit any act forbidden by the Indian Penal Code, 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 agreement. Undue Influence: 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. Fraud: Fraud exists 1. When a false representation has been made 2. Knowingly, or without belief in its truth, or 3. Recklessly, not caring whether it is true or false, and 4. The maker intended the other party to act upon it 5. With an intention to deceive. It also exists when there is a concealment of a material fact. Misrepresentation: It is a misstatement of a material fact made innocently with an honest belief as to its truth or non-disclosure of a material fact, without any intent to deceive the other party. Mistake: It is an erroneous belief concerning something. Mistake is of two types 1. Mistake of Law 2. Mistake of Fact. Mistake of Law: is again of two types 1. Mistake of Indian law. It does not vitiate a contract because ignorance of law is no excuse 2. Mistake of foreign law. It is treated as a mistake of fact. Mistake of Fact: It may be a 1. Bilateral mistake. Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement; the agreement is void. 2. Unilateral mistake - where only one of the parties is under a mistake as to a matter of fact, the contract is not voidable. Legality of Object and Consideration: The object and the consideration of an agreement must be lawful. Otherwise the agreement is void. It is unlawful, if 1. It is forbidden by law 2. It is of such a nature that if permitted it would defeat the provisions of any law 3. It is fraudulent 4. It involves or implies injury to a person or property of another 5. The court regards it as immoral or opposed to public policy. Agreements Expressly Declared Void: 1. Made by incompetent persons 2. Made under a bilateral mistake of fact 3. Made without consideration 4. The meaning of which is uncertain 5. The consideration or object is unlawful 6. To do impossible acts 7. In restraint of marriage 8. In restraints
of trade 9. In restraint of legal proceedings 10. Wagering agreements. Contingent Contract: A contingent contract is a contract to do or not to do something if some event collateral to such contract does or does not happen. The essentials of a contingent contract 1. Its performance depends upon the happening or non-happening in future of some event 2. The event must be collateral, and 3. Uncertain. Rules Regarding Contingent Contract: 1. Enforcement of contracts contingent on happening of a future uncertain event can only be done only when the event happens 2. Enforcement of contracts on the non-happening of a future uncertain event can only be done only when the happening of the event becomes impossible, and not before 3. Contracts contingent on future conduct of a living person, is considered impossible, when such person does anything which renders it impossible 4. Contracts contingent on a specified event happening within a fixed time, would become void if at the expiration of the time fixed such event does not happen or becomes impossible 5. Agreements contingent on impossible events are void. Quasi-Contract: It is an obligation imposed by law upon a person for the benefit of another even in the absence of a contract. Kinds of Quasi-Contract: 1. Claim for necessaries supplied to a person incapable of contracting or on his account 2. Reimbursement of person paying money due by another, in payment of which he is interested 3. Re-imbursement of person enjoying benefit of non-gratuitous act 4. Responsibility of finder of goods 5. Liability of person to whom money is paid or thing delivered by mistake or under Co-ercion. Performance of Contract: Performance of Contract means fulfulling of the terms of the contract by the respective parties to the Contract. Only the promisee can demand performance of the promise. Contract can be performed 1. In a personal contract by the promisor personally 2. In a non-personal contract by the promisor, by a third person on behalf of the promisor or by the legal representative if the promisor is dead, and 3. In case of joint promisors by them jointly. Discharge of Contract: It means discontinuation of the contractual relations between the parties. Various modes of discharges of a contract are by 1. Performance - actual or implied 2. Mutual Consent or agreement. This can be done by novation, rescission, alteration, remission or waiver 3. Subsequent or supervening impossibility or illegality 4. Lapse of time 5. Operation of law 6. Breach of contract - can be anticipatory or actual. Remedies for Breach of Contract: A breach of contract occurs if any party refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. The Various Remedies of Breach of Contract: 1. Rescission of contract 2. Suit for damages - which can be ordinary or general, special, exemplary, nominal, and liquidated 3. Suit for specific performance 4. Suit for injunction 5. Suit for quantum merrit. Notes
Indemnity and Guarantee

Indemnity: A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of Indemnity. The person who promises to make good the loss is called Indemnifier. The person whose loss is to be made good is called the indemnified or indemnity holder. Guarantee: A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. There are three parties to a contract of guarantee, principal debtor, creditor and the surety. These are two kinds of guarantee namely specific or continuing. A surety is descharged from liability by 1. Giving a notice of revocation 2. Death of surety 3. Variance in terms of contract 4. Release or discharge of principal debtor 5. Arrangement by creditor with principal debtor without suretys consent 6. Creditors act or omission imparing suretys eventral remedy 7. Loss of security, and 8. Invalidation of contract of guarantee.
Bailment and Pledge

Notes Bailment: A 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 desposed by according to the direction of the person delivering them. The person delivering the goods is called the bailor. The person to whom the goods are delivered is called the bailee. There are three kinds of bailment, gratuitous, non-gratuitous or Pawn (Pledge). The duties of bailee are 1. To take reasonable case of goods delivered to him 2. Not to make unauthorised use of goods entrustd to him 3. Not to mix good bailed with his own goods 4. To return the goods 5. To return accretions to the goods, and 6. Not to set up any adverse title. The duties of bailor are 1. To disclose faults / defects in goods bailed 2. To repay necessary expenses in case of gratuitous bailement 3. To repay any extra ordinary expenses in case of non-gratuitous bailment 4. To indemnify bailee, and to receive back the goods. The Right of bailee are 1. Enforcement of bailors duties 2. To deliver goods to one of several joint bailors 3. To deliver goods, in good faith, to bailor without title, and 4. Lien which may be general or particular. The Right of bailor are 1. Enforcement of bailees duties 2. To terminate bailment if the bailee uses the goods wrongfully, and 3. To demand return of goods at any time in case of gratuitous bailment.
Pledge or Pawn
The bailment of goods as security for payment of a debt or performance of a promise is called pledge. Pledge is a kind of bailment.
Agency
An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is represented, is called the principal. The contract which creates the relationship of principal and agent is called an agency. Principal must be a person competent to contract. A minor or a person of unsound mind can be appointed as agent, but in such a case the principal shall be liable. No consideration is necessary to create an agency. Creation of Agency: Can be done by 1. Express agreement, 2. Implied agreement -which may be by estoppel, or by holding out or by necessity 3. Ratification 4. Operation of law. Sub-agent is a person employed by an agent. Substituted agent is one who is appointed at request of the principal and then the agent drops out altogether from the scene. The Duties of agent are 1. To follow principals directions or customs 2. To carry out the work with reasonable skill and diligence 3. To render accounts 4. To communicate, in case of difficulty 5. Not to deal on his own account in the business 6. Not to make any profit out of his agency except his remmuneration 1. On termination of agency by principals death or insanity to protect and preserve the interests entrusted to him; and 8. Not to delegate authority. The rights of agent are 1. To receive remuneration 2. Retainer 3. Lein 4. To be indemnified against consequences of lawful acts 5. To be indemnified against consequences of acts done in good faith 6. To compensation for injuries sustained by him due to principals neglect or want of skill, and 1. Stoppage of goods in transit. The Duties of principal are indirectly the rights of an agent and the Rights of principal are indirectly the duties of an agent. An agency can be terminated by 1. Act of parties - which include agreement, revocation by the principal or by the agent, and 2. Operation of law which would cover completion of business of agency, expiry of time, death or insanity of principal or agent, insolvency of the principal, destruction of the subject matter, principal or agent becoming an alien enemy, and dissolution of company.
Review Questions
Notes
True or False
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Law of contract is the whole law of agreements and the whole law of obligations. A contract is usually treated as voidable when the consent of a party has not been free. A general offer can be accepted by anyone. A contract with a minor is voidable at the option of the minor. An act of co-ercion must necessarily proceed from a party to the contract. A stranger to consideration can sue. Agreement in restraint of legal proceedings is altogether void. The event in a contingent contract must be essential to the contract. In case of several joint promisors, the promisee can demand the performance from anyone or more of joint promisors. Actual breach of a contract may take place during the performance of the contract. A contract of indemnity is not a contingent contract. A continuing guarantee can be revoked as to the past transaction by giving notice to the creditor. Placing of ornaments in a bank locker is a contract of bailment. Consideration for agency is necessary. The principal may revoke agency for future acts only.
Practical Problems
Attempt the following problems giving reasons: 1. Madhur of Mussourie invites Mitr of Mumbai to stay with him during summer vacation. Mitr accepts the invitation and informs Madhur accordingly. When Mitr reaches Madhurs home, he finds it locked and he has to stay in a five star hotel. Can Mitr claim damages from Madhur? Amar sold his business to Bharat but this fact was not known to an old customer Chander. Chander placed an order for certain goods to Amar by name. Bharat supplied the goods to Chander. Is there a valid contract? Dhaniram, executed a mortgage in favour of Chotu, a minor who has advanced the money. Is this mortgage valid? Pratinidhi, an agent, refused to hand over the account books of the principal to the new agent appointed in his place unless the principal released him from all liabilities. The principal had to give a release deed as demanded. Is this release deed binding upon the principal? Kuber gifted Rs. 50000 to Sundari his neighbours wife by executing a registered gift deed without any consideration. There is no near relation between Kuber and Sundari. Is this gift valid? Amir granted a loan to Garib a guardian of kumari who is of 14 years of age, to enable Garib to celebrate Kumaris marriage. Can Amir recover his loan from Garib? Adhar agreed to pay Bhushan Rs. 50000 if Bhushan marries Chandra. Chandra was already married to Deepak at the time of agreement. Is the agreement valid? Shaitan asks Kathore to beat Komal and promises to indemnify Kathore against the
2.
3. 4.
5.
6. 7. 8.
Notes
consequences. Kathore beats Komal and is fined Rs. 1000. Can Kathore claim Rs. 1000 from Shaitan? 9. Swaranlata delivered her gold jewellery to Joharimal her husband who is a goldsmith for the purpose of making new one out of it. Every evening she used to receive the unfinished jewellery and to put it into a box kept at Joharimals shop. She kept the key of that box with herself. Is there a contract of bailment? Mukhiya, the principal, instructed Sevak his agent to put goods in Bhandaris warehouse. Sevak puts half of the goods in Bhandaris warehouse and the balance in another equally safe warehouse. All the goods were destroyed by fire without any negligence on part of Sevak. Is Sevak liable to Mukhiya?
10.
Test Questions
1. 2. 3. 4. 5. What is the object and nature of the law of contract? Illustrate the distinction between void, voidable and illegal agreements. Explain what is meant by i) lapse of an offer, and ii) a counter-offer. An agreement enforceable by law is a Contract. Discuss the definition and explain the essentials of a valid contract. Comment on the following: a) All contracts are agreements, but all agreements are not contracts. b) The law of contracts is not the whole law of agreements, nor is it the whole law of obligations. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. Give the various classification of contracts. Define a proposal and state the essential of valid proposal. When is a valid proposal made? Distinguish it from an invitation to an offer. Explain circumstances under which an offer lapses and becomes invalid. What do you understand by the term acceptance? What are the essentials of a valid acceptance? Discuss briefly the law relating to communication of proposal, acceptance and revocation. Define and explain consideration in a contract. State exceptions to the rule that an agreement without consideration is void. What do you mean by a consideration to a contract? Should there be adequate consideration to make a valid contract? No consideration, No Contract. State exceptions, if any, to the rule. Insufficiency of consideration is immaterial: but an agreement without consideration is void. Comment. A stranger to a contract cannot sue. Are there any exceptions to this rule? What do you understand by capacity to contract? What is the effect of agreements made by persons of unsound mind? Discuss in detail the provisions of law relating to minors agreements. State briefly the law relating to competence of parties to a contract. What are necessaries? When is a minor liable on a contract for necessaries? Examine the legal position of i) a minor promisor, ii) a minor promisse, and iii) a minor agent.
22. 23. 24. 25. 26. 27. 28. 29.
Discuss consent. When consent is said to be free consent? Define undue influence and distinguish it from coercion. Define misrepresentation and distinguish it from fraud. A contract caused by mistake is void. Discuss. Or A mere silence as to the facts is not fraud. Discuss. Two or more persons are said to consent when they agree upon the same thing in the same sense. Explain this statement and give illustrations. An agreement requires a meeting of the minds. Comment. What is misrepresentation? Distinguish it from fraud. Enumerate the agreements expressly declared to be void under the Indian Contract Act. Is the party who has received some benefit under a void contract bound to restore it to the other party? Distinguish between wagering and Insurance agreements. What are wagering agreements and essentials of wagering agreement? Explain contingent contracts. When can a party enforce such contracts? Distinguish between Contingent and Wagering Contracts. Under what circumstances is the object or consideration of a contract deemed unlawful? Illustrate with example. An agreement in restraint of trade is void. Examine this statement mentioning exceptions, if any. Insurance contracts are basically wagering agreements. Comment. Explain the meaning or a contingent contract. What are the rules relating to contingent contracts? A Quasi-contract is not a contract at all. It is an obligation which the law creates. Amplify and state the quasi contracts recognised under the Indian Contract Act. What are the several ways in which a contract is discharged? What are the remedies available to an aggrieved party in case of breach of contract? What are the rules laid down by the Indian Contract Act with regards to the assessment of damages on a breach of contract? When a party to a contract refuses altogether to perform or is disabled from performing his part of it, the other party has a right to rescind it. Discuss. What do you understand by performance of a contract? Impossibility of performance is, as a rule, not an excuse for non-performance of a contract. Discuss. Explain breach of contract as a mode of discharge of contract. If a contract is broken, the law will endeavour, so far as money can do it, to place the injured party in the same position as if the contract had been performed. Define: Special Damages: Exemplary Damage: Nominal Damages: Liquidated Damages: Injunction. What are quasi-contracts? Enumerate the quasi-contracts dealt with under the Indian Contract Act, 1872. Quasi-contracts rest on the ground of equity that a person shall not be allowed to enrich himself unjustly at the expense of another. Explain. Notes
30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49
50. Notes 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63.
What do you understand by contract of indemnity? Define contract of guarantee and distinguish it from contract of Indemnity? What is the extent of the liability of the surety? State the circumstances in which a surety is discharged from liability. What is bailment? Is the bailor under any duty to disclose to the bailee any defects or faults in the goods bailed? What are the rights of bailor and bailee? Explain Pledge and Bailment and their distinction. The position of a finder of goods is exacly that of a bailee in the case of a deposit. Comment and discuss. Define agent and principal. Is consideration needed in a contract of agency? What is a contract of agency? What are the essentials of relationship of agency? Write notes on i) Agency by estoppel, ii) Agency by holding out, and iii) Agency by necessity. How is the agency constituted? Explain Principals rights and duties for the agent and what are the Agents rights and duties for the Principal? Write short notes on: i. Termination ii. Ratification of agency
Practical Problems
1. Mitr cannot claim any damages from Madhur because the agreement between Madhur and Mitr is not enforceable by law. It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship. These was no contract at all between Bharat and Chander because chanders offer was a specific offer to Amar and Amar alone could accept it. (Leading Case: Boulton v Jones). The mortgage is valid and hence the money advanced to Dhaniram can be recovered because a minor can be a promissee (Leading Case: Raghave Charier v. Srinivasa). The release deed is not binding on the principal and he can avoid the contract on the ground of coercion, Principals consent is not free as it has been obtained by unlawful detaining of the property (i.e. account books) (Leading Case: Muthia v. Karuppan). The gift is valid. A completed gift needs no consideration and need not be a result of natural love and affection or near relation. Amir cannot recover his loan from Garib. The agreement is void because an object (i.e. minors marriage in contravention of the child Marriage Restraint Act) is unlawful. (Leading Case: Srinivas V.K. Raja Ram Mohan). Such agreement is void and hence not enforceable by law as marriage of Bhushan to Chandra is impossible at present. Kathore cannot claim Rs. 1000/- from Shaitan becuase the object of the agreement was unlawful. There was no contract of bailment because Joharilal (bailee) had re-delivered the jewellery bailed to, Swaranlata (bailor) (Leading Case: Kalia Derumal Pillai v. Visalakshmi). Sevak is not liable for the loss of goods put in Bhandaris warehouse because he acted according to the directions of Mukhiya. Sevak is liable for the loss of goods put in another warehouse because he has not acted according to the directions of Mukhiya.
2. 3. 4.
5. 6.
7. 8. 9. 10.
Answers to True & False

1. False 2. True 3. True 4. False 5. False 6. True 7. False 8. False 9. True 10. True 11. False 12. False 13. False 14. False 15. True Notes

Following are the answers to Check Your Progress, indicating respective paragraphs for reference. I) 2.1 2) 2.2 3) 2.3 4) 2.6 5) 2.6.9 6) 2.6.7 7) 2.6.5 8) 2.8.2 9) 2.8.3.f 10) 2.8.4 11) 2.10.3 12) 2.10.2 13) 2.11.3 14) 2.11.6 15) 2.14.3 16) 2.16.3 17) 2.18.2 18) 2.19.2 19) 2.19.2e 20) 2.19.2 b 21) 2.20.2B iii 22) 2.20.2D b.g 23) 2.21.9 24) 2.21.7 d 25) 2.22.2 26) 2.22.6 27) 2.22.14
References
1 4
Section 2(h) 2Section 2(e) 3Section2(b)
32
Balfour v. Balfour (1919) 2 K.B. 571. 5Rose and Frank Co. v. Crompton Bros. (1925) A.C. 445 6Section 11 Section 13 Section 14 Section 23 Section 10, paragraph 2 As laid down by Section 10 Section 2(j) 14Section 2(i) 15Section 2(a) Taylor v. Portington. (1885) All. E.R. 128 Sections 24 to 30
Section 3 of the Indian Majority Act, 187533 (1903) 30 Cal. 539

34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
Section 34 of the Specific Relief Act, 1963 Section 184 Section 12 Section 68 Section 13 Section 14 Section 15 Section 16(1) Secion 16(2) Section 17 Section 18 Section 20 Section 22 Section 65 Section 72 Section 23 Section2(g) Section 26 Section 27 Section 28 Section 30 Section 31 Section 32 Section 33 Section 34 Section 33 Section 35
7 8 9
10 11
12 13 16 17
Mrs Carlill v. Carbolic Smoke Ball Co. (1893) I Q B. 256 Lalman Shukla v. Gauri Dutt (1913) All L.J. 489 Section 6(2) Section 7 Section 6(1) Section 6(3) Section 2(b) Section 2(c) Section 8 Hindustan Co-operative Society v. Shyam Section2(d) Chinnaya v. Ramayya (1882) 4 Mad. 137 Section 185 Section 63 Section 11
18
19 20 21 22 23 24 25 26
Sunder AIR 1952 Cal. 691

27 28 29 30 31
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92
Section 36 Section 68 Section 69 Section 70 Section 71 - See Section 151 and 152 Section 72 Section 37 T.G. Venkataraman v. State of Madras AIR 1970 SC 508 Section 62 Section 39 Section 75 Section 124 Section 126 Section 130 Section 131 Section 133 Section 134 Section 135 Section 139 Section 141 Sections 142 and 143 Section 144 Section 148 Section 172 Section 182 Section 183 Section 184 Section 185 Section 187 Section 237 Section 191 Section 194
Notes
The Law of Sale of Goods Section
Notes
3
The Law is experience developed by reason and applied continually to further experience. Roscoe Pound STRUCTURE
3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Introduction to The Sale of Goods Act Meaning of contract of sale? Essential elements of sale. Sale and agreement to sell. Sale and hire purchase. Agreement to sell and hire purchase agreement. How a contract of sale is made? Condition and warranty. The doctrine of caveat emptor.
3.10 Transfer of property. 3.11 Performance of a contract of sale. 3.12 Delivery to carrier and wharfinger 3.13 Carriage by sea. 3.14 Unpaid seller. 3.15 Auction sale.
3.1 Introduction
Notes The sale of goods is the most common of all commercial transactions. A knowledge of the main principles of the sale of goods is important to all and particularly to the managers. The law relating to sale of goods is contained in the Sale of Goods Act, 1930 (hereinafter referred to as the Act), which came into force on 1st July, 1930. This Act extends to the whole of India except the state of Jammu and Kashmir. The general provisions of the Indian Contract Act, 1872, continue to be applicable to the contract of sale of goods in so far as they are not inconsistent with the express provisions of the Act.1
3.2
Meaning of Contract of Sale
According to the Act, A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.2 A contract of sale of goods may be absolute or conditional according to the desire of buyer and seller.
3.3
Essential Elements of Contract of Sale
This definition reveals the following essential elements of a contract of sale of goods.
3.3.1 Two Parties

There must be two distinct parties to a contract of sale of goods, viz. a buyer and a seller. A person can not buy his own goods.
3.3.2 Transfer of Property

Property means the general property in goods, and not merely a special property.3 General property in goods means ownership of goods. Special property in goods means possession of goods. If A owns certain goods, he has general property in goods. If he pledges with B, B has special property in the goods. Thus, there must be either a transfer of ownership of goods or an agreement to transfer the ownership of goods.
3.3.3 Goods
The subject matter of the contract of sale must be goods. According to the Act, goods means every kind of moveable 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 severed before sale or under the contract of sale.4 Thus every kind of movable property except actionable claims and money, is regarded as goods. Goodwill, trademarks, copyrights, patent right, water, gas, electricity,5 decree of a court of law are all regarded as goods. Sale of immovable property is governed by the Transfer of Property Act, 1882. a) b) The actionable claims mean claims which can be enforced through the courts of law, e.g. a debt due from one person to another is an actionable claim. The money here means the legal tender (i.e. currency of the country) and not old coins.
3.3.4 Price
There must be a price. Price means the money consideration for the sale of goods.6 When the consideration is only goods, it amounts to barter and not sale. However, the consideration may be partly in money and partly in goods.
3.3.5 Includes Both a Sale and An Agreement to Sell

The term contract of sale is a generic term and includes both a sale and an agreement to sell (This is clear from the definition of the term as is given in paragraph 3.2) Notes
3.3.6 No Formalities to be Observed

The Act does not prescribe any particular form to constitute a valid contract of sale. Neither payment nor delivery is necessary at the time of making the contract of sale.
3.4
Sale and Agreement to Sell
3.4.1 Sale
Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale.7 It refers to an absolute sale, i.e. outright sale. There is immediate transfer of ownership and mostly of the subject matter. Delivery may be given in future. It is an executed contract.
3.4.2 An Agreement to Sell

Where the transfer of property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.8 It is an executory contract and refers to a conditional sale. A contract of sale of goods can be made by mere offer and acceptance by the seller or the buyer. Neither payment nor delivery is necessary at the time of making the contract of sale. For example, where articles are exhibited for sale and the customer picks up an item and the sales assistant packs it up, there has resulted a contract of sale of goods by the conduct of the parties.9
3.4.3 Distinction Between Sale and Agreement to Sell S. No.

1.
Points of Distinction
Nature of Contract
Sale
Sale is an executed contract, where one of the parties has already performed his part of the contract. Sale creates a Jus-in-rem, i.e. right on the goods against the whole world.
Agreement to Sell
Agreement to sell is an executory contract, where both the parties are yet to perform their mutual promises within agreed time. It creates a Jus-in-personam, i.e. personal right only against the person in default for fulfilling his part of agreement. In this, risk and property do not pass to the buyer immediately.
2.
Creation of right
3.
Passing of property
The property in the goods passes to the buyer with the risk.
S. No.
Notes 4.
Remedies on breach of contract
Sale
The seller is entitled to sue for the price of the goods and also has a right of lien, stoppage in transit, and resale. The loss will be borne by the buyer even if the possession of goods is with the seller. The seller is entitled to sue for the price of the goods and also has a right of lien, stoppage in transit, and resale. The buyer is entitled to sue for the price of the goods and also has a right of lien, stoppage in transit, and reasale.
Agreement to Sell
The seller has the right only to sue for damages for nonperformance of the contract.
5.
Risk of loss
The loss will be borne by the seller since the ownership in the goods has not passed to the buyer. The seller has the right only to sue for damages for nonperformance of the contract.
6.
Insolvency of buyer before he pays for the goods
7.
Insolvency of seller if the buyer has already paid the price
The buyer has to prove the amount he has paid and can only claim a rate-able dividend. He cannot compel receiver to sell and deliver the goods. The seller can dispose of the goods as he likes and the original buyer can sue him for breach of contract only.
8.
Right to resale
The property is with the buyer and as such the seller (in possession of goods after sale) cannot resell the goods.
3.5
Sale and Hire Purchase
Contracts of sale resemble contracts of hire purchase as the real object of contract of hire purchase is the sale of goods ultimately. In hire purchase, property does not pass when agreement is made out but only passes when the option is finally exercised after complying with all the terms of agreement.
3.5.1 Distinction Between Sale and Hire Purchase S. No.

1.
Transfer of property in goods
Sale
In a sale, property in the goods is transferred to the buyer immediately at the time of contract.
Hire Purchase
In hire purchase, property in the goods passes to the hirer upon payment of the instalment.
S. No.
2.
Position of the buyer
Sale
The position of the buyer is that of the owner of the goods. The buyer cannot terminate the contract and is bound to pay the price of the goods. The seller takes the risk of any loss resulting from the insolvency of the buyer. Trade tax is levied at the time of the contract. Contract of sale includes both sale and agreement to sell.
Hire Purchase
Notes The position of the hirer is that of a bailee till he pays the last instalment. The hirer, may terminate the contract by returning the goods to its owner without paying remaining instalments. The owner takes no such risk. If the hirer fails to pay an instalment, the owner takes back the goods. Trade Tax is not leviable until it turns into a sale. Hire purchase agreement is bailment plus agreement to sell.
3.
Power to terminate the contract
4.
Risk of loss from the insolvency of the buyer Tax payable
5.
6.
Nature of contract
3.6
S. No.
1.
Distinction between Agreement to Sell and Hire Purchase Agreement

Nature of agreement Transfer of goods
Agreement to Sell
It is step to contract of sale
Hire Purchase Agreement

It becomes a sale only after the payment is made in full. Conveyance is immediately transferred while ownership remains with the seller. The buyer cannot exercise any ownership rights hence cannot sell or pledge these goods. The hirer cannot so claim the benefits of implied conditions unless it becomes a sale.
2.
Conveyance of goods may take subsequently
3.
Rights of ownership
The buyer can sell or pledge the goods.
Check Your Progress

1. Does possession of
goods directly mean the ownership? 2. In the law of sale of goods, what is the consideration? 3. What is a Hirepurchase agreement? How it differs from sale?
4.
Implied conditions and warranties
The buyer can take advantage of implied conditions and warranties under the Act. It is regulated by sale of Goods Act, 1930.
5.
Law applicable
It is regulated by Hire Purchase Act, 1972.
3.7
Notes a) b) c) d) e) f)
Contract of Sale - How is it made?10

A contract of sale may be made in writing or by word of mouth or partly in writing and partly by word of mouth or may be implied from the conduct or dealings of the parties. There must be an offer to buy or sell goods for a price and acceptance of such offer by another. The contract may provide for immediate delivery of the goods or delivery by instalments or delivery at a future date. The contract may provide for immediate payment of the price (money) or payment by instalment or payment may be postponed. The contract of sale of goods may be for existing or future goods. Contract of sale of goods must possess all the essentials of an ordinary contract.
3.8
Conditions and Warranties
3.8.1 Terms or Stipulations

A contract of sale of goods contains various terms or stipulations regarding the quality of goods, the price and the mode of its payment, the delivery of goods and its time and place. But all of them are not of equal importance. Some of these stipulations may be major terms which go to the very root of the contract (conditions). There may also be some stipulations which may be minor terms, which are not so vital that their breach may seem to be a breach of the contract as such (warranty). Thus a stipulation in a contract of goods may be a condition or warranty.11
3.8.2 Meaning of Condition

A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.12 In addition, he may maintain an action for damages for loss suffered, if any. Example: X asked a car dealer to suggest him a car suitable for touring purposes. The dealer suggested a particular car. Accordingly, X purchased it but found it unsuitable for touring purpose. In this case, suitability of car for touring purpose was a condition of contract. X was, therefore, entitled to reject the car and have refund of the price paid.
3.8.3 Meaning of Warranty

A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.13 Example: X asked a car dealer to suggest him a good car and while suggesting the car, the dealer said that it could run for 20 km per litre of petrol. But the car could run only 15 km per litre of petrol. In this case the statement made by the seller was a warranty. X was, therefore not entitled to reject the car but he was entitled to claim the damages.
3.8.4 How to Determine Whether Stipulation is a Condition or Warranty?

There is no hard and fast rule as to which stipulation is a condition and which one is a warranty. The Act lays down to the same effect, thus whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition though, called a warranty in the contract.14
3.8.5 Distinction Between Condition and Warranty

Notes
S. No.
1.
Stipulation
Condition
A condition is an essential stipulation to the main purpose of the contract. Breach of condition gives right to repudiate the contract and also to claim damages. Breach of condition may be treated as breach of warranty.
Warranty Check Your Progress

Warranty is a stipulation collateral to the main purpose. 4. What is known as stipulation? 5. What is Caveat Emptor? 6. Is warranty different from condition? Explain. A breach of warranty cannot be treated as a breach of condition.
2.
Breach
Breach of warranty gives right to claim damages only.
3.
Treatment
3.8.6 Express Conditions and Warranties

Conditions and warranties may be either express or implied. They are said to be express when at the will of the parties they are inserted in a contract.
Examples:
1. 2. A buyer desires to buy a Sony TV model no. 2062. Here model no. is an express condition. In an advertisement for Khaitan fans, guarantee for 5 years is an express warranty.
3.8.7 Implied Conditions and Warranties

Conditions and warranties are said to be implied when the law presumes their existence in the contract automatically though they have not been put into it in express words.
3.8.8 Implied Conditions

Unless otherwise agreed, the law incorporates into a contract of sale of goods the following implied conditions: a) Conditions as to Title: There is an implied condition on the part of the seller that (i) In the case of a sale, he has a right to sell the goods, and (ii) 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.15 Example: X purchased a car from Y. After 6 months Z, the true owner of car demanded it from X. X had to return it to its true owner. X was entitled to recover the full price even though he had used the car for 6 months.16 b) Conditions in a Sale by Description: 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. 17 The description may be in terms of the qualities or characteristics of the goods.
Notes
Example: Long staple cotton, Kalyan wheat, Sugar C -30, Basmati rice or may simply mention the trademark, brand name or the type of packing, etc. c) Condition in a Sale by Sample: When under a contract of sale, goods are to be supplied according to a sample agreed upon, the implied conditions are: i. That the bulk shall correspond with the sample in quality. ii. That the buyer shall have a reasonable opportunity of comparing the bulk with the sample. iii. That the goods shall be free from any defect (latent).18 d) Condition in a Sale by Sample as well as by Description: If the sale is by sample as well as by description, the goods must correspond both with the sample as well as the description.19 Example: G bought from N Foreign refined rapeseed oil which was warranted to be equal to sample. The oil supplied was equal to the sample. The sample was actually a mixture of rapeseed oil and hemp oil. G was entitled to reject the goods because the goods supplied did not correspond with the description.20 e) Condition as to Fitness or Quality: Ordinarily in a contract of sale there is no implied condition or warranty as to quality or fitness for any particular purpose of goods supplied; the rule of law being Caveat Emptor (i.e. let the buyer beware). But an implied condition is deemed to exist on the part of the seller that the goods supplied shall be reasonably fit for the purpose for which the buyer wants them, if the following conditions are satisfied: i. The particular purpose for which goods are required must have been disclosed (expressly or impliedly) by the buyer to the seller.
ii. The buyer should rely on the sellers skill or judgment. iii. The sellers business must be to sell such goods.21 Example: X purchased a hot water bottle from Y, a retail chemist. X asked Y if it would stand boiling water. The chemist (Y) told him that the bottle was meant to hold hot water. The bottle burst when hot water was poured into it and injured Xs wife. Y is liable to refund the price and pay damages because bottle was unfit for the purpose for which it was purchased.22 f) Condition as to Merchantability: Where the goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or producer or not), there is an implied condition that the goods shall be of merchantable quality. The expression merchantable quality means that the quality and condition of goods must be such that a man of ordinary prudence would accept them as the goods of that description. Goods must be free from any latent or hidden defects.23 Example: Where the underwears supplied contained certain chemicals which could cause skin disease to a person wearing them next to skin. It was held that because of such a defect the underwears were not of merchantable quality and the buyer was entitled to reject the goods.24 g) Condition as to Wholesomeness: In case of eatables or provisions or food stuffs, there is an implied condition as to wholesomeness, i.e. free from any defect which render them unfit for human consumption. Example: W bought a bottle of beer from H, a dealer in wines. The beer was contaminated with arsenic. W, on taking the beer fell ill. H was held liable to W for the consequent illness.25
3.8.9 Implied Warranties

Unless otherwise agreed, the law also incorporates into a contract of sale of goods the following implied warranties: a) Warranty of Quiet Possession: There is an implied warranty that the buyer shall have and enjoy quiet possession of the goods. This is an extension of the implied condition as to title.26 Example: M a lady purchased a second hand type-writer from B. She thereafter spent some money on its repair and used it for some months. Unknown to the parties the type-writer was a stolen one and M was compelled to return the same to its true owner. She was held entitled to recover from the sellers for the breach of this warranty damages reflecting not merely the price paid but also the cost of repair.27 b) Warranty of Freedom From Encumbrances: There is an implied warranty that the goods are free from any charge or encumbrance in favour of any third person if the buyer is not aware of such charge or encumbrance.28 Example: X borrowed Rs. 500 from Y and hypothecated his radio with Y as security. Later on X sold this radio to Z who bought in good faith. Here Z can claim damages from X because his possession is disturbed by Y having a charge. Warranty of Disclosing the Dangerous Nature of Goods to the Ignorant Buyer: There is an implied warranty on the part of the seller that in case the goods are of dangerous nature he will warn the ignorant buyer of the probable danger. Example: C purchases a tin of disinfected powder from A. A knows that the lid of the tin is defective and if it is opened without special care it may be dangerous, but tells nothing to C. C opens the tin in the normal way where upon the disinfectant powder flies into her eyes and causes injury. A is liable in damages to C as he should have warned C of the probable danger.29 Notes
c)
3.9
The Doctrine of Caveat Emptor
3.9.1 Meaning of the Doctrine of Caveat Emptor

The expression Caveat Emptor means let the buyer be aware. It is not part of the sellers duty to point out defects of the goods which he offers for sale, rather it is the duty of the buyer to satisfy himself about the quality as well as the suitability of goods.30 Example: Pigs were sold subject to all faults and the seller knew that the pigs were suffering from swine-fever but he did not inform the buyer about this defect. The seller was not liable for damages because Caveat Emptor is the rule.31
3.9.2 Exceptions
In the following cases, doctrine of Caveat Emptor does not apply. a) Custom or Usage of Trade: An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the custom or usage of trade. However, custom should not be unreasonable and inconsistent with the express terms of the contract. Fraud: Where the seller obtains the consent of the buyer by fraud or conceals a defect, the seller is liable. For Specific Purpose: (i) Where the goods are ordered for specific purpose, and (ii) the seller is made aware of it, and (iii) the buyer relies on the skill or judgment of the seller, there is an implied condition that the goods shall be reasonably fit for such purpose. Merchantable Quality: Where (i) the sale is by description and (ii) purchased from the seller who deals in goods of that description, there is an implied condition that the goods shall be of merchantable quality.
b) c)
d)
e) Notes
Goods are Sold by Sample or Description: In such cases, doctrine of Caveat Emptor does not apply.
3.10 Transfer of Property

3.10.1 Meaning of Transfer of Property
The phrase tranfer of property in goods means transfer of ownership of goods and not the physical possession of goods.
3.10.2 Significance of Transfer of Property

The time of transfer of ownership of goods decides various rights and liabilities of the seller and the buyer. This is important to know the answers of the following questions: a) b) c) d) e) Who shall bear the risk? - It is the owner who has to bear the risk and not the person who has the possession of goods. Who can take action against the third party? - It is the owner who can take action and not the person who has the possession. Can a seller sue for price? - The seller can sue for the price only if the ownership of goods has been transferred to the buyer. In case of insolvency of a buyer can the official receiver or assignee take the possession of goods from seller? - Yes only if the ownership of goods has been transferred to the buyer. In case of insolvency of a seller can the official receiver or assignee take the possession of goods from buyer? - Yes, only if the ownership of goods has not been transferred to the buyer.
3.10.3 Rules regarding Transfer of Property

The rules regarding transfer of property can be classified under the following categories: a) In Specific or Ascertained Goods: Specific goods mean goods identified and agreed upon at the time when a contract of sale is made. 32 The ownership of specific or ascertained goods is transferred to the buyer at such time as the parties intend it to be transferred. 33 For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties, and the circumstances of the case. However, when the intention of the parties cannot be judged, the following rules shall apply: i. When goods are in a deliverable state.34 ii. When goods have to be put into a deliverable state.35 iii. When the goods have to be measured etc. to ascertain price.36 b) In Unascertained or Future Goods: Unascertained goods mean goods which have not been identified and agreed upon at the time when contract of sale is made. Future goods mean goods to be manufactured or produced or acquired by the seller after the making of the contract of sale. The ownership of unascertained goods is transferred to the buyer when the following two conditions are fulfilled: i. The goods must have been ascertained. ii. The goods must have been unconditionally appropriated by the seller or the buyer with the consent of the other. c)
In Goods sent on Approval or on Sale or Return basis: Goods sent on approval
or on sale or return basis mean those goods in respect of which the buyer has option either to return or retain. The property in such type of goods passes to the buyer: i. When he signifies his approval or acceptance to the seller or does any other act adopting the transactions, e.g., uses the goods, pledges the goods, or resells them.
Notes
ii. If he does not signify his approval or acceptance to the seller but retains the goods, without giving notice of rejection, beyond the time fixed for the return of goods, or if no time is fixed, beyond a reasonable time.
Check Your Progress

7. 8. Why is Transfer of Property important? Can the Transfer of Property happen before the actual/ physical delivery of goods? When the seller is bound to make a delivery?
3.11 Performance of a Contract of Sale

3.11.1 Duty of the Seller and the Buyer
It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale.37 Buyers and sellers are free to provide any terms they like, about the time, place and the manner and acceptance of delivery of goods and payment of the price.
9.
3.11.2 Delivery
Delivery means voluntary transfer of possession of goods from one person to another.38 Delivery should have the effect of putting the buyer in possession of the goods so that he may acquire the position of exercising some degree of control over the goods, directly or through any of his representatives.
10. Who bears the expense of the delivery?
3.11.2.1 Modes of Delivery

Delivery of goods may be: a) b) Actual Delivery: Where the goods are physically handed over by the seller or his authorized agent to the buyer. Symbolic Delivery: Where the goods are bulky and incapable of actual delivery. Delivering of key of the warehouse, bill of lading, railway receipt etc. are the examples of symbolic delivery. Constructive Delivery: Where a third person in possession of goods acknowledges to hold goods on behalf of and at the disposal of the buyer, the delivery is constructive.
c)
3.11.2.2 Rules Regarding Delivery

a) Delivery May be Either Actual or Symbolic or Constructive: Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery. The seller need not be the owner of the goods. To constitute delivery to the buyer, he himself may not be in actual possession of the goods.39 Delivery and Payment are Concurrent: Unless otherwise agreed, delivery of goods and payment of the price are concurrent conditions. The seller shall be ready and willing to give possession of 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.40 Delivery to be Made to Buyer: Delivery of goods sold has the effect of putting the goods in possession of the buyer or of any person authorized to hold them on his behalf.41 Part Delivery: Delivery of part of the goods, in progress of delivery of the whole amounts to delivery of the whole, if there is no intention of severing of such part from the whole.42
b)
c) d)
e) Notes f)
Buyer to Apply for Delivery: Seller of goods is not bound to deliver the goods until the buyer applies for delivery thereof.43 Mode of Delivery: Mode of delivery depends on the contract between the parties whether it is for the buyer 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.44 Place of Delivery: Apart from such a contract: i. Goods sold are to be delivered at the place at which they are at the time of sale.
g)
ii. Goods agreed to be sold are to be delivered at the place at which they are at the time of the agreement to sell. iii. Goods not then in existence are to be delivered at the place at which they are manufactured or produced.45 h) Time of Delivery: Where no time for sending the goods is fixed the seller is bound to send them within a reasonable time.46 It implies that where time is fixed, the seller must send the goods in time. If the delivery is to be done as and when required, demand for delivery must be made at a reasonable time. Demand at Reasonable Hour: Demand for or tender of delivery must be made at a reasonable hour. What is a reasonable hour is a question of fact.47 Goods in Possession of Third Person: Where the goods at the time of sale are in possession of a third person, delivery to the buyer is only effected when such third person acknowledges to the buyer that he holds the goods on his behalf.48 Expenses: Expenses of and incidental to delivery are as a general rule to be borne by the seller. The parties may however, agree otherwise.49 Instalment Delivery: Buyer of goods is not bound to accept delivery thereof by instalments unless otherwise agreed.50 An agreement for delivery by instalments is made either expressly; or inferred from circumstances or from the conduct of the parties. Goods Delivered at Distant Place: Where the seller of goods agrees to deliver the goods at his own risk at a place other than that where they are when sold, the buyer shall unless otherwise agreed, take any risk of deterioration in the goods necessarily incidental to the course of transit.51 The necessary deterioration of merchantable quality of goods is on the buyer, even if the seller agrees to deliver the goods at his own risk.
i) j)
k) l)
m)
3.11.2.3 Delivery of Wrong Quality52

Wrong quantity may be either short delivery, excess delivery or mixed delivery. a) b) c) In Case of Short Delivery: The buyer may reject the goods delivered. If he accepts, he must pay for them. In Case of Excess Delivery: The buyer may accept the goods included in the contract and reject the rest or he may reject the whole. If he accepts the whole, he must pay for them. Where the Seller Mixes his Goods with the Buyers Goods: The buyer may accept the goods which are in accordance with the contract and reject the rest or he may reject the whole.
3.11.2.4 Acceptance of Delivery53

a) Acceptance of Delivery by the Buyer: In order that the delivery of goods may constitute a valid acceptance, the buyer must have a reasonable opportunity of examining them. The buyer is deemed to have accepted the goods when he intimates so to the seller or he acts in a manner which is inconsistent with the ownership of the seller or retains the goods without intimating to the seller that he has rejected them. The buyer is not bound to return the rejected
goods. The following rules are relevant: Rule 1: Examining Goods: The buyer is not deemed to have accepted the goods unless and until he has had a reasonable opportunity of examining them, for the purpose of ascertaining whether they are in conformity with the contract. When the seller tenders delivery of goods to the buyer he is bound on request to afford the buyer a reasonable opportunity of examining the goods. Right of inspection may be waived by agreement between the parties.54 Rule 2: When Accepted?: The buyer is deemed to have accepted the goods when: i. He intimates to the seller that he has accepted them; or 11. What should be done, when the buyer wants delivery in installments? 12. Shall the buyer return the rejected goods? 13. What right does a buyer has in case of breach of contract? ii. Where goods have been delivered to him and he does any act in relation to the goods which is inconsistent with the ownership of the seller, for example, he pledges the goods, or sends the goods to his sub-purchaser or when he resells them. iii. When after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them. The buyer after direct or indirect acceptance cannot reject the goods. He may be however, entitled to damages.55 Rule 3: Buyer not Bound to Return the Rejected Goods: Unless otherwise agreed where goods are delivered to the buyer and he refuses to accept them he is not bound to return the rejected goods to the seller. Mere intimation to the seller that he refuses to accept is sufficient. The goods are then at the sellers risk.56 Notes
Check Your Progress
3.11.2.5 Buyers Liability for Rejecting, Neglecting or Refusing Delivery of the Goods
Where the seller is ready and willing to deliver the goods and requests the buyer to take delivery, and the buyer does not take delivery of the goods within a reasonable time after such request, he is liable to the seller for: a) b) Any loss occasioned by his neglect or refusal to take delivery; and A reasonable charge for the care and custody of the goods.
Provided that where the neglect or refusal of the buyer to take delivery amounts to a repudiation of the contract, the seller may sue for the price or for damages.57
3.11.3 Rights and Duties of the Buyer

a) Rights i. To receive delivery of the goods. ii. To repudiate the contract if the seller commits breach of contract. iii. To have reasonable opportunity to examine the goods. iv. To sue the seller for damages for non-delivery of the goods. v. To recover the amount paid if the seller fails to deliver the goods. vi. To sue the seller for specific performance of the contract. vii. To sue seller for damages for breach of warranty. viii. In case of breach of contract by the seller, when the buyer sues for the refund of the price, the buyer has a right to claim interest on the amount of price paid from the date on which the payment was made. b) Duties i. To pay for the goods and take delivery thereof.
Notes
ii. To apply for the delivery of goods as the seller is not bound to deliver the goods until the buyer applies for delivery. iii. To compensate the seller for any loss occasioned by his neglect or refusal to take delivery of the goods and also for reasonable charge for care and custody of the goods.
3.11.4 Rights and Duties of the Seller

a) Rights i. ii. iii. iv. v. vi. To receive the price of the goods. To receive compensation or sue for damages for any loss occasioned by him by neglect or refusal of the buyer to take delivery of the goods. To receive reasonable charge for care and custody of the goods. If he is unpaid seller then to exercise his right of lien, to exercise his right of stoppage in transit; and to exercise his right of resale. To sue the buyer for damages for wrongfully neglecting or refusing to accept the goods. To recover interest from the buyer if there is specific agreement to that effect or charge interest on the price when it becomes due.
vii. To sue for the price of the goods. viii. To sue for damages on buyer repudiating the contract. b) Duties i. ii. iii. iv. v. To deliver the goods when buyer demands the delivery thereof. To compensate the buyer in case he repudiates the contract or commits breach of the contract. To give reasonable opportunity to the buyer to examine the goods. To refund the amount paid by the buyer in case he fails to deliver the goods. To compensate the buyer in case of delivery of wrong quantity.
3.12 Delivery to Carrier or Wharfinger58

a) Delivery of the goods by the seller to a carrier for purpose of transmission whether named by the buyer or not or wharfinger for safe custody, prima facie constitutes delivery of the goods to the buyer. The seller shall make such a contract on behalf of the buyer that the delivery must make carrier or wharfinger responsible for the goods. If the seller omits to do so, and if the goods are lost or damaged the buyer may decline to treat the delivery or may hold the seller responsible for damages. Where goods are sent by seller to the buyer by a route involving sea transit, the seller shall give such notice to the buyer as may enable him to insure the goods during sea transit. If the seller fails to do so, the goods shall be deemed to be at the sellers risk during such sea transit.
b)
c)
3.13 Carriage by Sea

In case of sea transit, the duty of insuring the goods is thrown on the buyer. There are three common types of contracts as regards carriage by sea, i.e. when the seller sends goods to the buyer involving sea transit.
a)
C.I.F. Contracts: It means Cost-Insurance-Freight. C.I.F. contract includes the price of the goods, cost of insurance and freight charges. The seller agrees to sell the goods inclusive of the cost of the goods, its insurance and freight charges. In C.I.F. contract buyer cannot insist on actual delivery of goods. Mere tender of shipping documents through a bank is sufficient performance on part of seller to entitle him to claim payment. As the buyer pays for the documents, he is not allowed inspection of the goods. However, in case of loss or damage to the goods in the course of transit, the buyer can recover the damages from the insurance or shipping company. In the C.I.F. contract, if there is a breach of contract or if the goods are not according to the specifications, the buyer may reject the goods and recover the price paid by him. F.O.B. Contract: F.O.B means Free on Board. The seller puts the goods on board at his own expense. No sooner the goods are placed on the board, the sellers liability ceases, and the buyers liability begins. The buyer is responsible to pay freight and also insurance charges and other expenses. The seller pays cost of loading and other expenses for placing the goods on ship. The seller gives the notice of the shipment to the buyer to enable him to insure the goods. Failure to give notice makes the seller liable for risk, unless the buyer waives the notice. The buyer must name the ship on which the goods are to be delivered, or he must authorize the seller to select the ship, failing which the seller can sue for damages for nonacceptance. Ex-Ship Contracts: By ex-ship contract, the seller does not merely ship the goods, but he has to deliver the goods to the buyer after the arrival of the ship on the port of delivery to buyers place where the goods are to be delivered at his own expense. The seller has to pay the freight. The property in the goods passes to the buyer only when the goods are delivered to him. The goods are at the sellers risk during the voyage.
Notes
b)
c)
3.14 Unpaid Seller

3.14.1 Who is an Unpaid Seller?
The seller of goods is deemed to be an unpaid seller a) b) When the whole of the price has not been paid or tendered. Where a bill of exchange or other negotiable instrument has been received as a conditional precedent, i.e. subject to the realization thereof, and the same has been dishonoured.59
3.14.2 Characteristics of an Unpaid Seller Check Your Progress

The following characteristics of an unpaid seller should be there: a) b) c) He must sell goods on cash terms and not on credit, and he must be unpaid. He must be unpaid either wholly or partly. He must not refuse to accept payment when tendered.
14. What are FOB and CIF contracts? 15. What are Ex-ship contracts? 16. Describe characteristics of an unpaid seller. 17. How auction sales are completed? 18. Once the bidding is made, can it be revoked? If yes, then how?
3.14.3 Rights of Unpaid Seller

The rights of an unpaid seller can be studied under two heads: a) When the Property in the Goods Has Passed to the Buyer: The Act lays down that notwithstanding that the property in the goods may have passed to the buyer, the unpaid seller of goods, as such has by implication of law: i. A lien on the goods for the price while he is in possession of them.
Notes b)
ii. In case of the insolvency of the buyer a right of stopping the goods in transit after he has parted with the possession of them. iii. A right of re-sale.60 When the Property in the Goods has not Passed to the Buyer: Where the property in the goods has not passed to the buyer, the unpaid seller has in addition to his other remedies, a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transit where the property has passed to the buyer. In short, the rights of an unpaid seller are:
Rights of an Unpaid Seller

Where the property in the goods has not passed
Where the property in the goods has passed
Lien
Stoppage in transit
Resale
Withholding delivery
To sue for price, damage and interests
3.15 Auction Sales

In an auction sale, the auctioneer invites bids from prospective purchasers and sells the goods to the highest bidder. Auction sale is sale for purpose of the Act.62 The Act lays down the following rules governing the auction sales.63 a) b) c) d) e) f) g) h) The sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner. A bidder is at liberty to withdraw his bid at any time before it is accepted by the auctioneer. The auctioneer is not bound to sell articles advertised to the highest bidder except when the sale is with reserve. The auctioneer is not bound to hold auction on the date of advertisement. His advertisement is not an offer but a mere invitation. The auctioneer has the right to make the auction subject to any conditions he likes. A condition in an auction sale the biddings once made cannot be withdrawn is not enforceable. The bidding can be withdrawn before acceptance. In case of goods put up for sale in lots, each lot is prima-facie deemed to be the subject of a separate contract of sale. A right to bid may be reserved expressly by or on behalf of the seller. Where such right is expressly reserved the seller or any person on his behalf may bid at the auction. No seller or any person who has advertised can bid at an auction sale, unless the right is expressly reserved and notified, otherwise, any such sale may be treated as fraudulent by the buyer. Agreements not to bid against each other are called Knockout Agreements and they are not unlawful. The seller may protect himself by a reserve bid. If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer. The sale may be notified subject to a reserve or upset price, i.e. there may be a price below
i)
j) k) l)
which the goods will not be sold. The reserve price may be kept a secret. m) n) Where the auctioneer discloses the fact that he is acting as an agent, but does not disclose the name of his principal and sells specific goods, the principals title to the goods is not lost. If the sale is through the court, it would be subject to the confirmation of the court. Notes
Summary
Contract of Sale
A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Goods here means only movable goods. Price must be expressed in money.
Sale and Agreement to Sell

In a sale the property in the goods is transferred from the seller to the buyer. In an agreement to sell, the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.
How a Contract of Sale is Made?

A contract of sale may be made in writing or orally or partly in writing and partly orally or may be implied from the conduct of the parties. There must be an offer to buy or sell goods for a price and acceptance of such offer. It may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by instalments or that both is done at a future date. It may be for existing or future goods.
What is a Stipulation?
A Stipulation in a contract of sale with reference to goods which are the subject thereof may be a Condition or a Warranty.
What is a Condition?
A Condition is a stipulation essential to the main purpose of the contract. Its breach gives a right to the buyer to repudiate the contract.
What is a Warranty?
A Warranty is a stipulation collateral to the main purpose of the contract. Its breach gives rise to a claim for damages but not a right to treat the contract as repudiated.
Express and Implied Conditions and Warranties

In a Contract of sale, conditions and warranties may be express or implied. They are express when they are mentioned in the contract by the parties. Implied conditions and warranties are those which are implied by law unless the parties stipulate to the contrary.
Implied Conditions
Notes These are conditions. 1. as to title 2. a sale by description 3. in a sale by sample 4. in a sale by sample as well as description 5. as to fitness or quality 6. to merchantability 7. as to wholesomeness.
Implied Warranties
In a contract of sale, unless there is a contrary intention, there is an impled warranty that 1. the buyer shall have and enjoy quiet possession of the goods 2. the goods are free from any charge or encumberances 3. that the seller will disclose the dangerous nature of goods to the ignorant buyer.
What is Caveat Emptor?

This means let the buyer be aware. The doctrine of Caveat Emptor does not apply 1. When there is custom or usage of trade 2. When there is a fraud by the seller 3. When the buyer intimates the purpose to the seller and depends upon his skill or judgement 4. In case of implied conditions and warranties.
Rules for Transfer of Property

Rules for ascertaining when the property in goods passes to the buyer are the following: 1. 2. Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained Where there is a Contract for the sale of 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. To ascertain the intention of the parties, relevant issues are; terms of the contract, the conduct of the parties and the circumstances of the following rules will be relevant. Specific Goods: 1. When goods are in a deliverable state 2. If the seller has to do something to make goods deliverable, then when the seller has done such thing, and notice thereof is given to the buyer. Unascertained or Future Goods: If such goods are sold by description, property passes, when goods according to the description are unconditionally appropriated, and the buyer is given a notice thereof. Goods Sent on Approval: In such goods, property passes when the buyer signifies his approval or acceptance or when he does some act adopting the transaction if he retains the goods without giving notice of rejection, property passes when the time agreed for returning the goods expires or a reasonable time has expired.
a)
b)
c)
Duty of Seller and Buyer

Sellers duty is to deliver the goods and the buyers duty is to accept and pay for the goods as per the terms of the contract of sale.
Delivery of Goods
Delivery means voluntary transfer of possession of goods from the seller to the buyer. It may be actual, symbolic or constructive.
Rules as to Delivery
1. Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions.
2. A delivery of part of the goods, in progress, of the delivery of whole, amounts to, for the purpose of passing the property in such goods, as a delivery of the whole. 3 Apart from any express contract, the seller of goods is not bound to deliver them until the buyer applies for delivery. 4. The place of delivery is the place at which they are at the time of the sale. 5. If the goods are in possession of a third party, there is no delivery until such third party acknowledges to the buyer that he holds the goods on his behalf. 6. Where the seller is bound to send the goods to the buyer but no time for sending them is fixed, they must be sent within a reasonable time. 7. Expenses of making delivery are borne by the seller and expenses of obtaining delivery by the buyer. 8. If the seller sends to the buyer a larger or a smaller quantity of goods than he ordered, the buyer may a) reject the whole, or b) accept the whole, or c) accept the quantity he ordered and reject the rest. 9. If the seller delivers, with the goods ordered, goods of a wrong description, the buyer may accept the goods ordered and reject the rest or reject the whole. 10. Unless otherwise agreed, the goods are not to be delivered by instalments.
Notes
Rights of an Unpaid Seller

A seller of goods is deemed to be an unpaid seller - 1. When the whole of the price has not been paid or tendered 2. When a bill of exchange or other negotiable instrument has been received as a conditional payment, and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument, or otherwise. An unpaid seller has the rights:
1.
As Against the Goods

i. Right of Lien: It is available to the unpaid seller when a) the goods have been sold without any stipulation as to credit; b) the goods have been sold on credit, but the term of the credit has expired; c) the buyer becomes insolvent.
ii. Right of Stoppage in Transit: When the buyer of goods becomes insolvent the unpaid seller who has parted with the possession of the goods has the right of stopping them in transit. The seller may resume possession of the goods, as long as they are in the course of transit and may retain them until payment or tender of the price. The unpaid seller may exercise this right of stoppage in transit either by taking actual possession of the goods, or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. iii. Right of Re-sale: The unpaid seller can re-sell the goods Where the goods are of a perishable nature- Where he has exercised his right of lien or stoppage in transit and given notice to the buyer of his intention to re-sell the goods and where the buyer has not within a reasonable time paid the price; andWhere the seller expressly reserves a right of re-sale in case the buyer should make default.
2.
Right of Withholding Delivery
Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and coextensive with his rights of lien and stoppage in transit where the property has passed to the buyer.
3.
As Against the Buyer Personally

i. Suit for Price: 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 for the goods according to the terms of the contract, the seller may sue him for the price of the goods.
ii. Damages for Non-acceptance: Where the buyer wrongfully neglects or refuses
to pay for the goods, the seller may sue him for damages for non-acceptance. Notes iii. Repudiation of Contract Before Due Date: Where the buyer in a contract of sale repudiates the contract before the date of delivery, the seller may either treat the contract as subsisting and wait till the date of delivery, or he may treat the contract as rescinded and sue for damages for the breach. iv. Suit for Interest: The seller can recover interest on price from the date on which the payment became due, if there is a special agreement to that effect.
4.
Auction Sale
A sale by auction is a public sale where different intending buyers try to outbid each other. The goods are ultimately sold to the highest bidder.
Review Questions
True or False
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. The consideration for the contract of sale can be partly in money and partly in goods. A stipulation the breach of which gives the aggrieved party a right to terminate the contract is called a warranty. The term property in goods and possession of goods means the same thing. The property in goods passes only when the goods are delivered. When the goods are sent on sale or return basis, the property in goods passes when the buyer retains the goods beyond a reasonable time. Generally, risk follows ownership whether the goods have been delivered or not and whether price has been paid or not. An unpaid seller is bound to resell the goods. In a contract of sale of goods, if goods are destroyed while still in the possession of the seller, the loss falls on the seller. In a contract of sale by sample, the bulk of goods supplied may not correspond with sample. Stipulations relating to time of payment are not of the essence of a contract of sale.
Practical Problems
Attempt the following problems giving reasons: 1. 2. 3. A sold 100 tons of groundnut oil to B. Before it could be delivered to B, the government requisitioned the whole quantity of A in public interest. Can B sue A for breach of Contract? Soda Water was supplied by S to B in bottles. B was injured by the bursting of one of the bottles. Can B claim damages from S? A contracts to sell B a piece of silk. B thinks that it is Indian silk. A knows that B thinks so but knows that it is not Indian silk. A does not correct Bs impression. B later discovers that it is not Indian silk and wants to repudiate the contract. Can he do so? A purchases a television from B on Bs plea that though it is old, it is in an excellent condition. A finds later on that the television set does not work at all. Can he reject the set and recover his money? A sells goods to B. B pays to A through a cheque. Before B could obtain the delivery of goods, his cheque is dishonoured by the bank. A, therefore, refuses to deliver the goods until paid. Is As action justified?
4.
5.
Practical Problems
1. 2. 3. 4. 5. B cannot sue A for breach of contract as the contract becomes void because of supervening impossibility. B can claim damages from S for the injury as the bottle is not of merchantable quality and there is a sale of goods by description. No, B cannot repudiate the contract, the rule of Caveat Emptor will apply here. This is a contract of sale by description. B described the T.V. to be in excellent condition whereas it was not. Thus, A can reject the T.V. set and recover his money. Yes, here A is an Unpaid Seller and under the Sale of Goods Act (section 47) can exercise his right of lien over the goods. Notes
Test Questions
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Explain Sale and give essential elements of a contract of sale. Differentiate between a) Sale and Hire Purchase Agreement. b) Sale and Agreement to sell. Explain the terms Condition and Warranty and distinguish them. What are Implied Conditions and Implied Warranties? What is meant by Caveat Emptor? In what circumstances the doctrine does not apply? Explain the rules governing passing of property. Delivery does not amount to acceptance of goods. Discuss when a buyer can be said to have accepted the goods. Explain rights and duties of the buyer and the seller. Define Unpaid Seller. What are the rights of an unpaid seller over the goods sold by him? Write Short notes on: a) Carriage by sea. b) Auction sale. Define the term goods. What are the different types of goods? In a contract for the sale of goods there is no implied condition or warranty as to the quality of the goods or their fitness for any oparticular purpose. Comment. In a contract for the sale of goods, state when a) the property, b) the risk, in the goods sold passes from the seller to the buyer. Summarise the provisions of the Sale of Goods Act in regard to the passing of property in a) ascertained goods, b) unascertained goods, c) goods sold on approval or on sale or return. The right or stoppage in transit is an extension of an unpaid sellers right of lien. Comment. State the rules gegarding sale by auction.

1. True 2. False 9. False 10. True 3. False 4. False 5. True 6. True 7. False 8. False

Following are the answers to Check Your Progress, indicating respective paragraphs for reference. 1) 3.3.2 2) 3.3.4 3) 3.5 & 3.5.1 4) 3.8.1 5) 3.9.1 6) 3.8.5 7) 3.10.2 8) 3.10.3 9) 3.11.2.2 10) 3.11.2.2.k 11) 3.11.2.2./ 12) 3.11.2.4.a rule 3 13) 3.11.3 14) 3.13.a.b 15) 3.13.c 16) 3.14.2 17) 3.15 18) 3.15.b
References
Notes
Section 3 Section 4 (1) 3 Section 2 (11) 4 Section 2 (7) 5 Rash Behari v. Emperor. A.I.R. (1936). Cal. 753 6 Section 2 (10) 7 Section 4 (3) 8 note 7 ibid 9 Section 5 10 note 9 ibid 11 Section 12 (1) 12 Section 12 (2) 13 Section 12 (3) 14 Section 12 (4) 15 Section 14 (a) 16 Rowland v. Divall. (1923), 2 K.B. 500. 17 Section 15 18 Section 17 19 note 17 ibid 20 Nichol v. Godts. (1854), 10 Ex. 191. 21 Section 16 (1) 22 Priest v. Last. (1903), 2 K.B. 148. 23 Section 16 (2) 24 Grant v. Australian Knitting Mills Ltd. (1936), A.C. 85. 25 Wren v. Halt. (1903), 1, K.B. 610. 26 Section 14 (b) 27 Mason v. Burmingham (1949), 2 K.B. 545. 28 Section 14 (c) 29 Clarke v. Army and Navy Cooperative Society Ltd. (1903), 1 K.B. 155. 30 Section 16 31 Ward v. Hobbs. (1878), 4 A.C. 13. 32 Section 2 (14) 33 Secton 19 (1) 34 Section 20 35 Section 21 36 Section 22 37 Section 31 38 Section 2 (2) 39 Section 33 40 Section 32 41 note 33 ibid 42 Section 34 43 Section 35 44 Section 36 (1) 45 note 44 ibid 46 Section 35 (2) 47 Section 36 (4) 48 Section 36 (3) 49 Section 36 (5) 50 Section 38 (1) 51 Section 40 52 Section 37 53 Sections 41 to 43 54 Section 41
1 2
Section 42 Section 43 57 Section 44 58 Section 39 59 Section 45 (1) 60 Section 46 (1) 61 Section 46 (2) 62 Loon Karan Sethia and ors. v. Ivan E. John and ors. - AIR 1973 SC 376. 63 Section 64
55 56
Section
Law Relating to Negotiable Instruments

Notes
4
Money speaks sense in a language all nations understand. Aphra Behn STRUCTURE
4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Introduction What is a Negotiable Instrument? Characteristics of Negotiable Instruments. Laws of Negotiable Instruments. Presumptions as to Negotiable Instruments Promissory Note. Bill of Exchange. Cheque. Negotiation.
4.10 Parties to Negotiable Instruments. 4.11 Endorsement.
4.1 Introduction
Notes Money is the most common medium of exchange in any advanced society. The reason for this is that money has the exchange value and is also freely transferable. In trade and commerce the use of ready cash is desirable, because of its acceptability, but it may cause inconvenience and risk. The need for some safe and effective substitute for money lead to the development of the use of negotiable instrument.The law relating to negotiable Instruments is contained in the Negotiable Instruments Act, 1881 (in short the Act). It came into force on 01-03-1882. It extends to the whole of India.
4.2 What is a Negotiable Instrument?

The term negotiable instrument consists of two words negotiable and instrument. The word negotiable means transferable by delivery or by endorsement and delivery and the word instrument means a written document by which a right is created in favour of some person or entity. Thus, the term negotiable instrument literally means a written document transferable by delivery. According to the Act, A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.1 Judge Wills defines a negotiable instrument as One, the property in which is acquired by anyone who takes it bonafide for value, not withstanding any defect of title in the person from whom he took it.
4.3 Characteristics of a Negotiable Instrument

An instrument must possess the following characteristics in order to be treated as a negotiable instrument: In writing, Signed by the maker/drawer, Promise or order to pay, Promise/order must be unconditional, and Payment in money. For a certain sum, payable at a time certain to arrive, drawee must be named or described with reasonable certainty.
4.4 Kinds of Negotiable Instruments

Negotiable Instruments may be of two kinds: a) b) Negotiable by Statute: The Act mentions only three kinds of instruments, i.e. Promissory note, Bill of Exchange and Cheque (These are discussed in paragraphs 4.6, 4.7 and 4.8 ). Negotiable by Custom or Usage: Though the Act speaks of only three kinds of negotiable instruments, it does not mean that there cannot be any other negotiable instruments. For Example: hundis, treasury bills, bankers draft, share warrants, bearer warrants, bearer debentures, etc. are negotiable instruments recognized by the custom, or usage or the Companies Act. Money orders, Postal orders, Deposit receipts, Bills of lading, Railway receipts, Dock warrants, etc. are not negotiable instruments. These documents are transferable by delivery and endorsement, they cannot give a better title to the transferee.
4.5 Presumptions as to Negotiable Instruments

The Act2 provides the following presumptions as to negotiable instruments: a) b) c) d)
Consideration: Every negotiable instrument was made or drawn, accepted, endorsed, negotiated for consideration. Date: Every negotiable instrument was made or drawn on the date it bears. Time of Acceptance: Every accepted bill was accepted within a reasonable time after its date and before its maturity. Transfer: Every transfer of a negotiable instrument was made before its maturity.
e) f) g) h)
Order of Endorsement: The endorsements on a negotiable instrument were made in the order in which they appear. Stamping: A lost promissory note or bill of exchange was duly stamped. Holder in Due Course: The holder of a negotiable instrument is a holder in due course. Proof of Protest: In a suit upon an instrument which has been dishonoured, the court shall, on proof of protest, presume the fact of dishonour, unless and until such fact is disproved, i.e. counter evidence.
Notes
The above presumptions are rebuttable by evidence to the contrary. Moreover, these presumptions would not arise if an instrument has been obtained by means of fraud (or) for unlawful consideration.
4.6
Promissory Note
4.6.1 Definition
According to the Act, A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.3 Bank notes and currency notes are not treated as promissory notes. The words or to the bearer of the instrument in the definition of the promissory note are inoperative in view of the provisions of the Reserve Bank of India Act, which prohibits the issue of a promissory note payable to bearer by anybody other than the Reserve Bank of India4 and the Central Government of India.
4.6.2 Essentials of a Promissory Note

From the definition given in the Act, it follows that to be a valid promissory note, an instrument must fulfill the following essential requirements: a) b) c) d) e) f) g) h) i) It must be in writing. It must contain a promise or undertaking to pay. The promise to pay must be unconditional. It must be signed by the maker. The maker must be a certain person. The payee must be certain. The sum payable must be certain. The amount payable must be in legal tender money of India. Other formalities like proper stamping should be there.
4.6.3 Illustrations S. No.

1. 2.
Check Your Progress Remarks

Acknowledges debt but no promise to pay. Acknowledges debt but no promise to pay. Acknowledges debt but no promise to pay.
Instrument
I owe B Rs. 500. I am liable to pay X Rs. 1000.
1. What is a Negotiable
Instrument? 2. How many types of negotiable instruments are there? 3. What is a Promissory Note?
3.
I have borrowed Rs. 2000 from Y.
S. No.
Notes 4.
Instrument
I promise to pay B Rs. 1000 after receiving money from Y.
I promise to pay B Rs. 1000 as soon as I am able to. I promise to pay B Rs. 1000 after his successful completion of studies. I promise to pay B Rs. 500 and other charges. I promise to pay Rs. 500 but after deducting money owed by him. I promise to pay B or his orders Rs. 500. I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand, for value received.
Remarks
Promise to pay is contingent on other factors. It is conditional promise to pay. Promise to pay is contingent on other factors. It is a conditional promise to pay. Promise to pay is contingent on other factors. It is a conditional promise to pay. The payable sum is uncertain. The payable sum is uncertain. The payable sum is certain and it is a promissory note. This instrument is a promissory note.
5.
6.
7. 8. 9.
10.
4.6.4
Specimen of a Promissory Note
4.7
Bill of Exchange
4.7.1 Definition
According to the Act, A 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, or to the order of, a certain person or to the bearer of the instrument.
4.7.2 Parties to a Bill of Exchange

There are three parties to a bill of exchange as under: a) b) c) Drawer - The person who draws a bill of exchange. Drawee - The person on whom the bill of exchange is drawn. He is also called as an acceptor of the bill. Payee - The person named in the instrument to whom or to whose order the money is directed to be paid by the instrument. Notes
Check Your Progress

4. What is a Bill of
Exchange? 5. Who are the parties to a Bill of Exchange?
4.7.3 Distinction Between Bill and Promissory Note
S. No. Point of Distinction

1.
Numbers of parties
Bill of Exchange
There are three parties in the case of a bill of exchange, viz. Drawer, Drawee and Payee, one person may assume any of the two capacities out of the three. A bill contains an unconditional order. A bill arises usually upon the basis of a creditor-debtor relationship, i.e the drawer of a bill is the creditor and the drawee is the debtor. A bill needs to be accepted to make it valid. The drawee puts his signature as acceptor (Bills payable on demand do not require acceptance). The liability of the drawer of a bill is secondary and conditional. The drawee or the acceptor is primarily liable. The drawer (maker) of an acceptance bill stands in immediate relation with the acceptor and the payee. When a bill is dishonoured either by non-payment, due notice of dishonour must be given by the holder to all prior parties (including drawer and intermediate endorsers).
Promisory Note (Pro-note)

There are only two parties to a pro-note, viz., Maker and Payee. Hence, it is a two party paper. A pro-note contains an unconditional undertaking or promise. A pro-note is based on a debtor creditor relationship, i.e. the maker of a pro-note is debtor and the payee is creditor. No such acceptance is required, a pro-note is signed by the maker only.
2.
Order and promise Nature of relationship
3.
4.
Acceptacne
5.
Nature of liability
The liability of the maker of a pro-note is primary and absolute because he himself is the main debtor. The maker of a note stands in immdiate relation with the payee.
6.
Immediate relation
7.
Notice to prior parties
Notice of dishonour need not be given to the maker of a pro-note.
Notes

8.
Sets
Bill of Exchange
Foreign bills are drawn in sets (of three or four). Foreign bills must be protested for dishonour when such protest is required by the law of the place where they are drawn. A bill may be accepted conditionally. The acceptor for honour can even make the payment of a bill. A bill may be payable to the maker (drawer) himself when the drawer and the payee are one and the same person.
Promisory Note (Pro-note)

Pro-notes are not so drawn.
9.
Protest
No such protest for dishonour is required for foreign pro-notes.
10.
Conditional acceptance Acceptor for honour Payable to the maker himself
The maker of the pro-note cannot attach any such condition to it. It cannot be paid for honour.
11.
12.
A not cannot be made payable to the market himself.
4.7.4 Specimen of a Bill of Exchange
4.8 Cheque
4.8.1 Definition
According to the Act A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.5
Explanation I For the purposes of this section, the expressions:

a)
a cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system; a truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
Notes
b)
Explanation II For the purposes of this section, the expression clearing house means the
clearing house managed by the Reserve Bank of India or a clearing house recognized as such by the Reserve Bank of India.
4.8.2 Distinction Between Cheque and Bill of Exchange

A cheque can be distinguished from a bill of exchange as shown below:

1.
Drawee demand Payable on demand
Cheque
A cheque is always drawn on a specified banker only. A cheque is always payable on demand and may be made payable to bearer or order. A cheque is always payable on demand and may be made payable to bearer or order. A cheque requires no acceptance. No days of grace are allowed.
Bill of Exchange
A bill may be drawn on any one including a banker. A bill may be drawn payable on demand or on the expiry of a certain period after date or sight. A bill cannot be drawn payable to the bearer on demand. A bill must be accepted before payment can be claimed. In the case of time bills three days of grace are allowed from the due date for calculating the maturity of the bill. In case of a bill, there is no such presumption.
2.
3.
Payable to the bearer on demand Acceptance
4.
5.
Days of grace
6.
Supposition
It is presumed that the customer is having an account with sufficient credit balance or credit arrangement. A cheque can be crossed either generally or specially. A cheque does not require any stamp.
7.
Crossing
A bill cannot be crossed.
8.
Stamping
A bill must be properly stamped (except in the case of demand bills).
Notes

9.
Countermanding
Cheque
A payment of a cheque can be countermanded by the drawer. A cheque is not intended for circulation but for immediate payment. A cheque is not generally discounted. If the cheque is not presented for payment on the due date, the drawer is not discharged from liability unless he suffers any damages by delay in presentment, e.g. the liquidation of the bank. The drawer of chequie is primarily liable for payment. The banker is protected if he pays a cheque under a forged endorsement. A cheque need not be noted and protested when dishonoured. Cheques are not issued in sets.
Bill of Exchange
The payment of a bill cannot be countermanded by the drawer. A bill can be discounted and rediscounted with the banks.
10.
Circulation
11.
Discounting
A bill can be discounted and rediscounted with the bank. The drawer of a bill is discharged if it is not duly presented to the acceptor for payment or else.
12.
Failure to present
13.
Primary liability Statutory protection
The drawee or the acceptor of a bill is primarily liable for it. The drawee of a bill has no such protection.
14.
15.
Noting and protesting
A Bill must be noted and protested when it is dishonoured. Foreign bills are generally drawn in sets of three or four.
16.
Sets
4.8.3 Specimen of a Cheque
4.8.4 Crossing of Cheque

A crossed cheque is payable only through a collecting banker and not directly at the counter of the bank. A cheque is said to be crossed when two parallel transverse lines, with or without any words, are drawn on the left hand top corner of the cheque. There are the following types of crossing: a) General: Where a cheque bears across its face, two parallel transverse lines either with or without any words, that shall be deemed to be crossed generally. The words used are & Co. Not negotialbe or a combination of both. Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. Special: Where a cheque bears across its face an addition of the name of a banker, either with or without the words not negotiable, and company, the cheque is deemed to be crossed specially. The payment of a specially crossed cheque can be obtained only through the particular banker whose name appears across the face of the cheque or between the transverse lines, if any. Restrictive: In addition to the two statutory types of crossing (general or special) discussed above, there is another type which has been adopted by commercial and banking usage. In this type of crossing the words A/c Payee only are added to general or special crossing. The words A/c Payee only on a cheque are a direction to the collecting banker that the amount collected on the cheque is to be credited to the account of the payee. A/c payee cheques are negotiable. Notes
b)
c)
Not negotiable crossing (Section 130) - The effect of the words not negotiable on a crossed cheque is that the title of the transferee of such a cheque cannot be better than that of its transferor. The addition of the words not negotiable does not restrict the further transferability of the cheque. The object of crossing a cheque not negotiable is to afford protection to the drawer or holder of the cheque against miscarriage or dishonesty in the course of transit by making it difficult to get the cheque so crossed cashed, until it reaches its destination. For example: W drew a cheque not negotiable in bank and handed it to his clerk to fill in the amount and the name of the payee. The clerk inserted a sum in excess of her authority, and delivered the cheque to P in payment of a debt of her own. Held, that the clerk had no title to the cheque and as such P had no better title, and therefore W was not liable.
4.8.5 Bouncing of Cheques

A drawer of a dishonoured (bounced) cheque shall be deemed to have committed an offence. For this offence, the punishment provided in the Act is imprisonment upto two years or with a fine which may extend to twice the amount of the cheque or with both provided the following conditions are fulfilled: a) Cheque should have been dishonoured due to insufficiency of funds. The courts have held the following amounting to dishounour for insufficiency of funds: i. Stop-payment instructions to the payee bank. ii. Request to the payee not to present the cheque till further intimation. iii. Cheque received back from the payee bank with the remarks Account Closed. However, remarks Refer to Drawer will not constitute dishonour for insufficiency of funds because a cheque may be referred to a drawer for reasons other than insufficiency of funds. b) c) d) The cheque should be presented within its validity. The cheque was issued for the discharge of legally enforceable debt or other liability (not for charity or marriage or birthday presents). The payee is to give notice demanding payment, within thirty days, from the drawer, on receipt of information of dishonour of cheque from the bank.
Check Your Progress

6 What is a Truncated
Cheque? 7. What is the effect and type of crossing? 8. What are the rules for bouncing of cheque?
e) Notes f)
The drawer is liable only if he fails to make payment within fifteen days of such notice period. A written complaint to a Metropolitan Magistrate or a Judicial Magistrate of the first class is made within one month of cause of action arising.
4.8.6 Offences by Companies

For the offence of dishonour of cheque for insufficiency of funds in the account (Section 138) by a company following rules are note-worthy. a) b) The word Company includes a partnership firm, or any other body corporate, or body of individuals, and director, in relation to a firm means partner in a firm.6 If the offence under section 138 of the Act is committed by a company, then every person, who at the time when the offence was committed, was in charge of, and was responsible to, the company for conducting its business, shall be deemed to be guilty as also the company itself of the offence.7 The persons who are guilty under Section 138 being in charge of the affairs of the company can escape the liability if they can prove that: i. d) e) The offence was committed without their knowledge, or ii. They had exercised due diligence to prevent the commission of such offence.8 The words in charge of the company must mean In overall conduct of the day-to-day business of the company or the firm.9 In order to proceed against any director, manager, secretary or other officer of the company, it has got to be proved that the offence has been committed by the company, and such offence has been committed with the consent, or connivance of or is attributable to the neglect on the part of any such director, manager, secretary or other officer of the company.10 The company, and the person in charge of or officer of the company may be prosecuted independently, or jointly.11
c)
f)
Note: The remedy available to the payee (or any other holder) of a cheque dishonoured for the
reasons mentioned in Section 138 of the Act is an additional remedy. Since the amount of the cheque dishonoured basically constitutes a debt, the holder of the cheque can sue the drawer under the civil law to claim his debt.
4.9
Negotiation
4.9.1 Definition
According to the Act, When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.12 Thus negotiation implies a transfer of negotiable instrument so as to constitute the transferee a holder thereof, who should be entitled in his own name to sue on the instrument and recover the amount due thereon. Example: Handing over a bearer instrument to a servant for safe keeping is not negotiation.
4.10 Parties to Negotiable Instruments

The parties to negotiable instrument in case of promissory note, bill of exchange and cheque are stated below: a)
Drawer: The maker of a negotiable instrument is called drawer.
b) c)
Drawee: He is the person on whom the instrument is drawn. Acceptor: He is a the person who accepts the instrument of bill of exchange. Generally the drawee becomes the acceptor after accepting the instrument (but sometimes a stranger may accept on behalf of the drawee). Payee: Payee is a person to whom the sum stated in the instrument is payable. The drawer or any other person may also be the payee. In the latter case, he is called Payee for Honour. Endorser: When the holder endorses the instrument to any one else, he becomes the endorser. Endorsee: The person to whom the instrument is endorsed is known as endorsee. Endorsee in Case of Need: The person to whom resort may be had in case of need (In English law, he is called referee in case of need), i.e. when the bill is dishonoured either by non-acceptance or by non-payment. Acceptor for Honour: Further, any person may voluntarily become a party to a bill as an acceptor. A person who, on refusal by the original drawee to accept the bill or to furnish better security when demanded by the notary, accepts the bill in order to safeguard the honour of the drawer or any endorser is called acceptor for honour. Holder: According to the Act, The holder of a negotiable instrument means any person entitled to the possession of the instrument in his own name and to receive or recover the amount due thereon from the parties thereto. 13 Where the promissory note, bill of exchange or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction. Holder in Due Course: According to the Act, Holder in due course means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque, if payable to the bearer, or the payee or endorsee thereof, if payable to the order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.14 For example: A bank note sent by post was taken and carried away by a robber. The next day the same note was received by X. He received it for full and valuable consideration and in the usual course of his business and without any notice of the bank note being taken out of the mail. The court held him to be a holder in due course. Notes
d) e) f) g)
h)
i)
j)
4.10.1 Essentials to Become a Holder in Due Course

The essential requirements for attaining the status of a holder in due course are elaborated below: a) b) c) d) e) He must be a holder. The holder must have paid a valuable consideration. He must have become the holder of the negotiable instrument before its maturity. He must take the negotiable instrument complete and regular on the face of it. The holder must have obtained the instrument without a sufficient cause to believe that any defect existed in the title of the person from whom he has derived his title (Good faith).
4.10.2 Privileges of a Holder in Due Course

A holder in due course is given certain other privileges under the Act, which are not available to a holder. a) A person, who signed and delivered to another a stamped but otherwise inchoate (incomplete) instrument, is stopped from asserting, as against a holder in due course, that the instrument has not been filled in accordance with the authority given by him provided the amount filled is covered by the stamp affixed.15
Check Your Progress

9. Who is holder in due course?
10. What is endorsement?
b) Notes c)
Every prior party to a negotiable instrument, i.e. the maker or drawer, the acceptor, and all the intermediate endorsers continue to remain liable to the holder in due course until the instrument is duly satisfied.16 Where a bill of exchange is drawn by a fictitious person and is payable to his order, the acceptor cannot be relieved from his liability to the holder in due course. The holder in due course shall, however, have to prove that the instrument was endorsed by the same hand as the drawers signature.17 Where as instrument is negotiated to a holder in due course, the parties to the instrument cannot escape liability on the ground that the delivery of the instrument was conditional or for a special purpose only.18 Not only that the title of the holder in due course is not subject to the defect in previous holders title but once the instrument passes through the hands of a holder in due course, it is purged of all defects. Any person acquiring it takes it as free of all defects, unless he was himself a party to the fraud.19 No maker of a promissory note and no drawer of a bill of exchange or cheque shall in a suit thereon by a holder in due course, be permitted to deny the validity of the instrument as originally made or drawn.20 a. b. Estoppel against denying capacity of payee to endorse.21 Defence that instrument is obtained by unlawful means or for unlawful consideration is not valid against a holder in due course.22
d)
e)
f)
4.11 Endorsement
4.11.1 Definition
When the maker or holder of a negotiable instrument signs the same, otherwise than such a 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 a negotiable instrument, he is said to endorse the same; and is called the endorser.23 The person who signs the instrument with the intention of transferring its ownership to another is called the endorser and the person in whose favour the instrument is transferred is called the endorsee and the procedure is called endorsement.
4.11.2 Who may Endorse?

The following persons may endorse a negotiable instrument: a) b) c) d) e) The payee of the instrument. The holder of instrument. The maker signing it otherwise as such maker. Every sole maker, drawer, payee or endorsee or all of several joint makers, drawers, payees or endorsees of the instrument. The holder in due course of the instrument.
4.11.3 Types of Endorsement

a) Blank or General Endorsement: An endorsement is said to be blank or general when the endorser merely signs on the back of the instrument without specifying any person to whom the payment is to be made.
b)
Full or special Endorsement: When an endorser signs his name and also specifies a person to whom or to whose order the amount of the instrument is to be said the endorsement is said to be full or special, and the person so specified is called the endorsee of the instrument.24 Restrictive Endorsement: An endorsement is said to be restrictive when endorser, by express words, restricts the right of further negotiation of the instrument. Partial Endorsement: Where only part of the amount of the instrument is transferred, it is called partial endorsement. A partial endorsement does not operate as a negotiation of the instrument, e.g. the holder of a promissory note for Rs. 2,000 writes on it, pay B Rs. 1,000 and endorses the note. The endorsement is invalid for the purpose of negotiation. But where a instrument has been partly paid, it can be negotiated for the balance, provided the fact of partpayment is noted on the instrument (Section 56). Conditional or Qualified Endorsement: Where an endorsement limits or negates the liability of the endorser, it is called qualified endorsement.25 It differs from a restrictive endorsement which restricts the negotiability of the instrument but does not in any way limit or negate the liability of the endorser. San Recourse Endorsement: An endorsement of a negotiable instrument may be express words in the endorsement exclude his own liability thereon. Such endorsement is called Endorsement Sans Recourse or without recourse to me. For example, where X endorses a cheque as: Pay Y or order Sans Recourse or Pay Y order without recourse to me. X will not be liable on the instrument if it is dishonoured. Sans Frais: These words, when added at the end of the endorsement, indicate that no expenses should be incurred on account of the bill. Faculative Endorsement: Where such words are added to an endorsement whereby the endorser waives his right to receive notice of dishonour, the endorsement is termed as Faculative Endorsement.
Notes
c) d)
e)
f)
g) h)
Summary
The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. A negotiable instrument means a promissory note, bill of exchange or cheque payable to order or to bearer.
Characteristics of a Negotiable Instrument

An instrument in order to be treated as a negotiable instrument must be 1. in writing, 2. signed by the maker / drawer, 3. a promise or order to pay, 4. Unconditional, 5. payment in money, 6. for a certain sum, 7. payable at a time certain to arrive and 8. draweee must be named or described with reasonable certainity.
Presumptions
The presumptions laid down by the Act in favour of negotiable instruments are as to a) consideration, b) date, c) time of acceptance, d) time of transfer, e) order of endorsement, f) stamping, g) holder in due course, and h) proof of interest.
Promissory Note
A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.
Bill of Exchange
Notes A 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, or to the order of, a certain person or to the bearer of the instrument.
Cheque
A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.
Crossing of Cheque
When a cheque bears across its face two parallel transverse lines, the cheque is said to be crossed. The payment of a crossed cheque can be obtained only through another banker. The crossing may be general, special or restrictive.
Bouncing of Cheque
A drawer of a dishonoured cheque is punishable to imprisonment upto two years or with a fine upto twice the amount of the cheque, if cerain conditions are fulfilled. These conditions are, 1. Cheque should have been dishonoured due to insufficiency of funds, 2. cheque should be presented within its validity, 3. Cheque was issued for the discharge of legally enforceable debt or other liability, 4. Payee is to give notice demanding payment within thirty days of dishonour, 5. Drawer is allowed to make payment within fifteen days after receiving the notice, and 6. A written complaint to a Metropolitan Magistrate or a Judicial Magistrate of the first class is made within one month of cause of action arising. If the cheque issued by a company is dishonoured, then the company and the person in charge of or officer of the company may be prosecuted independently or jointly.
Negotiation
When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.
Holder
The holder of a negotiable instrument means any person entitled to the possession of the instrument in his own name and to receive or recover the amount due thereon from the parties thereto.
Holder in due Course

Holder in due course means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque, if payable to the bearer, or the payee or endorse thereof, if payable to the order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
Privileges of a holder in due course

He enjoys the following privileges 1. He gets a better title than that of the transfer, 2. Privileges in case of inchoate stamped instruments upto the value of the stamps fixed, 3. All prior parties are
liable to him, 4. Acceptor of a fictitious bill is liable to a holder in due course provided the latter can show that the first endorsement on the bill and the signature of the supposed drawer are in the same handwriting, 5. Privilege when an instrument delivered conditionally is negotiated, 6. Estopped against denying original validity of instrument, 7. Estopped against denying capacity of payee to endorse.
Notes
Endorsement
When the maker or holder of a negotiable instrument signs the same, ortherwise than such a 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 a negotiable instrument, he is said to endorse the same, and is called the endorser.
Types of Endorsement
1. Blank or general, 2. Full or special, 3. Restrictive, 4. Partial , 5. Conditional or qualified, 6. San Recourse, 7. Sans Frais, and 8. Faculative.
Review Questions
True or False
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. If an instrument contains a promise to pay something in addition to money, it can be a promissory note. A cheque is a species of bill of exchange. The payment of a specially crossed cheque can be obtained only by the particular banker whose name appears between the crossing. Every prior party to a negotiable instrument is duly liable thereon to a holder in due course until the instrument is satisfied. A minor signing a promissory note for necessaries is personally liable. The liability of the maker of a note is primary and unconditional. Noting and protesting are compulsory in the case of all bills. Generally, every holder of a negotiable instrument is presumed by law to be holder in due course. A bill of exchange can be drawn upon bank. All negotiable instruments are entitled to three days of grace.
Practical Problems
1. 2. Mr. X promises by way of promissory note to pay Y, his partner, a sum of Rs. 10,000 in the event of Ys retirement from the partnership firm. Is this a valid promissory note. A signed as maker, a blank stamped paper and gave it to B and authorized him to fill it as a note for Rs. 500. B fraudulently filled it up as a note for Rs. 1,000 payable to C, who in good faith advanced Rs. 1,000. Can C recover Rs. 1,000 from A? A owes Rs. 1,000 to B. A makes a promissory note for the amount payable to B. A dies and the promissory note was found by his legal heirs, afterwards among his papers, and delivered to B. Can B sue upon it? A cheque payable to bearer is crossed generally and is marked not negotiable. The cheque
3.
4.
Notes 5.
is lost and comes into possession of Ram, who takes it in good faith and for value. Ram deposits the cheque in his bank account and the banker collects the same. Can Ram be compelled to return the money to the true owner of the cheque? Amit draws a bill of exchange on Shashi. Arun writes an acceptance on it. Is it a valid acceptance?
Practical Problems
1. 2. 3. The promise of X is conditional, and hence it cannot be constituted as a valid promissory note. Further retirement of Y from the partnership firm is not a certain event. C, being a holder in due course can recover Rs. 1,000 from A provided the stamp covers the value of Rs. 1,000. No, B cannot sue upon it because the instrument was not properly negotiated. Delivery is essential to complete negotiation. The delivery effected by legal heirs of a deceased is not considered as a good delivery under the Negotiable Instruments Act. Yes, the true owner can compel Ram to refund money because the cheque bears not negotiable crossing as a request of which the transferee cannot get a better title than that of the transferor. No, a stranger to the bill cannot accept it unless it is done for the honour of the party liable on the bill after the bill has been noted or protested for non-acceptance.
4.
5.
Test Questions
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. What is a Negotiable Instrument? Explain its essential characteristics. What are the presumptions as to negotiable instruments? Define a Promissory Note. How does it differ from bill of exchange? What is a bill of exchange? How does it differ from a cheque? Define a cheque. In what ways a cheque is different from a promissory note? What is meant by the term crossing a cheque? Explain the different types of crossings. Discuss the law relating to bouncing of cheques for insufficiency of funds in the account. Explain briefly what is meant by negotiation. Explain the terms holder and holder in due course. A holder in due course gets a title free from equities. Explain the statement and discuss the various privileges of a holder in due course. What do you mean by the term Endorsement? What are the types of endorsement? What are the types of negotiable instruments? What is a Promissory Note? What are its essential elements? Why are bills of exchange, promissory notes and cheques called negotiable instruments? Dishonour of a cheque for want of funds is an offence under the Negotiable Instrument Act. Do you agree with this statement?

1. False 2. True 3. True 4. True 5. False 6. True 7. False 8. True 9. True 10. False

Following are the answers to Check Your Progress, indicating respective paragraphs for reference. 1) 4.2 2) 4.4 3) 4.6.1 4) 4.7.1 5) 4.7.2 6) 4.8.1b 7) 4.8.4 8) 4.8.5 9) 4.10.1 10) 4.11.1 Notes
References
1
Section 13 (1). It may be noted that the Act does not give the meaning of the term negotiable instrument. Rather it enumerates the class of instruments considered as negotiable by the statute.
2 3 4 5
Sections 118 and 119. Section 4. Section 31 (2) of the Reserve Bank of India, Act.
Section 6 as amended by the Negotiable Instrument (Amendment and Miscellaneous Provisions) Act, 2002 (55 of 2002) (w.e.f. 6.2.2003).
6 7 8 9
Explanation to section 141. Section 141(1). Proviso to section 141(1). Supreme Court decision in Girdhari Lal v. D.N. Mehta 1971 SC 2162. Section 141(2). Section 14. Section 8. Section 9. Section 20. Section 36. Section 42. Sections 46 and 47. Section 53. Section 120. Section 121. Section 58. Section 15. Section 16. Section 52. Sheoratan Agarwal v. State of Madhya Pradesh. AIR 1984 n 4 SCC 352.
10 11
12 13 14 15 16 17 18 19 20 21 22 23 24 25
Notes
Section
Consumer Protection Act 1986

Notes
5
Dont agonise; organise. Money speaks sense in a language all nations understand. FlorynceAphra Behn R. Kennedy STRUCTURE
5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 Introduction Objects of the Act Meaning of Some Important and Relevant Terms Consumer Disputes Redressal Agencies Manner of Making a Complaint Procedure on Admission of Complaint Findings Miscellaneous Some Decisions of National Commission / Supreme Court
5.1 Introduction
Notes In India, with industrialisation and economic development, the population of consumers and the volume of consumption of goods and services increased. The Contract Act, 1872 and the Sale of Goods Act, 1930 provided remedies but they were time consuming and expensive. Consumer issues started gaining importance. The interests of consumers were highlighted by media, nongovernment organisations, social activists and even business concerns. The United Nations organised a session on the need for the protection of consumers. The government of India also realised that consumers need to be protected by law.The law relating to consumer protection is contained in the Consumer Protection Act, 1986 (in short the Act). The Act extends to the whole of India except the state of Jammu and Kashmir.
5.2 Objects of the Act

The objects of the Act are as follows: a) b) Better Protection of Interests of Consumers: The Act seeks to provide consumer councils and authorities for settlement of consumer disputes. Protection of Rights of Consumers: The Act seeks to promote and protect the rights of consumers such as: i. The right to be protected: Against marketing of goods and services which are hazardous to life and property.
ii. The right to be informed: About the quality, quantity, potency, purity, standard and price of goods and services so as to protect the consumers against unfair trade practices. iii. The right to be assured: Wherever possible, access to goods and services at competitive prices. iv. The right to be heard: And to be assured that consumers interest will receive due consideration at appropriate forums. v. The right to seek redressal: Against unfair trade practices or restrictive trade practices or unscrupulous exploitation of consumers.
vi. Right to consumer education: By publishing material and magazines for the benefit of consumers, such as magazine like Upbhokta Jagran. c) Consumer Protection Councils: The above said objects are sought to be promoted and protected by the consumer protection councils established at the central, state and district levels. Quasi-judicial Machinery for Speedy Redressal of Consumer Disputes: The Act seeks to provide speedy and simple redressal to consumer disputes. For this purpose, the following consumer disputes redressal agencies are envisaged: i. District Forums: at district level. ii. State Commissions: at State level. iii. National Commission: at Central or National level.
d)
5.3 Meaning of Some Important and Relevant Terms

5.3.1 Consumer
According to the Act, Consumer means any person who: a)
Buys any goods for consideration which has been paid or promised or partly paid and
partly promised, or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid or partly promised or under any system of deferred payment when such use is made with the approval of such person, but does not include a person who obtains such goods for resale or for any commercial purpose; or b) Hires or avails of any services for a consideration which has been paid or promised or partly paid or partly promised, or under system of deferred payment and includes any beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first mentioned person but does not include a person who avails of such services for any commercial purpose.
Notes
Commercial purpose does not include use by a person of goods bought and used by him and services availed by him exclusively for the purposes of earning his livelihood by means of selfemployment.1 To put briefly, consumer is a person who buys any goods or hires or avails of any services for a consideration.
Esamples
1. Amar bought a pressure cooker for use by his family. In the first use it self, while his wife Bindu was using it, the pressure cooker burst, hurting her. Is Amar a consumer? Is Bindu a consumer? Chander bought a laptop and gifted it to his son Dev, Dev is an advocate and uses the laptop for his business. Are Chander and Dev Consumers?
2.
Answers to Examples
1. Amar is a consumer due to the first part of (i) buys any goods for consideration. Bindu is also a consumer as the provision provides and includes any user of such goods other than the person who buys such goods for consideration.... ... when such use is made with the approval of such person. Chander was a consumer when he bought the laptop, as the purchase was neither for resale nor for commercial purpose. However, Dev is not a consumer as he is using it for commercial purpose.
2.
Case A charitable trust was running a diagnostic centre, where patients taking advantage of X-ray, CT scan etc. were ordinarily required to pay for the same and only 10% of them being provided free service. It was held that the machines purchased by the Trust for use in the diagnostic centre were meant for commercial purpose, and therefore the Trust was not a consumer. - Kalpavraksha Charitable
Trust vs Toshniwal Brothers (Bombay) (P) Ltd. - ((2000) I.S.C.C. 512).
Check Your Progress 5.3.2 Goods

As per the Act, Goods mean goods as defined in the Sale of Goods Act, 1930.2 According to the Sale of Goods Act, Goods means every kind of moveable property other than actionable claims and money; and includes stocks and shares, growing crops, grass and things attached to or forming part of land which are agreed to be severed before sale or under the contract of sale.3 1. 2. 3. Who is a consumer? What is a service? What is known as Unfair Trade Practice?
5.3.3 Services
Notes According to the Act, Service means service of any description which is available to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service.4
Case A customer of a bank is aconsumer entitled to seek compensation under the act, and the bank is liable for deficiency of service. - Vimal Chandra Grover vs Bank of India ((2002), 110 comp. cas: 499 (SC))
5.3.4 Complainant
According to the Act, Complainant meansa) b) c) d) a consumer. any voluntary consumer association registered under the companies act, 1956 or under any other law for the time being in force. the central government or any state government. one or more consumers, where there are numerous consumers having the same interest, in case of a death of a consumer, his legal heir or representative; who or which makes a complaint.5
Case Where Insurance company pays and settles the claim of the insured, it can file a complaint for the loss caused to the insured goods by negligence of goods/service providers. For example, when loss is caused to such goods because of negligence of transport company, the insurance company can file a claim against the transport company. - New India Assurance Company Ltd. vs Green Transport Co.
((1991), CPJ(I) Delhi).
5.3.5 Complaint
Complaint means any allegation in writing made by a complainant with a view to obtaining any relief under the Act.
5.3.6 Restrictive Trade Practice

According to the Act, Restrictive trade practice means a trade practice which tends to bring about manipulation of price or its conditions of delivery or to affect flow of supplies in the market relating to goods or services in such a manner as to impose on the consumers unjustified costs or restrictions and shall include: a) b) Delay beyond the period agreed to by a trader in supply of such goods or in providing the services which has led or is likely to lead to rise in the prices. Any trade practice which requires a consumer to buy, hire or avail of any goods or, as the case may be, services as condition precedent to buying, hiring or availing of other goods or services.6
Case A furniture dealer offers to sell a Sofa at Rs. 20,000 and Double Bed at Rs. 15,000. He has an offer that whoever will buy Sofa and Bed both he will charge Rs. 30,000 only. Here the choice is open to the customer to buy the products single or composte. This is not a restrictive trade practice. Notes
5.3.7 Unfair Trade Practice

Unfair trade practice means a trade practice, which, for the purposes of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practices.7 The Act also lists out some of the practices as unfair trade practice, like misleading advertisements and making of false statements, permitting publication of any advertisement for the sale at a bargain price that are not intended to be offered for sale at bargain price, or permitting the offering of gifts and prizes with the intention of not providing them or with holding gifts/prizes after declaration of result of the scheme, or not conforming to prescribed standards or hoarding of goods or manufacturing of spurious goods.
Example Akash sold a second hand computer to Bharat representing it to be a new one. Here Bharat can make a complaint against Akash for adopting an unfair trade practice.
5.3.8 Defect
A defect is defined to mean any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard which is required to be maintained under any law or contract.8
Example Ajit bought a computer from Bimal. It was not working properly since day one. Ajit can make a complaint against Bimal for supplying a defective computer.
5.3.9 Deficiency
It is defined to mean any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained under any law or contract.9
Case A boarded a train. The compartmet in which he travelled was in ban shape-fans and shutters of windows were not working, rexin of the berth was badly torn and there were rusty nails which caused some injury to his wife who was also travelling along with him. A made a complaint against Railways for deficiency in service. It was held that the faults or short-coming pointed out in the plaint constituted deficieny in service and teh compensation of Rs. 1500 was awarded to A. General Manager, South Eastern Railway vs Anand Prasad Sinha ((1991), CPJ 10 (12) NC).
5.3.10 Person
The expression person for the purposes of the Act shall include: a) b) A firm whether registered or not A hindu undivided family
c) Notes d)
A co-operative society Every other association of persons whether registered under the Societies Registration Act or not.
5.3.11 Consumer Dispute

It means a dispute where the person against whom a complaint has been made, denies or disputes the allegations contained in the complaint.10
5.4 Consumer Disputes Redressal Agencies

S. No. Point of District Forum Distinction
1. 2.
Territorial Composition One or more district. President & two members - one woman.
State Commission
One or more state. President & minimum two members - one woman. Serving or retired judge of High Court. (Consultation with Chief Justice of the High Court necessary). Same as for District Forum.
National Commission
All India. President & minimum seven members - one woman. Serving or retired judge of Supreme Court. (Consultation with Chief Justice of India necessary). Same as for District Forum.
3.
Qualifications for President
Serving or retired or qualified to be a District Judge.
4.
Qualifications of members
Age - 35 yrs. Bachelors degree 10 yrs experience in economics, law, ecommerce, accountancy etc. a) Convicted & sentenced to imprisonment for an offence of moral turpitude. b) Undischarged insolvent. c) Unsound mind. d) Removed or dismissed from service. e) Has financial or other interest. f) Others as may be prescribed. Chairman - President of State Commission. Members - Secretary Law, Secretary Consumers Affairs of State.
5.
Disqualifications of members
Same as for District Forum.
6.
Selection Committee
Chairman, S.C. Judge Members - Secy. Deptt of legal affairs Secy. Deptt of Consumer Affairs.

7.
Term
District Forum
State Commission
National Commission
5 years or age of 70 whichever is earlier. Yes
Notes
5 years or age of 65 5 years or age of whichever is earlier. 67 whichever is earlier. Yes
8.
Eligibility for Yes reappointment
9. 10. 11.
Monetary Jurisdiction Administratove control Limitation
Upto 20 lakhs.
Between 20 lakhs and one crore. National Commission. Upto 2 years from the date on which the cause of action arose.
More than one crore.
State commission. Upto 2 years from the date on which the cause of action arose. State Commission within 30 days of order. 50% of the amount payable or Rs. 25000, whichever is less to be deposited by the appellant. As if it is a court order, forwarded to the appropriate court. Imprisonment Not less than one month but may extend to 3 years. Fine - not less than Rs. 2000, but may extend to Rs. 10,000. Dismiss the complaint and costs upto Rs. 10,000.
-------Upto 2 years from the date on which the cause of action arose.
12.
Appeal
National commission Supreme Court within 30 days of within 30 days of order. order. 50% of the amount payable or Rs. 50000, whichever is less to be deposited by the appellant.
13.
Enforcement of the order
As if it is a court order, forwarded to the appropriate court. Imprisonment - Not less than one month but may extend to 3 years. Fine - not less than Rs. 2000, but may extend to Rs. 10,000. Dismiss the complaint and costs upto Rs. 10,000.
As if it is a court order, forwarded to the appropriate court. Imprisonment - Not less than one month but may extend to 3 years. Fine - not less than Rs. 2000, but may extend to Rs. 10,000.
14.
Penalties
Check Your Progress

4. Are defects and deficiencies the same? Is a co-operative society treated on the basis of separate individual under law? 6. Who bears the laboratory expenses incurred? 7. How diligently the complaint shall be handled?
5.
15.
Frivolous or Vexatious Complaints
Dismiss the complaint and costs upto Rs. 10,000.
5.5 Manner of Making a Complaint

A complaint can be made by any complainant in relation to any goods sold, delivered or agreed to be sold or delivered or any service provided or agreed to be provided. Complaint shall be filed along with fees as prescribed. Fees prescribed is very nominal. Admissibility of the complaint shall
Notes
ordinarily be decided within twenty one days of the receipt of complaint. A complaint may be proceeded with or rejected. However before rejection, an opportunity to be given to the complainant for hearing.
5.6
Procedure on Admission of Complaint
If a complaint relates to any goods, a copy of the admitted complaint should be given to the opposite party within 21 days for him to give his version within thirty days. If the opposite party denies or disputes the complaint or fails or omits to take any action within the time given, (Initial 30 days and can be extended by 15 days) then the complaint shall be proceeded further. If the defect in goods needs analysis or testing by a laboratory, a sample of the goods shall be sent to the laboratory for a report within forty five days. The fees for the laboratory test shall be payable by the complainant. The report of the laboratory test is given to the opposite party. If any of the parties disputes the correctness of the laboratory test report, the objections to such report shall be made in writing. A reasonable opportunity of being heard shall be given regarding the objections made in relation to laboratory test.If the complaint relates to any services or in respect of goods where laboratory report is not required, then a copy of the complaint is referred to the opposite party directing him to give his version within a period of thirty days. This can be extended by fifteen days. If the opposite party does not file any reply the complaint shall be decided exparte. If the opposite party, denies or disputes the allegations made in complaint, the matter will be decided on the basis of evidence adduced by the complainant and the opposite party. Every complaint shall be heard expeditiously and endeavour shall be made to decide the complaint within three months when it does not require analysis or testing by any laboratory and within five months if it requires analysis or testing of commodities.11
5.7
a) b) c) d)
Findings
To remove the defect - pointed out by the appropriate laboratory from the goods in question. To replace the goods - with new goods of similar description which shall be free from any defect. To return to the complainant the price - or, as the case may be, the charges paid by the complainant. To pay compensation - to the consumer for any loss or injury suffered due to the negligence of the opposite party. However the consumer disputes redressal agency shall have the power to grant punitive damages in such circumstances as it deems fit. To remove the defects in goods or deficiencies in services - in question. To discontinue the unfair trade practice or the restrictive trade practice - or not to repeat them. Not to offer hazardous goods for sale. To withdraw the hazardous goods - from being offered for sale. To cease manufacture of hazardous goods - and to desist from offering services which are hazardous in nature. To pay such sum - as may be determined by it, if it is of the opinion that loss or injury has been suffered by a large number of consumers who are not identifiable conveniently. However, the minimum amount of sum so payable shall not be less than five percent of the value of such defective gods sold or services provided as the case may be to such consumers. It may also provide that the amount so obtained shall be credited in favour of such person and utilised in such manner as may be prescribed. To issue corrective advertisement - to neutralise the effect of misleading advertisement at
The following orders can be made by the consumer dispute redressal agency:
e) f) g) h) i) j)
k)
the cost of the opposite party responsible for issuing such misleading advertisement. l) To provide for adequate costs - to parties.12 Notes
5.8 Miscellaneous
The act also lays down provisions regarding the following: a) b) Protection of action taken in good faith.13 Power to make rules by the central government or by the state governments,14 and laying of such rules before parliament/state legislature.15
5.9
a) b)
Some decisions of National Commission/Supreme Court

Doctors are within the purview of the Act.16 Government hospitals/health centres/dispensaries where services are rendered free of charge to all the patients, the provisions of the Act do not apply. The Supreme Court did not agree with the contention that the expenses of running the said hospitals are met by appropriation from the Consolidated Fund which is raised from the taxes paid by the tax payers.17 Under the Act, damages are payable only if there is negligence of the opposite party.18 Employees of Bank of Baroda, Calcutta, resorted to a strike, in opposition to a scheme of transfer of its employees. The striking employees created barricades by forming a human wall before the bank. The customers were prevented from entering the bank for 54 days. The customers had suffered losses, which included loss of interest. The Supreme Court ruled that the shortcoming in the service by bank did not arise due to failure on the part of bank in performing its duty or discharging its obligations as required by law.19 Where the opposite party failed to file written objections within the time allowed, it could not be denied the privilege of oral submissions before the Forums. The National Commission gave the reason that the opposite party should not be deprived of its natural and legal right to put forward its defence.20 Provident fund subscribers are also consumers.21 Wearing of jewellery on body of person included in luggage, being in his charge during travel in Railway. Gold chain snatched by miscreants while travelling in reserved compartment. It was held that there was deficiency in service on the part of Railways.22 A Statutory Authority developing land or constructing a house, is like a builder or a contractor, if the service is defective, then it would be an unfair trade practice.23 When an intra-muscular injection administered intra-venously, caused combolism of heart as the blood circulation to heart stopped and the patient died within minutes. The argument that he did not pay for the services was negated as how a deadman can pay for the services. Negligence was also proved.24 Complainant having confirmed ticket, not provided seat in aircraft and consequently lost job. It was held that there was deficiency of service on the part of the airlines.25 Nursing home had no proper arrangements to meet emergency and not properly equipped, it is deficient in service. When forceps delivery was done in haste which caused haemorrhage and no attempt was made to stop profuse bleeding, it was held that there was negligence and deficiency in medical care.26 Deceased was insured under the Salary Savings Scheme from L.I.C. Employer failed to deduct the premium from the salary of the employee. As a result policy lapsed. It was held that the complainant (wife of the deceased) is entitled to claim the insurance amount from the employer.27
c)
d)
e) f)
g) h)
i) j)
k)
l) Notes m)
When there is a delay in delivery of motor vehicle and there is unauthorised escalation in price, consumer is not liable to pay.28 Complainant applied for allotment of a flat under a scheme of Housing Board and made full payment. Possession of the flat was not given as per the scheme. The contention of the Housing Board that the scheme was given up due to unavoidable reasons and the option given to the complainant to opt for another scheme is not valid. It was held that there was a deficiency in service on the part of the Housing Board.29
Summary
The law relating to consumer protection is contained in the Consumer Protection Act, 1986. Its objects are a) better protection of interests of consumers, b) protection of rights of consumers, c) to provide for consumer protection councils and d) to provide quasi-judicial machinery for speedy redressal of consumer disputes. The Act also defines terms like a) consumer who buys goods and services for a price b) goods means every kind of moveable property c) services, d) complainant, e) complaint f) restrictive trade practices, g) unfair trade practices h) defect, i) deficiency, i) persons and k) consumer dispute.
Consumer Disputes Redressal Agencies

There are three such agencies a) District Forum b) State Commission and c) National Commission. District Forum is for one or more district and a consumer can file his claim if the limit of the claim is upto Rs. 20 lakhs. Appeal from the decision of the District Forum is to be filed within 30 days of its order to the State Commission. A State Commission is for one or more states. A consumer can file his claim if the claim is above Rs. 20 lakhs but below one crore. Appeal from the decision of the State Commission can be filed within 30 days of its order to the National Commission. National Commission is one for the whole of India. A Consumer can file his claim if it is more than Rs. 1 crore. Appeal from the decisions of the National Commission can be made in the Supreme Court of India.
How a Complaint is Made and Dealt With?

A complainant can make a complaint before the appropriate consumer dispute redressal agency in relation to any defect in goods or deficiency in service. The complaint relating to any goods or services is given to the opposite party within 21 days to allow him to give his version in 30 days. If the defect in goods needs analysis or testing by a laboratory, a sample of the goods is sent to the laboratory for a report within 45 days. The report is given to the opposite party. Complaint shall be decided within 3 months if no laboratory test is required and within 5 months if the laboratory test is required.
Findings
The consumer dispute redressal agencies can arrive at any of these findings a) to remove defects, b) to replace goods, c) to return the price, d) to pay compensation, e) to remove deficiencies in services, f) to discontinue the unfair trade practice or the restrictive trade practice, g) not to offer hazardous goods for sale, h) to withdraw hazardous goods, i) to cease manufacture of hazardous goods, j) to pay such sum as may be determined by such agency k) to issue corrective advertisement, and l) to provide for adequate costs to parties.
Review Questions
Notes
True or False
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. When a cause of action has arisen, a complaint before a consumer dispute redressal agency is to be filed within three years. A patient receiving free medical treatment in a government hospital is a consumer. A member of the District Forum under the Consumer Protection Act, can hold office upto the age of 65 years. A claim of Rs. 50 lakhs under Consumer Protection Act is to be filed before the National Commission. A tutor teaches a student for one year and the student fails. The student is a consumer under the Consumer Protection Act. A woman is necessary as a member in all the consumer disputes redressal agencies. A member is not eligible for reappointment in the National Commission. Consumer Protection Act does not provide any remedy for frivolous and vexatious complaints. No appeal can be filed from the orders of the National Commission. Complainant is required to pay the cost of testing of goods in an appropriate laboratory.
Practical Problems
1. Mr. Chaluram is a transport contractor and has a proprietory firm in Meerut by the name of M/s Ram and Sons. He has two trailors of Ashok Leyland make. He purchased a third trailor for a sum of Rs. 4.75 lakhs. This trailor did not give satisfactory service and started giving trouble on account of manufacturing defects. He filed a complaint before District Forum, Meerut against M/s Ashok Leyland for defects in the trailor. Will Mr. Chaluram succeed? Sampatilal became a member of a Cooperative Group Housing Society, Ghaziabad. The Managing Committee of the society did not allot the flat to Sampatilal and he had to wait over 20 months after making full payment of Rs. 25 lakhs to get the flat. Sampatilal wants to file a complaint under the Consumer Protection Act. Advise him as to which consumer dispute redressal agency he can file his complaint and whether he will succeed or not. Kamjor, a subscriber to the Provident Fund Under Employees Provident Fund and Misc. Provisions Act, 1952 could not get final provident fund dues amounting to Rs. 5.75 lakhs within the stipulated period of 20 days. After waiting for twenty months he filed a complaint in the concerned District Forum against the relevant Regional Provident Fund Commissioner. Will Kamjor succeed? Akash a reputed manufacturer of consumer goods advertised a scheme called Hidden treasure prize offer where prize coupons were placed inside some of the bottles of the product, by which purchasers of the bottles wherein coupons are placed would get prizes. Does this amount to an unfair trade practice? A boy aged 10 years was admitted in a private nursing home with high fever. On account of negligence and deficiency on the part of nursing home, doctors and nurses the child suffered irreparable damage. Can childs parents file complaint under the Consumers Protection Act?
2.
3.
4.
5.
Test Questions
Notes 1. 2. 3. What are the objects which the Consumer Protection Act, 1986, seeks to achieve? Discuss the main features of the Consumer Protection Act, 1986. Define the following terms as used in the Consumer Protection Act, 1986. a. Consumer b. c. d. e. f. 4. 5. 6. 7. Goods Services Complainant Restrictive Trade Practice Unfair Trade Practice
Which are the Consumer Dispute Redressal Agencies and what are their powers? How a complaint is made? Describe the procedure for disposal of a complaint. Explain the rights of a consumer enshrined under the Consumer Protection Act, 1986. What findings can by given by the Consumer Disputes Redressal Agencies?
Practical Problems
1. 2. No, as he is not a consumer because trailor was purchased for commercial purpose. Uttar Pradesh Consumer Disputes Redressal Commission as the claim amount of Rs. 25 lakhs is within the jurisdiction of State Commission. He will succeed as the Cooperative Group Housing Society comes under Consumer Protection Act. Yes as the Regional Commissioner to the employees provident fund comes under the purview of Consumer Protection Act. Non payment of dues within the stipulated period is a deficiency of service. No, it does not amount to Unfair Trade Practice under the Consumer Protection Act. Yes, they come under the definition of consumer under the Act.
3.
4. 5.

1. False 8. False 2. False 3. True 9. False 10. True 4. False 5. False 6. True 7. False

Following are the answers to Check Your Progress, indicating respective paragraphs for reference. 1) 5.3.1 2) 5.3.3 3) 5.3.7 4) 5.3.8 & 5.3.9 5) 5.3.10 6) 5.6 7) 5.6
References
1 2 3 4 5
Section 2 (1) (d). Section 2 (1) (i). Section 2 (7) of the Sale of Goods Act, 1930. Section 2 (1) (o). Section 2 (1) (b).
6 7 8 9
Section 2 (1) (nnn). Section 2 (1) (r). Section 2 (1) (f). Section 2 (1) (g). Section 2 (1) (c). Section 14. Section 28. Section 30. Section 31. Section 13. Notes
10 11
12 13 14 15 16
Indian Medical Association V.P. Shantha & Ors. (1995) 3 CTJ 969 (Supreme Court CP); [1995 (III) CPJ 1 (SC)]. See note 16 ibid. Section 14 (1) (d). Consumer Unity and Trust Society, Jaipur v. Chairman and Managing Director, Bank of South Delhi University Teacher Cooperative Group Housing Society Ltd. v. Dr. Madhu Regional Provident Fund Commissioner, Faridabad v. Shiv Kumar Joshi (1997) 24 CLA NCDRC. Mrs. M. Kanthimathi & Anr v. Government of India, Ministry of Railways; I 2003 CPJ 16 Lucknow Development Authority v. M. K. Gupta. C. A No. 6237 of 1990 (SC). Dr. Sham Lal & ors. v. Mrs Saroj Rani & Ors; I (2003) CPJ 47 (NC). Manager Air India Ltd. & Anr. v. A Moideen Kutty & Ors., I (2003) CPJ 65 (NC). Dr. Smt. T. Vani Devi & ors. v. T.L.N. Narasa Reddy. I (2003) CPJ 180 (NC). Smt. C. Rajeshwari v L.I.C. of India & Anr. I (2000) CPJ 50 (NC). M/s Vikas Motors Ltd v. Dr. P.K. Jain. II (1999) CPJ 44 (SC). George Thomas & ors. v. G.D.A. & ors. I (1999) CPJ 18 (NC).
17 18 19
Baroda, Calcutta and Another; 1995 (2) SCC 150.

20
Rathour; II 1994 CPJ 49.

21 22
(NC).
23 24 25 26 27 28 29
Notes
Section
Introduction to Law of Partnership
Notes
6
The most enlightened judicial policy is to let people manage their own Money speaks sense way. business in their own in a language all nations understand. Aphra Behn Oliver Wendell Holmes STRUCTURE
6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 Introduction Definition of Partnership Essential Elements of a Partnership Meaning of Partner, Firm and Firm Name Nature of a Partnership Firm Partnership and other Association Registration of Firms Rights and Duties of a Partner Reconstitution of Firm
6.10 Types of Dissolution of Partnership Firm 6.11 Modes of Dissolution of Firm 6.12 Limited Liability Partnership (LLP)
6.1 Introduction
Notes To carry on a business, a person may choose any form of organization depending upon his needs. When a person works in his individual capacity, he runs a proprietary organization, also known as a sole trader. When he works with some person, they are running a partnership. Partnership is the most common form of organisation . Law relating to partnership is governed by the Indian Partnership Act, 1932 (the Act). it extends to the whole of India except to the state of Jammu and Kashmir.
6.2 Definition of Partnership

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.1
6.3 Essential Elements of a Partnership

An analysis of the definition of partnership reveals the following essential elements. a) An agreement: partnership is the result of an agreement. It does not arise from status (as in the case of Hindu Undivided Family) operation of law (as of co-owners) or inheritance. Agreement may be express or implied. Again it may be oral or in writing. partnership deed is example, of an agreement in writing. Two or More Persons: There must be at least two persons to form a partnership. The Act does not mention any thing about the maximum number of persons who can be partners in a partnership firm but the Companies Act, 1956 (Section 11) lays down that a partnership consisting of more than 10 persons for banking business and 20 persons for any other business would be illegal. Hence these should be regarded as the maximum limits on the number of partners in a partnership firm.
b)
Note: The term person means any person competent to enter into a contract and includes a company also. A minor can be admitted as a partner only for the benefits of partnership. c) Carrying on a Business: For a partnership to exist, it is essential that there should be a business. Business includes every trade, occupation and profession.2 It may be for long term business activities or for a particular venture or for a short duration. Sharing of Profits: There must be sharing of profits. However, partners may agree to share profits in any proportion. But whenever the partnership firm runs into losses, the partners will share it too since a loss represents a negative profit. Mutual Agency: There must exist a mutual agency relationship among the partners. Mutual agency implies that each partner acts for the other partners. He, thus, is an agent of other partners. Also, each partner is a principal for he is bound by the acts of other partners.
d)
e)
6.4 Meaning of Partner, Firm, and Firm name

Persons who have entered into partnership with one another are called individually partners and collectively a firm, and the name under which their business is carried on is called the firm name.3
6.5 Nature of a Partnership Firm

A partnership firm is not a person in the eyes of law. It has no separate legal entity apart from the parners constituting it.
6.6 Partnership and Other Association

Notes
6.6.1 Partnership and Joint Hindu Family

A business in Hindu Law is a heritable asset. If an ancestral business descends on the members of a Joint Hindu Family (also called Hindu Undivided Family), or if they start a common business out of the Joint funds at any time after the death of the ancestors such a business is called a Joint Family Business. The members of a Joint Hindu Family carrying on family business as such are not partners in such business. The points of distinction between the two are as follows : 1. 2. Mode of creation. Partnership is essentially the result of an agreement. A Joint Hindu Family arises from status and is not the result of an agreement. It arises by operation of law. Interest in business. In partnership a person does not acquire interest in partnership business by birth. It is the result of an agreement In a joint family business, the male members acquire Interest by birth. Admission of new members. In partnership, a new partner can be admitted only with the consent of all the partners. In a joint family business, a male becomes a member by his birth. a) Female members. A female can become a full-fledged partner in partnership, whereas in a joint family business, a female does not become its member by birth. 3.
Check Your Progress

1. 2. What is partnership? What are the essential elements of a partnership? Is it compulsory to register a partnership firm?
3.
b) Minor members. In partnership, a minor can be admitted to the benefits of partnership with the consent of the other partners. In a Joint family business, a male minor becomes its member merely by birth. c) Membership fluctuating. In partnership, the number of partners should not exceed ten in case of a firm carrying on banking business and twenty in case of any other business. In a joint family business, there is no limit to the maximum number of members.
4.
Authority of members. In partnership each partner has implied authority to bind the firm by acts done in the ordinary course of the business of the firm. In a joint family business, only the Karta (usually the eldest male member of the family) has implied authority to contract debts and pledge the credit and the property of the family for the ordinary purposes of the family business. Liability of members. In partnership, the liability of the partners is unlimited. The share of each partner in the partnership property along with his private property is liable for the discharge of partnership liabilities. In a joint family business, the Karta is personally liable for the debts of the family whereas the other members are liable only to the extent of their Interest in the Joint family business. The other members are personally liable If they are also contracting parties. Right of members to demand accounts. In partnership, every partner has a right to have access to and inspect and copy any of the books of the firm and ask for the account of profits and losses. The members of a joint family business cannot ask the Karta of the family for accounts of his past dealings concerning the family business. Similarly, they cannot ask the Karta for the account of profits and losses. Registration. In case of partnership, it is not compulsory that it should be registered. But, indirectly, law has made registration compulsory because an unregistered firm suffers from certain disabilities. A joint family business does hot require any such registration.
5.
6.
7.
6.6.2 Partnership and co-ownership

Co-ownership means joint ownership of some property which does not necessarily result in partnership. In partnership the partners are necessarily co-owners of the property of the firm, but In co-ownership the co-owners are not necessarily partners. The following are the points of difference
between the two: Notes 1. 2. 3. 4. Mode of creation. Partnership is necessarily the result of an agreement. Co-ownership may or may not arise from agreement; it may also arise by status. Business. Business Is necessary for the existence of partnership ; co-ownership can exisf without it Nature of interest. Partnership involves community of interest whereas co-ownership may not necessarily involve any such interest. Transfer of interest. A partner cannot transfer his share to a stranger without the consent of the other partners. A co-owner can. When a co-owner transfers his share, the transferee becomes vis-a-vis the other co- wners a substitute of the co owner who transfers his share. Number of members. In partnership, the number of members cannot exceed the statutory limit. In co-ownership there is no limit on maximum number. Authority of members. A partner is the agent of his co-partners. A co-owner is not the agent of the other co-owners. Partition of property. A partner cannot sue for the partition of partnership property in specie but he can sue his co-partners for the dissolution of the firm and accounts. A co-owner can sue for the partition of the property. Lien for expenses. A partner has a lien on the partnership property for expenses incurred by him on such property on behalf of the firm ; a co-owner has no such lien.
5. 6. 7.
8.
6.6.3 Clubs
A club or a society, such as a cricket club or a debating society or a residents welfare society, is not a partnership. It is not formed to earn profit and its members are not agents of one another and as such are not liable for one anothers acts. A member of a club Is not liable to a creditor except so far as he has assented to the contract in respect of which such liability has arisen. A club Is formed upon the implied condition that its members are not bound to contribute to its losses beyond the amount or subscription as laid down in the rules to be paid so long as he remains a member.
6.7 Registration of Firms

According to the Act, it is not compulsory to get a firm registered with the Registrar of Firms. (Appointed by the State Government). It is, thus, an optional affair. The Act, however, puts an unregistered firm to certain disabilities thereby making registration of firms desirable. A firm may get registered anytime, i.e. at the time of formation or anytime thereafter.
6.8 Rights and Duties of a Partner

Check Your Progress
4. 5. Explain the rights and duties of a partner. Under what circumstances does reconstitution of a partnership firm take place?
6.8.1 Relation of Partners to one another

The relations of the partners of a firm to one another are usually governed by the agreement among them. Such agreement may be express or may be implied from the course of dealing among them. It may be varied by consent of all them, and such consent may be expressed or may be implied by a course of dealing [Sec. 11 (1)]. Where there is no specific agreement or where the agreement is silent on a certain point, the relations of partners to one another as regards their rights and duties are governed by Sees. 9 to 17 of the Partnership Act.
6.8.2 Rights
1. Right to take part in business. The partnership agreement usually provides the mode of the conduct of the business. Subject to any such agreement between the partners, every partner has a right to take part in the conduct of the business. This is based on the general principle that partnership business is the common business of all the partners. Right to be consulted. Every partner has an inherent right to be consulted in all matters affecting the business of the partnership and express his views before any decision is taken by the partners. Right of access to accounts. Subject to contract between the partners, every partner has a right to have access to and inspect and copy any of the books of the firm. A minor partner may have access to and inspect any of the accounts of the firm but not books. Right to share in profits. In the absence of any agreement, the partners are entitled to share equally in the profits earned and are liable to contribute equally to the losses sustained by the firm. Right to interest on capital The partnership agreement may contain a clause as to the right of the partners to claim interest on capital at a certain rate. Such interest, subject to contract between the partners is payable only out of profits, if any, earned by the firm. Right to interest on advances. Where a partner makes, for the purposes of the business of the firm, any advance beyond the amount of capital, he is entitled to interest on such advance at the rate of six per cent per annum. Such interest is not only payable out of the profits of the business but also out of the assets of the firm. Right to be indemnified. A partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances. Such acts of the partner bind the firm. If as a consequence of any such act, the partner incurs any liability or makes any payment, he has a right to be indemnified. Right to the use of partnership property. Subject to contract between the partners, the property of the firm must be held and used by the partners exclusively for the purposes of the business of the firm. No partner has a right to treat it as his individual property. If a partner uses the property of the firm directly or indirectly for his private purpose, he must account to the firm for the profits which he may have earned by the use of that property. Right of partner as agent of the firm. Every partner for the purposes of the business of the firm is the agent of the firm. And subject to the provisions of the Indian Partnership Act the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. No new partner to be introduced. Every partner has a right to prevent the introduction of a new partner unless he consents to that or unless there is an express term in the contract permitting such introduction. No liability before joining. A person who is introduced as a partner into a firm is not liable for any act of the firm done before he became a partner. Right to retire. A partner has a right to retire (a) with the consent of all the other partners, or (b) in accordance with an express agreement between the partners, or (c) where the partnership is at will, by giving notice to all the other partners of his intention to retire. Right not to be expelled. A partner has a right not to be expelled from the firm by any majority of the partners, save in the exercise in good faith of powers conferred by the contract between the partners. Right of outgoing partner to share in the subsequent profits. Where a partner has died, or has ceased to be a partner by retirement, expulsion, insolvency, or any ether cause, the surviving or continuing partners may carry on the business with the property of the firm
Notes
Check Your Progress

6. How does the dissolution of a partnership firm takes place? What is a limited liability partnership?
2.
3.
7.
4.
5.
6.
7.
8.
9.
10.
11. 12.
13.
14.
Notes
without any final settlement of accounts as between them and the outgoing partner or his estate. In such a case, legal representative of the deceased partner or the outgoing partner, in the absence of a contract to the contrary. Is entitled, at his option, to a) such share, of the profits as is proportionate to his share in the property of the firm, or b) Interest at the rate of 6 per cent per annum on the amount of his share in the property of the firm.
6.8.3 Duties
Partnership is a contract of uberrimae fidea. The partners must act with utmost good faith as the very basis of partnership is mutual trust and confidence. According to Sec. 9, which deals with the general duties of partners, partners are bound a) b) c) to carry on the business of the firm to the greatest common advantage, to be Just and faithful to each other, and to render true accounts and full Information of all things affecting the firm to any partner or his legal representative. To carry on business to the greatest common advantage. Every partner is bound to carry on the business of the firm to the greatest common advantage. He is bound, in all transactions affecting the partnership, to do his best in the common interest of the firm. He must share with other partners any benefit which he may have been able to obtain from other people and in which the firm is in honour and conscience entitled to participate. To observe faith. Partnership is a fiduciary relation. Every partner must be Just and faithful, and observe utmost good faith towards every other partner of the firm. Good faith requires that he shall not obtain a private advantage at the expense of the firm. He is bound, in all transactions affecting the partnership, to do his best In the common interest of the firm. To indemnijy for fraud. Every partner is bound to indemnify the firm for any loss caused to it by his fraud In the conduct of the business of the firm. This is an absolute duty of a partner and no partner can contract himself out of it. The innocent partners of the firm are, however, liable to third parties for the fraud of any of the partners. But they can proceed to claim damages against the partner who has committed the fraud. To attend diligently. Subject to contract, between the partners, it is the duty of every partner to attend diligently to his duties in the conduct of the business of the firm, and to use his knowledge and skill to the common advantage of all the partners. Not to claim remuneration. A partner Is not entitled to receive any remuneration in any form for taking part in the conduct of the business of the firm. It is, however, usual to allow some remuneration to the working partners provided there is a specific agreement to that effect. To share losses. It is the duty of every partner to contribute to the losses of the firm. In the absence of an agreement to the contrary, the partners are bound to contribute equally to the losses sustained by the firm. An agreement to share profits implies an agreement to share losses also. To indemnify for wilful neglect. Every partner Is, subject to contract between the partners, bound to indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm. The firm is, however, liable to the third persons for the wilful neglect or fraud of any of the partners. To hold and use property of the firm exclusively for the firm. It is the duty of every partner of the firm to hold and use the property of the firm exclusively for the purposes of the business of the firm. The partners may agree differently but, in such a case, there should be a specific agreement to that effect.
The other duties are spread over the Partnership Act These duties are summed up as under: 1.
2.
3.
4.
5.
6.
7.
8.
9.
To account for personal profits. If a partner derives any benefit, without the consent of the other partners, from partnership transactions (or from any use by him of the partnership property, name or business connection), he must account for it and pay it to the firm. This is because the relationship between partners is a fiduciary relationships and no partner is entitled to make any personal profit. To account for profits in competing business. A partner must not carry on any business of the same nature as competing with that of the firm. If he does that he is bound to account for and pay to the firm all profits made by him in that business. This is, however, subject to contract between the partners. To act within authority. Every partner is bound to act within the scope of his actual or Implied authority. Where he exceeds the authority conferred on him and the firm suffers a loss, he shall have to compensate the firm for any such loss. To be liable jointly and severally. Every partner is liable, jointly with all the other partners and also severally, for all the acts of the firm done while he is a partner. Not to assign his rights. A partner cannot assign his rights and interest in the firm to an outsider so as to make him the partner of the firm. He can, however, assign his share of the profit and his share in the assets of the firm.
Notes
10.
11.
12. 13.
6.9 Reconstitution of Firm

A firm is reconstituted when there is a change in the composition of its partners without affecting the continuity of the firm. Such a reconstitution may take place due to: a) b) c) d) e) f) Introduction of a new partner Retirement of a partner Expulsion of a partner Insolvency of a partner Death of a partner, or Transfer of a partners share
6.10 Types of Dissolution of Partnership Firm

The Act contemplates and distinguishes between: a) Dissolution of Firm: The term refers to the dissolution of partnership between all the partners of a firm. Thus, where all the partners in a firm agree to sever their relationship, it is known as dissolution of firm. Dissolution of Partnership: The term implies the re-organisation or reconstitution of firm wherein one or more partners sever their relationship with other partners who decide to continue with the business under altered conditions but without dissolution of firm. This may happen when one or more partners in a firm either die, retire or are declared insolvent and the remaining partners elect to continue with business. Thus, the dissolution of firm necessarily implies the dissolution of partnership but the dissolution of partnership may not necessarily lead to the dissolution of firm.
b)
6.11 Modes of Dissolution of Firm

Broadly speaking, the dissolution of a firm may take place: a) Without court order: Such a dissolution may take place in the following ways: i. Dissolution by agreement
Notes
ii. Compulsory dissolution by the adjudication of all partners or of all the partners but one as insolvent, or by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership. iii. Dissolution on happening of certain contingencies. Subject to contract between the partners a firm is dissolved: a. If constituted for a fixed term, by the expiry of that term; b. If constituted to carry out one or more adventures or undertakings by the completion thereof; c. By the death of a partner; and d. By the adjudication of a partner as an insolvent. iv. Dissolution by notice of partnership at will: a. Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. b. The firm is dissolved as from the date mentioned in the notice as the date of dissolution, or if no date is mentioned, as from the date of the communication of the notice. b) Dissolution by the Court: At the suit of a partner, the court may dissolve a firm on any of the following grounds, namely: i. That a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner;
ii. That a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner; iii. That a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business; iv. That a partner, other than the partner suing willfully or persistently commits breach of agreements relating to the management of affairs of the firm or the conduct of its business; or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him; v. That the business of a firm cannot be carried on except at a loss; vi. That a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed it to be sold if the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner; or vii. On any other ground which renders it just and equitable that the firm should be dissolved.
6.12 Limited Liability Partnership (LLP)

A partnership firm entails unlimited liability for its partners, where the chief advantage of forming a company under the Companies Act, 1956 is the limited liability of its members. A company is required to carry out a number of legal formalities. To get the advantage of limited liability as well as that of partnership establishment of limited liability partnership (LLP) has now been given legal recognition. LLP Act has now been enacted and the professionals can now form partnership firm with limited liability. This would promote a new era of entrepreneurship. Forming an LLP has all the advantages of a sole trader or partnership like flexibility in taking decisions, less legal formalities than that of a joint stock company and the advantage of a limited liability. A firm of professionals like chartered accountants lawyers and company secretaries may take benefit of such a partnership under the LLP Act.4
Summay
Notes
Law Relating to Partnership

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Essential elements of a partnership are 1- Agreement, 2- Two or more persons, 3- Carrying on a business, 4- Sharing of profits, and 5- Mutual agency. Persons who have entered into partnership with one another are called individually partners and collectively a firm, and the name under which their business is carried on is called the firm name. A partnership firm is not a person in the eyes of law. A Partnership is different from their associations like joint hindu family, co-ownership and clubs. Registration of firm is optional. Rights of a partner are, 1- To take part in business, 2- To be consulted, 3- Access to accounts, 4Share profits, 5- Interest on capital, 6- Interest on advances, 7- To be indemnified, 8- To use partnership property, 9- Agent of firm, 10- To permit introduction of new partner, 11- To retire, 12Not to be expelled, and 13- Outgoing partner to share subsequent profits. Duties of a partner are: 1General duties like to be just and faithful to other, to render true accounts, to carry on the business of the firm to the greater common advantage and to provide full information to all partners, 2- To indemnity for loss caused due to fraud or willful neglect, 3- To attend diligently, 4- Not to claim remuneration, 5-To contribute to losses, 6- To use firms property for business, 7- To account for personal profits, 8- To account for profits in competing business, 9- To act with authority, 10- Joint and several liability for acts of firm, and 11- Not to assign his partnership rights. A firm is reconstituted when there is a change in the composition of its partners without affecting the continuity of the firm. There are two types of dissolution, 1- Dissolution of firm, and 2- Dissolution of partnership. Dissolution of firm may take place in two modes, 1- Without court order, and 2Dissolution by the court. Limited liability partnership (LLP) has been given a legal recognition.
Review Questions
True or False
1. 2. 3. A money lender getting a share in the profits of the firm for the sum lent is a partner in the firm. A partner is an agent of other partners in a partnership firm. Permanent incapacity of partner is not a ground for dissolution of partnership.
Test Questions
1. 2. 3. 4. 5. 6. 7. 8. What is parternship? Give essential elements of a partnership. Is partnership a person as per law? Is registration of partnership firm compulsory? What are the rights of a partner? Give primary duties of a partner. What do you understand by the reconstitution of a partnership firm? A parnership firm can be dissolved by a court order only? Is it true?
Practical Problems
Notes Attempt the following problem giving reasons: 1. X, the lessee and manager of a theatre enters into an agreement for the performance of a play at his theatre, with Y, the manager of a theatrical company. The terms of the agreement provide that X would provide the theatre, pay for the lighting and pay bills and would receive 60 per cent of the receipts, and Y would receive the remaining 40 per cent. State whether the aforesaid relationship amounts to partnership between X and Y or not. A and B are partners of a trading firm. A borrows Rs. 40000 from C in the name of the firm without the knowledge of B. A spends the amount for his own purpose. Can C hold B liable for Rs. 40000? A, B and C carry on partnership business. A dispute about partnership accounts is referred to arbitration by A and B. Is the reference competent?
2.
3.

1. False 2. True 3. False
Answers to Practical Problems

1. 2. 3. No, the participation in profit is not the decisive test of partnership. Yes, C can hold B liable. No, as all the parties interested in the matter of dispute are not ad-idem on the question of reference, the reference is invalid and the award will not bind even the consenting parties.

Following are the answers to Check Your Progress, indicating respective paragraphs or reference. 1) 6.2 2) 6.3 3) 6.7 4) 6.8 5) 6.9
References
Section 4 of the Indian Partnership Act, 1932.
2 3
Section 2 (b) of the Indian Partnership Act, 1932. Section 4 of the Indian Partnership Act, 1932.
Details of LLP can be obtained on Ministry of Company Affairs site http://www.nic.in/dca and Institute of Company Affairs site www.icsi.edu.
Section
The Competition Act, 2002
Notes
7
Free competition is worth more to society thanunderstand. Money speaks sense in a language all nations it costs. Oliver Wendell Holmes Aphra Behn STRUCTURE
7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 Introduction Extent and Application Prohibition of Certain Agreements, Abuse of Dominant Position and Regulation of Combination Competition Commission of India Director General (DG) Penalties Competition Advocacy Finance, Accounts And Audit Competition Appellate Tribunal (CAT)
7.10 Miscelianeous
7.1 Introduction:
Notes India has in the pursuit of globalization, responded to liberalization. . The natural corollary of this is that the Indian market should be geared to face competition from within the country and outside. The Monopolistic Restrictive Trade Practices Act, 1969 had become obsolete in certain respects in the light of international economic development relating more particularly to competition laws. There is a need to shift our focus from curbing monopolies to promoting competition. Competition in business is like the blood in the body. As without blood, body will perish, similarly without competition, business will languish and perish. Even giants like Microsoft was slapped a fine of US$ 613 million by European Union competition authority for its antitrust (anti-competitive) practices. Microsoft had also lost the Case in US, under anti-trust law. In India the Central Government constituted a High Level Committee on competition Policy and Law (Under the chairmanship of Mr. V.S. Raghavan). This committee submitted its report on 22.5.2000. Thereafter the Central Government consulted all concerned including the trade and industry associations and the general public. The Central Government after considering the suggestions of all concerned parties enacted the Competition Act, 2002, hereinafter referred to as the Act. The Act received the assent of the President on 13.1.2003. The Act was further extensivly amended in 2007.
7.2 Extent And Application1

The Act extends to the whole of India except Jammu and Kashmir. It defines the terms such as Cartel, enterprise, price, relevant market, relevant geographic market, relevant product market, acquisition, consumer, goods and service. Certain section of the Act have come into force from 31.3.2003 and some from 19.06.2003.
7.3 Prohibition of Certain Agreements, Abuse of Dominant Position and Regulation of Combination2
a) Anti-competitive Agreements: The Act provides for prohibition of agreement, which causes or is likely to cause an appreciable adverse effect on competition within India. In this category come agreements relating to bid-rigging or collusive bidding, market - sharing, control of source of production or services, tie-in agreements or exclusive supply or distribution agreements. However the right of any person to restrain any infringements of for protecting any of his rights under Intellectual Property Rights (like Copyright Act 1957, Patents Act 1970 or such other IPR protection law) is protected. Abuse of Dominant position: No enterprise or group shall abuse its Dominant position. The expression dominant position means a position of strength, enjoyed by an Enteiprise, in the relevant market in India Regulation of combination: The acquisition of one or more enterprises by one or more persons or acquiring of control or merger or amalgamation of enterprises under certain circumstances (exceeding monetary limits of assets or turnover as specified in section 5 of the Act and given below) shall be construed as combination. Any combination, if entered into, shall be void. The monetary limits specified for acquisition under the Act are: i. The parties jointly have a. In India assets > Rs.1000 crores or turnover>Rs.3000 crores b. In India or outside India assets >500 million US$ including at least Rs. 500 crores in India or turnover > 1500 million US$ including at least Rs.1500 crores in India. ii. The group jointly havea. In India assets > Rs 4000 crores or turnover > Rs 12000 crores . b. in India or outside India the assets >2billion US$ including at least Ks. 500 crores in
b)
c)
India or turnover > 6 billion US$ including at least Rs. 1500 crores in India. iii. Direct or indirect contract of acquisition if the acquirer has directly or indirectly control over. a. Any other enterprise in India -for the limits as provided in i (a). b. A group in India > Rs. 12000 crores. assets > Rs. 4000 crores or turnover Notes
c. In India or outside India the assets > 2 billion US$ including at least Rs. 500 crores in India or turnover > 6 billion US$. iv. Any enterprise after merger/amalgamation a. In India assets > Rs. 1000 crores or turnover > Rs. 3000 crores. b. In India or outside India assets > 500 million US$ including at least Rs. 500 crores in India or turnover > 6 billion US$ including at least Rs. 1500 crores in India. Note:1. Any person/enterprise entering into a combination shall give notice to the Competition Commission of India (CCI) within 30 days of approval of the proposal by its board of directors or execution of any agreement or other document for execution. No combination shall come into effect until 210 days have passed from the day on which the notice has been given to CCI, which may deal with the notice in accordance with the Act.
2.
7.4 Competition Commission of India3

a) Establishment of Competition Commission (CCI): The Act provides for the establishment of the CCI which shall consist of the chairperson and not less than 2 and not more than 6 members, to be appointed by the Central Government. Their term shall be of 5 years and are eligible for re-appointment. Central Government may appoint a Director General for assisting CCI. Duties of C.C.I.: It shall be the duty of CCI:i. To eliminate practices having adverse effect on competition. ii. Promote and sustain competition. iii. Protect the interests of consumers. iv. Ensure freedom of trade carried on by other participants in markets in India. v. c) To make inquiries into certain agreements and dominant position of enterprise and about combinations.
b)
Check Your Progress

1. What are anticompetitive agreement. What is abuse of dominant position? What do you understand by combination? Explain duties of CCI.
Procedure for Inquiry: C.C.I, can direct the Director General (D.G.) to investigate, if primafacie case exists. If there is no prima-facie case, the matter shall be closed D.G. after inquiry shall submit the report to C.C.I., who shall send the report to the parties, Central Government or State Government. If DGs report says no contravention, then the complainant or the relevant authorities shall be given an opportunity to rebut DGs findings. C.C.I, can dismiss or order further enquiry. No enquiry shall take place after the expiiy of 1 year from the date on which combination has taken effect. Powers of CCI: After inquiring into agreements or abuse of dominant position CCI can pass appropriate orders. It can order division of enterprise enjoying dominant position. CCI has powers to regulate its own procedure and to rectify its own orders and to make a reference to the statutory authority. CCI has power to inquire into acts taking place outside India but
2. 3.
d)
4.
having its effect on competition in India. Notes
7.5 Director General (DG)4

D.G. shall on directions from C.C.I assist CCI in investigating into any contravention of the Act, DG has all the powers of the court to summon witnesses, discovery and production of documents, receiving evidence, issuing commission etc. DG has also the powers of an Inspector under the Companies Act, 1956 (Sec. 240 and 240A) for investigation of the companies.
7.6 Penalties5
Some of the penalties under the Act are as under: Note:i. C.C.I, has power to impose a lesser penalty, if any producer, seller, distributor, trader or service provider has made a full and true disclosure.
ii. Amount of penalties to be credited to the Consolidated Fund of India.
S. No.
1.
Offences
Contravention of orders of C.C.I.
Penalties
Imprisonment upto 3 years or fine upto Rs. 25 crore or both Rs.l lakh for each day of default, subject to a maximum of Rs. One crore.
2.
Failure to comply with the directions of C.C.I and D.G.
3.
Non furnishing of information on combination Making false statements or omission to furnish material information (being a party to the combination) Making false statement, omission of material fact or alteration or destruction of document (offences in relation to furnishing of information)
Upto one percent of total turnover or assets whichever is higher. Not less than Rs. 50 lakhs extendable upto Rs. 1 crore.
4.
5.
Check Your Progress

5. 6. Does DG have power of a court? What penalties are provided for the contravention of orders of CCI? Is opinion given by CCI binding on Central/State Government.
Fine upto Rs. One crore but shall not be less than Rs. 50 lakhs.
7.7 Competition Advocacy6

The Central or a State Government may in formulating competition policy (including a review of competition law) or any other matter ask the opinion of the C.C.I. C.C.I, shall give its opinion within 60 days but the opinion given by C.C.I shall not be binding on the Central/State Government. CCI shall take suitable measures for the promotion of competition advocacy, creating awareness and imparting training about competition issues.
7.
7.8 Finance, Accounts And Audit7

Central Government may make grants to C.C.I. There shall be constituted a fund to be called the Competition Fund to which all incomes and grants shall be credited and from which all expenses of C.C.I shall, be met. C.C.I shall maintain proper accounts in the form as prescribed by the Central Government in Consultation with the Comptroller and Auditor-General of India. The audit of accounts shall be done by the Comptroller and Auditor General of India. The audit report shall be forwarded annually to the Central Government and shall be laid before each House of Parliament. Notes
7.9 Competition Appellate Tribunal (CAT)8

a. Establishment of CAT: The Central Government shall establish CAT to hear and dispose of appeals against any direction issued or decision made or order passed by CCI. CAT shall also adjudicate on claims for compensation. Appeal to CAT: The Central or State Government, a local authority, enterprise or any person aggrieved by any direction, decision or order of CCI may file an appeal to CAT, Appeal shall be filed within 60 days of the receipt of the order/decision by the appellant, CAT should dispose of the appeal within 6 months of its receipts. Composition of CAT: CAT shall consist of a chairperson and not more than two members. The term of chairperson or a member of CAT is five years and they are eligible for reappointment. Procedure and Powers of CAT: CAT shall not be bound by the procedure laid down in the Code of Civil Procedure. It shall be guided by the principles of natural justice, provisions of the Act and rules made by the Central Government. CAT shall have power to regulate its own procedure. CAT shall have the same powers as are vested in a civil court. Contravention of orders of CAT.: Any person contravening any order of CAT shall be liable for a penalty upto Rs. 1 crore or imprisonment upto 3 years or both. Appeal to Supreme Court: Any person/authority/enterprise or Government aggrieved by any decision or order of CAT may file an appeal to the Supreme court within 60 days from the communication of the decision/order of CAT.
b.
c.
d.
e. f.
7.10 Miscellaneous9
This part of the Act provides for: a. Power to exempt by government of: i. Any enterprise necessary in the interest of security of state or public interest. ii. Any agreement arising out of treaty, agreement or convention with any country. iii. Any enterprise performing sovereign function. b. c. d. e. f. g. h. i. Government has power to issue directions or supersede C.C.I. The chairpersons and members of C.C.I., CAT, D.G., Secretary officers and employees are public servants. Protection of action taken in good faith. The Act to have over-riding effect. The application of other laws is not barred. The exclusion of jurisdiction of civil court. Power to make rules and regulations. Power to remove difficulties upto 2 years. Monopolistic Restrictive Trade Practices Act, 1969 is repeated.
j. Notes
All pending cases relating to Monopolistic Restrictive Trade Practices shall revert to C.C.i and of Unfair Trade Practices (except some) to the National Commission under the Consumer Protection Act, 1986.
Summary
The Competition Act, 2002
Competition is necessary for any business in India. The law regarding competition is contained in the Competition Act, 2002 as amended in 2007. It extends to the whole of India except Jammu and Kashmir. The Act prohibits anti-Competitive agreements, abuse of dominant position and regulates combination by laying down monetary limits for acquisition by one or by a group in or outside India. The Act also provides for the establishment of Competition Commission of India (CCI) and its power and duties and the procedure for Inquiry to be conducted by the Director General. From the orders of CCI, appeal can be filed to the competition Appellate Tribunal (CAT) and from its orders in the Supreme Court of India. The Act provides for various offences like contravention of orders of CCI, non furnishing of information on combination making false statements and the punishment for them. There are provisions for finance, audit and accounts and some miscellaneous aspects.
Review Questions
True or False
1. 2. 3. The CCI orders are not appeal-able From the orders of the CAT appeal is made to the Supreme Court of India. The Competition Commission of India (CCI) shall consist of members not more than: a) Two b) Three c) Five d) Six
Choose the Right Answer
Test Questions
1. 2. 3. 4. 5. Explain the composition, powers and duties of the CCI. Discuss briefly the offences and penalties provided in the Competition Act, 2002. What are the main anti-competitive practices? What is competition advocacy. Write a short note on Competition Appellate Tribunal.

1. False 2. True 3. Two.

Following are the answers to Check Your Progress, indicating respective paragraphs or reference. 1) 7.3 (a) 2) 7.3 (b) 3) 7.3 (c) 4) 7.4 (b) 5) 7.5 6) 7.6 7) 7.7
References
1 2 3 4 5 6 7 8 9
Sections 1 to 2 of the Competition Act, 2002 Sections 3 to 6 of the Competition Act, 2002 Sections 7 to 34 of th e Competition Act, 2002 Section 41 of the Competition Act, 2002 Sections 42 to 48 of the Competition Act, 2002 Section 49 of the Competition Act, 2002 Sections 50 to 53 of the Competition Act, 2002 Sections 53A 53U of the Competition Act, 2002 Sections 54 to 66 of the Competition Act, 2002
Notes
Notes
Section
8
STRUCTURE
8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 Introdution
Highlights of Information Technology Act

Notes
Money speaks sense inwhen it is to all nations understand. to break them. Men keep agreements a language the advantage of neither Aphra Behn Salon
Objectives of the Act. Applicability. Authentication of Electronic Records. Electronic Governance. Attribution, Acknowledgement and Despatch of Electronic Records. Secure Electronic Records and Secure Digital Signatures. Regulation of Certifying Authorities. Digital Signature Certificates (DSC)
8.10 Duties of Subscribers. 8.11 Penalties and Adjudication. 8.12 The Cyber Regulation Appellate Tribunal. 8.13 Offences. 8.14 Liability of Network Service Provider. 8.15 Miscellaneous.
8.1 Introduction
Notes Electronic commerce eliminates the need for paper based transactions, therefore to facilitate ecommerce there is a need for legal changes. The United Nations Commission on International Trade Law (UNCITRAL) adopted the model law on e-commerce in 1996. The General Assembly of the United Nations by its resolution No. A/RES/51/162 dated 30 January 1997, recommended that all states should give favourable considerations to the said model law when they enact or revise their law. Consequently, India enacted Information Technology Act, 2000 (hereinafter referred to as the Act) which came into force on 17-10-2000.
8.2 Objectives of the Act

The Act is set to revolutionise the technology scenerio in the country. This Act provides for legal recognition for transactions carried out by means of electronic communication, commonly referred to as electronic commerce, which involve the use of alternatives to paper based methods of communication and storage of information, to facilitate electronic filing of documents with the Government agencies, and further to amend the Indian Penal Code, 1860, the Indian Evidence Act, 1872, the Bankers Books Evidence Act, 1891 and the Reserve Bank of India Act, 1934 and for matters connected therewith or incidental thereto.
8.3 Applicability
The Act extends to the whole of India. It shall also apply to any violation or contravention of the provisions of the Act done by any person any where in the world. The Act is not applicable to: a) b) c) d) e) f) A negotiable instrument as defined in section 13 of the Negotiable Instruments Act, 1881. A power-of-attorney as defined in section 1A of the Powers-of-Attorney Act, 1882. A trust as defined in section 3 of the Indian Trusts Act, 1882. A will as defined in clause (h) of section 2 of the Indian Succession Act, 1925, including any other testamentary disposition by whatever name called. Any contract for the sale or conveyance of immovable property or any interest in such property. Any such class of documents or transactions as may be notified by the Central Government in the Official Gazette.1
8.4 Authentication of Electronic Records2

Any subscriber may authenticate an electronic record by affixing his digital signatures. The authentication of the electronic record shall be effected by the use of asymmetric crypto system and hash function, which envelop and transform the initial electronic record into another electronic record. The entire regime of digital signatures is based upon the concept of public key and private key. Both these keys are simultaneously generated by the algorithm. While the private key remains with the subscriber, the public key remains with the Certifying Authority and the public key is used by other members of the public to verify that the digital signature on a particular document has been affixed by using the private key of the subscriber. The private key and the public key are unique to the subscriber. These two keys constitute a functioning key pair.
8.5 Electronic Governance

a)
Legal recognition of electronic records.3 Where any law provides that information or any matter shall be in writing or in the typewritten
or printed form, then such requirement shall be deemed to have been satisfied if such information or matter is:i. b) Rendered or made available in the electronic form. ii. Accessible so as to be usable for a subsequent reference. Legal recognition of digital signatures.4 If any information/matter is required by law to be authenticated by affixing the signature, then such requirement shall be deemed to have been satisfied, if such information/ matter is authenticated by means of digital signature, affixed in the prescribed manner. c) Use of electronic records and digital signatures in Government and its agencies.5 This is permitted for filing of any records, issue, grant of licenses/permit or receipt/ payment of money, as may be prescribed by appropriate Government. d) Retention of electronic records.6 If any law provides that documents, records or information are required to be retained for any specified period, then that requirement shall be deemed to have been satisfied if the same is retained in electronic form. e) f) g) Publication of rules, regulations, etc. in Electronic Gazette.7 It provides for the publication of the Official Gazette in the electronic form. Sections 6,7,8 not to confer right to insist document should be accepted in electronic form.8 Central Govt. has power to make rules in respect of digital signatures.9
Notes
8.6 Attribution, Acknowledgement and Despatch of Electronic Records

a) Attribution of electronic records.10 An electronic record shall be attributed to the originator: i. If it was sent by the originator himself. ii. By any person who has such an authority. iii. By an information system programmed by or on behalf of the originator to operate automatically. b) Acknowledgement of receipt.11 This can be given of electronic record in a particular form or by a particular method, if so desired by the originator. c) Time and place of dispatch and receipt of electronic record.
12
Check Your Progress

1. 2. How are electronic records authenticated? Are digital signatures legally recognised? What is a secure digital signature? 4. How are digital signature certificates issued?
The dispatch of an electronic record (E.R.) occurs when it enters a computer resource (C.R.) outside the control of the originator.The time of receipt of an E.R. shall be determined: i. If the addressee has designated a C.R. for the purpose of receiving E.R., when E.R. enters designated C.R. or when E.R. is retrieved by the addressee.
ii. If the addressee has not designated a C.R. along with specified timings, if any, receipt occurs when the E.R. enters the C.R. of the addressee.
3.
8.7 Secure Electronic Records and Secure Digital Signatures

a) Secure E.R.
13
Where any security procedure has been applied to an E.R. at a specified point of time, then such record shall be deemed to be a secure E.R. from such point of time to the time of
verification. Notes b) Secure digital signature (D.S).14 If it can be verified that a D.S. at the time it was affixed, was (i) unique to the subscriber affixing it (ii) capable of identifying the subscriber, (iii) created in a manner or using a means under the exclusive control of the subscriber and is linked to the E.R. to which it relates in such a manner that if the E.R. was altered, the D.S. would be invalidated, then such D.S. shall be deemed to be a secure D.S. c) Security Procedure.15 The central government shall prescribe the security procedure having regard to commercial circumstances prevailing at the time when the procedure was used.
8.8 Regulation of Certifying Authorities16

Central government may appoint Controller of Certifying Authorities. The Controller shall be the repository of all Digital Signature Certificates (DSC). The Controller may issue license to any person to issue DSC. The Controller or any person authorised by him shall have access to any computer system and data to find out if any contravention of the Act has been committed.
8.9 Digital Signature Certificates (DSC)17

Any person can make an application to the Certifying Authority for the issue of a DSC by paying the fees upto Rs. 25000. Application must be accompanied by a certification practice statement or a statement containing specified particulars. A DSC can be revoked as provided in the Act.
8.10 Duties of Subscribers18

The duties of subscribers are: a) b) c) Generating key pair (private and public) by applying the security procedure. Acceptance of DSC once it is published or authorised for publication. Control of private key corresponding to public key shall be exercised.
8.11 Penalties and Adjudication19

The Act provides for: a) b) Penalties for damage to computer, computer system etc. upto Rs. 1 crore and for failure to furnish information, return etc. upto Rs. 1.5 lakhs. Power to adjudicate by adjudicating officer to be appointed by the central government.
8.12 The Cyber Regulation Appellate Tribunal20

The Central Government shall establish one or more Cyber Appellate Tribunal (CAT). The Act provides for the composition of CAT, conditions of service, qualifications and terms of office of presiding officer CAT. The appeal shall be disposed of finally within six months. Civil Courts shall not have any jurisdiction. Appeal from the decisions of CAT shall be filed to the High Court within sixty days from the date of communication of the decision of CAT.
8.13 Offences21
a)
Offences and the punishment provided can be summarised in the following table:
S. No.
Offences
Punishment Imprisonment Term upto

3 years 3 years 5 years
Fine upto
Notes
1. 2. 3.
Tempering with computer source document. Hacking with computer system. Publishing of Information which is obscene in electronic form. Failure to comply with the orders of the Controller. Failure to comply with the directions of the Controller to extend facilities to decrypt information. Securing access to a protected system. Misrepresentation or suppression of fact. Breach of confidentiality and piracy, publishing false or fraudulent DSC.
2 lakhs 2 lakhs 1 lakh
4. 5.
3 years 7 years
2 lakhs NIL
6. 7. 8.
10 years 2 years 2 years
No Limit 1 lakh 1 lakh
b) c)
Extra-territorial jurisdiction - The provisions of the Act shall apply also to any offence committee outside India by any person irrespective of his nationality. Confiscation - Any computer, floppies, compact discs, tape drive or any other accessories related thereto, in respect of which any contravention has been committed shall be liable to confiscation. Penalties or confiscation not to interfere with other punishments provided in any other law. Power to investigate offences - This power is vested with police officer not below the rank of Deputy Superintendent of Police.
d) e)
8.14 Liability of Network Service Provider22

Network service provider shall not be liable if the offence or contravention was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence or contravention.
Check Your Progress

5. To what extent, the penalties may go in case of noncompliance with the Act? 6. Who has the power to investigate offences under the I.T. Act?
8.15 Miscellaneous23
This portion of the Act deals with miscellaneous subjects like power to make rules and regulations and amendments to Indian Penal Code I860, Indian Evidence Act 1872, Bankers Books Evidence Act 1891, and the Reserve Bank of India Act, 1934. By an amendment made in 2002 the Act shall apply to electronic cheques and truncated cheques.24
Summary
Notes
Information Technology Act

The United Commission on International Trade Law (UNCITRAL) had adopted the model law on e-commerce in 1996. In India the law relating to Information Technology is based on this model law and contained in the Information Technology Act, 2000. The objectives of this Act are ecommerce and e-governance. The Act extends to India and also it has extra-territorial application even outside India. The Act is not applicable to certain documents like negotiable instruments, will, trust, power of attorney and any conveyance of immovable property. Authentication of electronic records is done by digital signature which is based on the concept of private and public key. E-governance is provided by means of legal recognition of electronic records, of digital siginatures, retention of electronic records and publication of rules, regulations etc. in electronic gazette. An electronic record is attributed to the originator when it was sent by himself or by authorised person. Digital Signatures shall be given by the Controller of Certifying Authority appointed by the central government. The Act also provides for Digital signatures Certificates, penalties, adjudication, the Cyber Appellate Tribunal and the liability of network service provider.
Review Questions
True or False
1. 2. 3. A contravention of Information Technology Act by any person any where in the world is punishable under the Act. The digital signatures are generated by one key and not by a set of keys. There is no provision of appeal in the Information Technology Act.
Multiple Choice Questions

1 Digital signature can be obtained from: a) c) 2 Central Government Certifying Authority b) d) State Government Cyber Regulation Appellate Tribunal
Information Technology Act, is not applicable to: a) Company law b) Central Excise c) Income Tax d) Trust
Test Questions
1. Write short notes on: a) 2. 3. 4. 5.
Digital signature
b) Electronic governance Explain the provisions on penalties, adjudication and offences of the Information Technology Act. Explain the areas where Information Technology Act 2000 is not applicable. How are electronic records authenticated? Give highlights of the Information Technology Act, 2000.

1. True 2. False 3. False Notes

1. c 2. d

Following are the answers to Check Your Progress, indicating respective paragraphs for reference. 1) 8.4 2) 8.5.b 3) 8.7 (b) 4) 8.9 5) 8.13 (a) 6) 8.13.e
References
1 2 3 4 5 6 7 8 9
Section 1 (4) of the Information Technology Act, 2000. Section 3 of the Information Technology Act, 2000. Section 4 of the Information Technology Act, 2000. Section 5 of the Information Technology Act, 2000. Section 6 of the Information Technology Act, 2000. Section 7 of the Information Technology Act, 2000. Section 8 of the Information Technology Act, 2000. Section 9 of the Information Technology Act, 2000. Section 10 of the Information Technology Act, 2000. Section 11 of the Information Technology Act, 2000. Section 13 of the Information Technology Act, 2000. Section 14 of the Information Technology Act, 2000. Section 15 of the Information Technology Act, 2000. Section 16 of the Information Technology Act, 2000. Sections 17 to 34 of the Information Technology Act, 2000. Sections 35 to 39 of the Information Technology Act, 2000. Sections 40 to 42 of the Information Technology Act, 2000. Sections 43 to 47 of the Information Technology Act, 2000. Sections 48 to 64 of the Information Technology Act, 2000. Sections 65 to 78 of the Information Technology Act, 2000. Sections 79 of the Information Technology Act, 2000. Sections 80 to 94 of the Information Technology Act, 2000. Inserted by Amendment Act, 2002. (55 of2002) w.e.f. 6-2-2003. Section 12 of the Information Technology Act, 2000.
10 11
12 13 14 15 16 17 18 19 20
21 22 23 24
Notes
Section
Important Features of Copyright Law
Notes
9
Thoughts, emotions and sensationsall nations understand. Money speaks sense in a language demand legal recognition. Louis D. Brandeis Aphra Behn STRUCTURE
9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 Introduction Copyright Office and Copyright Board Copyright, its Ownership and Term Licences Copyright Societies Rights of Broadcasting Organisations and of Performers International Copyright Registration of Copyright Infringement of Copyright 2. 3. 4. 1. What is a Copyright Board? Who is the owner of a copyright? What is the life of a copyright? Does the use of copyrighted material for a judicial proceeding infringe copyright?
Check Your Progress
9.10 Civil Remedies 9.11 Offences 9.12 Miscellaneous 9.13 Some Cases on Copyright
9.1 Introduction
Notes Copyright is about the right to copy. It is based on the principle that people who produce creative work like poems, novels have a right to decide how their works can be reproduced. It is relevant to mention that copyright is not related to ideas, but to their expression. Law relating to copyright is contained in the Copyright Act, 1957 (referred to as the Act). It extends to the whole of India and came into force on 21-11958. The Act has been amended in 1983, 1984, 1992, 1994 and 1999 primarily to bring the Indian law in conformity with the international conventions like Bern Convention, Universal Copyright Convention and agreements ofWorld Trade Organization relating to Trade Related Intellectual Property Rights (TRIPS).
9.2 Copyright Office and Copyright Board1

The Central Government has established a Copyright Office under the control of Registrar of Copyrights. The Central Government has also constituted a Copyright Board. The Registrar of Copyrights is the Secretary of the Board. The Copyright Board consists of a Chairman and between 2 to 14 members. The Board functions through Benches consisting of 3 members. The Copyright Board shall be deemed to be a civil court.
9.3 Copyright, its Ownership and Term2

a) Works in which Copyright Subsists: Copyright subsists throughout India in the following classes of work: i. Original literary, dramatic, musical and artistic works. ii. Cinematograph films. iii. Sound recordings. Literary works include computer programmes, tables and compilations including computer databases. The term dramatic works includes any piece of recitation, choreographic work or entertainment in dumb show or acting. The words musical works mean a work consisting of music and includes any graphical notation of such work. A painting, sculpture, drawing or works of architecture and photograph are included in artistic works.
Case 1 Check Your Progress

1. 2. 3. 4. What is a Copyright Board? Who is the owner of a copyright? What is the life of a copyright? Does the use of copyrighted material for a judicial proceeding infringe copyright? Basically for a copyright, there should be a work and not a mere idea. Idea does not have a copyright protection. To claim copyright, the work should be in a material form which involves the ideas translated. - Jeffreys vs Bosey (1854, 4 HLC 815).
Case 2 The term literary means anything written or printed such as books on various subjects, serious and non-serious, novels, drama, poetry, anthology, critique, excerpts with comments, etc. What is material is that there should be some originality and skill in the work turned out. Thus the term literary is not confined to works of literature in the commonly understood sense but would include of what is expressed in writing whether they have inherent or latent literary merit or not. - Agarwal Publishing House vs Board of Higher Secondary and Intermediate
Education, (UP AIR 1967 (All) 91).
Case 3 It is the original inventive literary work that is entitled to protection under the Act. The
word original does not mean that the work must be the expression or inventive thought. Orginality relates to the expression of thought but the Act does not require that the expression must be in original or other form. The work must not be copied from another work, that is, it should not originate from another. - MacMillan & Co. vs Cooper, (AIR 1924 PC 75).
Notes
Case 4 Copyright exists in computer programes (software) and the written requests, punched cards, magnetic tapes or disks as the case may be. In a television programme also, there exists a copyright. The Tambola ticket books carry copyright protection as it consists of tables and numbers of skill and labour as has been bestowed. In the case of question papers, they enjoy copyright. - Jagdish Prasad vs Parameswar Prasad, (AIR 1966 Pat 33).
Case 5 An exhibition of a film in a television through video tape in which the cinematograph film is recorded will be the subject matter of copyright protection. A VCR which is used for playing pre-recorded cassettes of movies similarly will also be subject - matter of copyrights protection. In respect of cinematographic films the word original is missing in the section. In a film, a particular actor cannot claim any copyright and hence the actors performance is not copyrighted. In other words, a cine artiste in a film does not have a copyright protection.
- International Films vs Dev Anand, (AIR 1979, Bom 17).
b) c)
Meaning of Copyright: The word Copyright means the exclusive right in all the works in which the copyright subsists (See paragraph 9.3.3 (a)) Ownership of Copyright: The author of the work is the first owner of the copyright therein. This is, however, subject to some exceptions like an employer can have the ownership on a work produced by an author, under a Contract of Service or apprenticeship or the ownership of a computer related work vests in one who pays for it. Assignment of Copyright: The owner of the copyright may assign to any person the copyright, either wholly or partially, and either generally or subject to limitation and either for the whole term of the copyright or any part thereof. The assignment is valid only when it is in writing. Term of Copyright: i. The term of the copyright in any literary, dramatic, musical or artistic work (other than a photograph) is: a. If published with in the lifetime of the author until 60 years from the beginning of the calendar year next following the year in which the author dies. b. If published anonymously or pseudonymously, until 60 years from the beginning of the calendar year next following the year in which the work is first published. If, however, the identity of the author is disclosed before the expiry of the said period, then copyright shall subsist as per a above. c. In posthumous works, until 60 years from the beginning of the calendar year next following the year in which the work is first published. ii. The term of the copyright in case of a photograph, cinematograph film, sound recording, government work, work of public undertaking and the works of an international organisation, shall subsist until 60 years from the beginning of the calendar year next following the year in which the work is first published.
d)
e)
9.4 Licences3
Notes The owner of the copyright in any existing work or the prospective owner of the copyright in any future work may grant any interest in the right by license in writing signed by him or by his duly authorised agent. License to produce and publish a translation of a literary or dramatic work in any language may be applied to the Copyright Board, after a period of 7 years from the first publication of the work. A License to translate foreign literary or dramatic work, may be applied after three years from its publication.
Case Many a time there arises a contentious issue whether a deed is one of assignment of copyright or licensing of copyright may arise. Much of the confusion is because of the manner of drafting the deed. Particularly whether there is an exclusive licence or a partial licence or non-exclusive licence or a partial assignment or otherwise of the copyright the problem of interpretation becomes necessary in the context of the intention expressed in the deed but where the agreement contain express words indicating a licence or a partial assignment not much difference would areise. Many times where the agreement provides for royalties for sharing of profits in respect of literary works, the inference that could be drawn is that there is no assignment of the copyright. Similarly, where the publishers have been conferred exclusive licence to publish and sell and the authors are under obligation to revise the work and keep it up-to-date, there would be in law an inference that there is no assignment of the copyright whatsoever. Where payment of royalty is specified in the agreement the preponderance of the conclusion that there is no assignment would be right in law.
- Sundaram vs Rattan Prakashan Mandir, (AIR 1983 Del 461).
9.5 Copyright Societies4

No person or association of persons can commence or carry on the business of issuing or granting licenses in respect of any work in which copyright subsists unless a copyright society is registered by the Central Government. For example: Phonographic Performance Ltd. (PPL) is a copyright society which has got licenses from music companies for broadcasting their music in India.
9.6 Rights of Broadcasting Organisations and of Performers5

Every broadcasting organisation shall have a special right known as Broadcasting Reproduction Right in respect of its broadcasts. The term of this right is 25 years and of performers right subsists for 50 years.
9.7 International Copyright6

The Central Government can extend copyright protection to foreign works, and works made and published by certain International Organisations. Accordingly the Central Government has made the International Copyright Order, 1991 and the Copyright (International Organisations) Order, 1958.
9.8 Registration of Copyright7

Registration of copyright is optional. A register of copyright is kept in the copyright office. All details of works in which registration is applied for is entered in that register. Register of copyrights is a prima-facie evidence of the particulars entered there in. The register is open for inspection and extracts of it can be obtained. The entries in the register can be corrected or rectified and shall be published. A certificate of registration becomes a crucial prima-facie evidence before a court
in the ownership of the material and other facts recorded therein.
Case The copyright exists whether the registration is done or not, and the registration is merely a piece of evidence as to when a certain author started claiming copyrights in some artistic or some other work. - Glaxo Operations UK Ltd. vs Samrat Pharmaceuticals (AIR 1984 Del 265).
Notes
9.9 Infringement of Copyright8

Some of the acts which are considered as no infringement of copyright are: a) b) c) d) e) f) g) h) i) j) k) l) Private use including research. Criticism or review. Computer programme - making copies for the purpose for which it was supplied or make backup copies. Reporting current events in a newspaper, magazine or by broadcast or in a cinematograph film, or by means of photographs. For judicial proceedings. In any work prepared by the Secretariat of a Legislature exclusively for the use of its members. Copy made in accordance with any law. Reading in public of any reasonable extract from a published literary or dramatic work. Along with non-copyright matter, for the bonafide use of educational institutions. By a teacher or pupil in the course of instruction or as a part of question or answer in examination. Recording to be heard in public by utilising it in an enclosed room. Any bonafide religious ceremony held by the Central or State Government or any Local Authority.
Case Mr. Anand wrote a play entitled Hum Hindustani in 1953. The play was enacted in the next few years, in Delhi and Calcutta. It got good reviews in newspapers like the Indian Express, Hindustan Times, The Times of India and other papers. The play was based on the theme of provincialism and its baneful and divisive effects on the society. A film maker, Mr. Mohan Sehgal, become interested in making a film based on the play. He heard the play from Mr. Anand, in his office. Mr. Mohan did not receive any further communication from Mr. Sehgal. Thereafter, Mr. Sehgal announced the production of a film New Delhi. The picture was released in Delhi in September, 1956. From comments in the press, Mr. Anand felt that the film was very much like his play, Hum Hindustani. Thereafter, Mr. Anand himself saw the picture and felt that the film was entirely based on his play. He felt that Mr. Sehgal had dishonestly imitated the play in the film and violated his copyright. He, therefore, moved the court and the case finally came before the Supreme Court. The opposite party (Delux Films) claimed that they had communicated to Mr. Anand that the play might have been all right for the amateur stage, but it was too inadequate for the purposes of making a full length commercial motion picture. The key argument of the opposite party was that there could be no copyright on the subject or idea of provincialism. Any one can adopt it in his own way. They claimed that the motion picture was quite different from the play. Hum Hindustani in its content, spirit and climax. Some similarities could be explained by the fact that both were based
on the idea of provincialism. Notes Thus the position appears to be that an idea, principle, theme, or subject matter or historical or legendary facts being common property, cannot be the subject matter of copyright of a particular person. It is always open to any person to choose an idea as a subject matter and develop it in his own manner and give expression to the idea by treating it differently from others. Where two writers write on the same subject, similarities are bound to occur because the central idea of both are the same but the similarities or coincidences by themselves cannot lead to an irressistible inference of plagiarism or piracy. The court found that there had been no copyright violation in that case. - R.
G. Anand vs M/s Delux Films and others (AIR 1978 SC 1613).
9.10 Civil Remedies9

The owner of copyright can sue in the district court having jurisdiction and shall be entitled to remedies such as injunction, damages.
9.11 Offences10
Any infringement of copyright is punishable with imprisonment of not less than 6 months but may extend to 3 years or fine not less than Rs. 50 thousand but may extend to Rs. 2 lakhs. For infringement of copyright in computer programme punishment provided is imprisonment of not less than seven days but may extend to 3 years and fine of not less than Rs. 50 thousand but may extend to Rs. 2 lakh. If the infringement is not for gain or commercial purpose punishment can be less. If any person is aggrieved by any order made by the court, then he can file appeal within 30 days of the date of the order to the higher appellate court.
9.12 Miscellaneous11
This provides for the Central Government to make rules and also that all the actions taken by officials under the Act, if done in goods faith are protected.
9.13 Some Cases on Copyright

a) Ratnasagar Pvt. Ltd. v. Trisea Publications and others (citation: (1997) 24 CLA (SNR) 1 Delhi) Ratnasagar Pvt. Ltd. had published a book titled Living Science and claimed rights of literary work in that book. Trisea Publications brought out another book titled Unique Science. Ratnasagar Pvt. Ltd. urged that their copyright has been infringed by Trisea Publications and prayed for an injunction which was granted. Nagoti Venkataramana Case (Citation: 1996, (6) Scale 417 and 1996, (6) Sec 409)Nagoti Venkataramana was owning a Video parlour named Video City in Andhra Pradesh. He was sentenced to 3 months R.I. and fine of Rs. 3000 for keeping 90 pirated Telugu, Hindi and English movies video cassettes. He used to give these pirated cassettes to customers on hire. On the point that the police should have produced the evidence of the copyright owners, the Supreme Court ruled that It is unnecessary for the prosecution to track on and trace out the owner of the copyright to come and adduce evidence of infringement of the copyright. Phonographic Performance Ltd. (PPL) (As reported in the Times of India, Delhi edition 1st Jan. 2004). PPL is a copyright society registered under the Copyright Act. It is the sole authority to administer the broadcasting, telecasting and public performance rights and to collect licence fees on behalf of the music industry. Music Companies are members of PPL and have assigned it the right to issue licenses to event organisers for playing music at public performance. In a petition filed by PPL in Bombay High Court against the hotels of Mumbai for not paying license fee to PPL for playing music in respect of the companies with PPL on New years eve parties, the High Court of Bombay directed hotels of Mumbai
b)
c)
to pay license fee to PPL for the music they play. d) P. N. Krishnamurthys Case Shri P. N. Krishnamurthy, 70 year old author of Childrens literature won a copyright case against CARE after battling in court for 27 years. CARE was imposed a fine of Rs 5000 for a copyright violation. An appeal filed by CARE was dismissed as Without any merit. Notes
Summary
Copyright
The law relating to Copyright is contained in the Copyright Act, 1957. The Indian law is in conformity with our obligations in International Conventions. The Registrar of Copyright controls Copyright office and above him is the Copyright Board. The copyright subsits in 1 - original literary, dramatic, musical and artistic works, 2 - cinematograph films, and 3 - sound recordings. Copyright means the exclusive right in all the works in which the copyright subsists. The author of the work is the first owner of the Copyright therein. The owner of the copyright may assign to any person the copyright, either partially or wholly. The term of the copyright in any literary, dramatic, musical or artistic work is 60 years. The term of broadcasting reproduction right is 25 years and of performers right in 50 years. The Act provides for international copyright and for optional registration of copyright. Some of the acts which are considered as no infringement of copyright are, a - private use including research, b - criticism or review, c - making back-up copies of computer programme, d - reporting current events, e -for judicial proceedings, f- work prepared by secretariat of a legislature for its members, g - copy made in accordance with law, h - reading in public of any extract from a published literary or dramatic work, i - for the bonafide use of educational institutions, j - in the course of instructions or as a part in examination, k - recording to be heard in an enclosed room, or l - any bonafide religious ceremony held by the Central, State or Local Government. The infringement of copyright gives rise to civil remedies such as injunction or damages and penalties of imprisonment upto 3 years and fine upto Rs. 2 lakhs.
Review Questions
True or False
1. 2. 3. 4. Registration of copyright is compulsory under the Copyright Act. Granting license of copyright can only be done to a copyright society registered by the Central Government. The assignment of copyright is valid only when it is in writing. Making back-up copies of a computer programme is no infringement of copyright.

Tick the Right Answer: 1. 2. The term of Performers Right is for a period of: a. 50 years b. 40 years c. 30 years d. 20 years d. 80 years The term of copyright is for a period of: a. 20 years b. 40 years c. 60 years
Test Questions
Notes 1. 2. 3. Elaborate on the meaning of Copyright. How infringements of Copyright are dealt under the copyright Act, 1957? What acts are considered as no infringement of copyright? Give highlights of the Copyright Act, 1957?

1. False 2. True 3. True 4. True
Answers to Multiple Choice Questions

1. a 2. c

Following are the answers to Check Your Progress, indicating respective paragraphs for reference: 1) 9.2 2) 9.3 c 3) 9.3 e 4) 9.9 c
References
Sections 9 to 12 of the Copyright Act, 1957. Sections 13 to 29 of the Copyright Act, 1957. 3 Sections 30 to 32 B of the Copyright Act, 1957. 4 Sections 33 to 36 A of the Copyright Act, 1957. 5 Sections 37 to 39 A of the Copyright Act, 1957. 6 Sections 40 to 43 of the Copyright Act, 1957. 7 Sections 44 to 50 A of the Copyright Act, 1957. 8 Sections 51 to 53 A of the Copyright Act, 1957. 9 Sections 54 to 62 of the Copyright Act, 1957. 10 Sections 63 to 73 of the Copyright Act, 1957. 11 Sections 74 to 79 of the Copyright Act, 1957.
1 2
Section
Important Aspects of Patent Law
Notes
10
Art and law are as different as chalk from cheese. But the dreamer also needs support. Money speaks sense in a language all nations understand. Anonymous Aphra Behn STRUCTURE
10.1 Introduction 10.2 What is a Patent? 10.3 Inventions not Patentable 10.4. Application for Patents 10.5 Publication and Examination of Application 10.6 Oppositoin Proceedings to Grant of Patents 10.7 Provisions for Secrecy of Certain Inventions 10.8 Grant of Patents and Rights Conferred Thereby 10.9 Patents of Addition 10.10 Amendment of Applications and Specifications 10.11 Restoration of Lapsed Patents 10.12 Surrender and Revocation of Patents 10.13 Register of Patents 10.14 Ratent Office and its Establishment and Powers of Controller 1. 10.15 Working of Patents, Compulsory Licences and Revocation Which Act governs the law related to patents?
Check Your Progress
2. Who makes the 10.16 Use of Inventions for Purposes of Government and Acquisition of Inventions by Central applications for Government patents? 10.17 Suits Concerning Infringement of Patents 10.18 Miscellaneous
10.1 Introduction
Notes The fundamental principle of patent law is that a patent is granted only for an invention which must be new and useful. That is to say, it must have novelty and utility. It is essential for the validity of a patent that it must be the inventors own creation as opposed to mere verification of what was already known before the date of the patent. Mere collection of more than one integers or things, not involving the exercise of any inventive faculty does not qualify for the grant of a patent. The law relating to patents is contained in the Patents Act, 1970, hereinafter referred to as the Act. It extends to the whole of India. The Act describes the procedure for the grant of patent and protects the rights of the patentee against infringement. The Act came into force from 21-91970. It has been amended in 1999, 2002 and again in 2005.
10.2 What is a Patent?

The Act states that a patent means a patent for any invention granted under the Act.1 It can also be defined as a grant from the government, which confers on the grantee, for a limited term, the exclusive privilege of making, selling and using an invention and also authorising others to do so. Thus a patent is a protection given to a patentee for his invention for a limited term by the Government in consideration of his disclosing the invention.
10.3 Inventions not Patentable2

Some of the inventions which are not patentable under the Act are: a) b) c) d) e) f) g) h) i) j) k) Frivolous inventions or which claim anything obvious or contrary to well established natural laws. Inventions which are contrary to public order or morality, or which caused serious prejudice to human, animal or plant life or health or to the environment. Mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance. Mere discovery of any new property or mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant. A method of agriculture or horticulture. A mathematical or business method or a computer programme per se or algorithms. A mere scheme or rule or method of performing mental act or method of playing game. A presentation of information. Topography of integrated circuits. An invention which, in effect, is traditional knowledge. An invention relating to atomic energy.
Case Mere arrangement or rearrangement or duplication of a known device cannot be patented. - Standipack
Pvt. Ltd. vs Oswal Trading Co. Ltd. ((19) PTC 479 (Del)).
10.4 Application for Patents3

A patent application can be made by any of the following persons either alone or jointly: a)
True and first inventor
b) c)
Assignee of (a) The legal representative of (a) or (b) after their death Notes
Every application for a patent shall be for one invention only and on a prescribed form. It shall be filed in the patent office with provisional or complete specifications. The Act also provides for international application under the Patent Cooperation Treaty, for a patent.
10.5 Publication and Examination of Application4

Every application of patent shall be published. When a request for examination is made by the applicant, the Controller shall refer the application and the specifications to an examiner for making a report to him. The examiner can come to the conclusion whether the invention has already been published or claimed or is the subject matter of existing patent. Controller can make objections, which the applicant shall rectify.
Case Prior registration of patent in another country prima facie constitutes prior publication and is liable to be rejected. - Lintech Electronics (P) Ltd. vs Marvel Engineering Co. (1995 (35) DRJ 11).
10.6 Opposition Proceedings to Grant of Patents5

Where an application for a patent has been published but a patent has not been granted, any person may, in writing on specified grounds give, notice of opposition to the Controller against the grant of patent. At any time after the grant of patent but before the expiry of one year from the date of publication of grant of a patent any person interested may give notice of opposition to the Controller on certain specified grounds only. Where any notice of opposition has been given, the Controller shall constitute an Opposition Board for examination and submission of its recommendations to the Controller. Thereafter the Controller may, if so desired, give to both the applicant and the opponent an opportunity to be heard before ordering either to maintain or to amend or to revoke the patent.
10.7 Provisions for Secrecy of Certain Inventions6

Where in respect of an application for a patent, it appears to the Controller that the invention is one of a class notified to him by the Central Government as relevant for defense purposes, then he may give directions for prohibiting or restricting the publication of information with respect to the invention or the communication of such information. Such directions shall be periodically reviewed at intervals of six months or on a request made by the applicant.
10.8 Grant of Patents and Rights Conferred Thereby7 Check Your Progress
a) Grant of Patent: Where the application for the patent is accepted, then the Controller shall grant the patent. The date of the grant of patent is entered in the register when the patent is granted, the application, specification and other documents related to the patent shall be open for public inspection. Date of Patent: Every patent shall be dated as of the date on which the application for patent was filed. Rights of Patentee: The patentee has exclusive right to prevent third parties from the act of making, using, selling or importing for these purposes the patented product in India. Term of Patent: The term of every patent shall be 20 years from the date of filing of the application for the patent. 3. When the secrecy shall be maintained with regard to patents? What are the rights related to the patentee? How long a patent is valid?
b) c) d)
4.
5.
10.9 Patents of Addition8

Notes An application may be for a patent in respect of any improvement in or modification of a patented invention (known as main invention). The Controller may grant the patent for the improvement or modification as a patent of addition. The term of the patent of addition shall run concurrently and terminate with the main patent. A patent of addition shall not be granted before grant of the patent for the main invention.
10.10 Amendment of Applications and Specifications9

The Controller is empowered to allow the application for the patent or the complete specification or any document relating thereto to be amended. Every such application shall state the reasons and nature of the proposed amendment. If such application is made after the grant of the patent then the nature of the proposed amendment shall be published.
10.11 Restoration of Lapsed Patents10

Where a patent has ceased to have effect by reason of failure to pay any renewal fee within the prescribed period, then an application may be made to the Controller within 18 months for the restoration of the patent.
10.12 Surrender and Revocation of Patents11

A patentee may at any time by giving notice to the Controller, offer to surrender his patent. This offer shall be published. Opposition can be made and settled and then only the Controller shall revoke the patent. The Appellate Board may also revoke the patent on a petition of any person interested or of the Central Government. The High Court may also revoke the patent on a counter claim in a suit for infringement of the patent. The Act also provides revocation of patent by the Central Government in public interest.
10.13 Register of Patents12

A register of patents shall be kept at the patent office. The particulars regarding the patent, patentee, assignment, transfer, license shall be entered in the register. The Controller can keep the register in computer floppies, diskettes, or any other electronic form. This register shall be open to inspection by the public. Any person can take extracts of the register on payment of prescribed fee. The register shall be prima-facie evidence of any matters required or authorised to be entered therein. The Appellate Board may, on the application of an aggrieved person make such order for the making, variation or deletion of any entry therein as it may think fit.
10.14 Patent Office and its Establishment and Powers of Controller13

The head office and the branch offices of the patent office shall be specified by the Central Government. Presently it has branch offices at Mumbai, New Delhi and Chennai and head office at Kolkata. The Controller General of Patents, Design and Trade Marks is the Controller of Patents. There shall be a seal of the patent office. The Controller shall have powers of Civil Court. The Controller has powers to correct clerical errors, take evidence either orally or by affidavit. Three of the patent offices in Kolkata, Chennai, Mumbai and New Delhi have been modernised. The modernisation of patent offices helps fast track patent processing, apart from linking them with Patent Cooperation Treaty network in Geneva.14
10.15 Working of Patents, Compulsory Licenses and Revocation15

a) Working of Patents: The patents are granted to encourage inventions, and to make the benefit of the patented inventions available at reasonably affordable prices to the public. They are not granted merely to enable patentees to enjoy a monopoly. The patents granted do not impede protection of public health and nutrition. The Central Government is working on a fast track solution to ease the burden of ever growing patent applications in India. Once the system is in place, the procedure of completing a patent application will take six months to five years. At present the government needs at least 11 years to handle one patent application. Till a couple of years ago, only 4000 patent applications were filed annually. In 2004-05, there were about 17000 applications which further went upto 25000 during 2005-06.16 Compulsory Licenses and Revocation: At any time after the expiration of 3 years from the date of the grant of a patent, any person interested may make an application to the Controller for the grant of compulsory license on patent. The Controller, may grant a license on such terms as he may deem fit. The Controller may grant compulsory license for export of patented pharmaceutical products in certain exceptional circumstances like public health. Any license of the patent can also be terminated by the Controller.
Notes
b)
10.16 Use of Inventions for Purposes of Government and Acquisition of Inventions by Central Government17
At any time after the application for a patent had been filed or the patent has been granted, the Central Government may use the invention for government purposes. The Central Government can acquire an invention for a public purpose, before or after the grant of a patent. Adequate compensation for the acquisition shall be paid.
10.17 Suits Concerning Infringement of Patents18

The court can grant relief in cases of groundless threats of infringement, including an injunction and damages. In any suit of infringement, the Court may grant an injunction, or seizure of goods or damages.
Case Where the defendant neither claims to be the owner of the patent nor has it filed any petition or counter claim, it cannot plead that the plaintiff has no locus standi to institute proceeding for infringement of patent, merely raising the plea that the plaintiffs registration is improper. - Schnieder
Electric Industries SA vs Telemecaniqne and Controls (I) Ltd. ((IA no 8522) 2000 (20) PTC 20 (Del)).
10.18 Miscellaneous
The Act also provides for: a) b) c) d) e) f) Appeals to the Appellate Board.19 Penalties.20 Patent agents.21 International arrangements.22 Fees for grant, renewal etc. of patents.23 Power of High Courts and Central Government to make rules.24
Check Your Progress

6. How can the modifications be made to an existing patents? What is the time allowed to patentee for restoring a lapsed patent?
7.
Summary
Notes
Patent
The law relating to patents is contained in the Patents Act, 1970. Patent is granted only for inventions which are new and useful. Patent is a grant from the government, which confers on the grantee, for a limited term, the exclusive privilege of making, selling and using an invention and also authorising others to do so. Some of the inventions which are not patentable are 1 - frivolous, 2 - contrary to public order or morality, 3 - mere discovery of any new property or a known substance, 4 - methods of agriculture or horticulture, 5 - mathematical or business methods, 6 - method of playing games, 7 - presentation of information, 8 - topography of integrated circuits, 9 - which in effect is traditional knowledge, and 10 - relating to atomic energy. A patent application can be made by true and first inventor, his assignee or their legal representative. Every application shall be for one invention and accompanied by provisional or complete specifications. Every application shall be published and sent to an examiner for a report. If any opposition to the grant of patent is made, it shall be decided by the controller. If the invention is relevant for defense purposes, then the Central Government may give directions as to prohibiting the publication of information. The term of the patent shall be 20 years from the date of filing of the application for the patent. The patentee has exclusive right to prevent third parties from making, using or importing the patented product in India. The Controller may grant the patent for the improvements or modification as a patent of addition. The Controller has powers 1 - to allow the application for the patent or complete specifications, 2 - for the restoration of a lapsed patent and 3 - to allow surrender or to revoke the patent. A register of patent is kept in the patent office. All the particulars regarding the patent are entered in the register. The register is prima-facie evidence of entries made in the register. The head office of the patent office is at Kolkata and branch offices are at Mumbai, New Delhi and Chennai. The Central Government may use the invention for government purposes and also can acquire an invention for a public purpose for adequate compensation. For any infringement of patent, the court may grant injunction, seizure of goods or damages.
Review Questions
True or False
1. 2. 3. 4. A method of agriculture cannot be patented. The Central Government can acquire a patent for public purpose without paying any compensation. A patent application can be made by true and first inventor. The Controller is empowered to allow the application for the patent to be amended.

Tick the Right Answer: 1. 2. The term of patent under the Patent Act, 1970 is: a. 7 years b. 14 years c. 20 years d. 50 years The head office of the patent office is: a. New Delhi b. Chennai c. Mumbai d. Kolkata
Test Questions
1. 2. 3. What is a patent? Explain the procedure for grant of patent? What inventions can not be patented under the Patents Act, 1970? Notes

1. True 2. False 3. True 4. True

1. C 2. D

Following are the answers to Check Your Progress, indicating respective paragraphs for reference: 1) 10.1 2) 10.4 3) 10.7 4) 10.8 c 5) 10.8 d 6) 10.9 7) 10.11
References
1 2 3 4 5 6 7 8 9
Section 2 (1) (m) of the Patents Act, 1970. Section 3 and 4 of the Patents Act, 1970. Section 6 to 11 of the Patents Act, 1970. Section 11 A to 21 of the Patents Act, 1970. Section 25 to 28 of the Patents Act, 1970. Section 35 to 42 of the Patents Act, 1970. Section 43 to 53 of the Patents Act, 1970. Section 54 to 56 of the Patents Act, 1970. Section 57 to 59 of the Patents Act, 1970. Section 60 to 62 of the Patents Act, 1970. Section 67 to 72 of the Patents Act, 1970. Section 73 to 81 of the Patents Act, 1970. Section 63 to 66 of the Patents Act, 1970.
10 11
12 13 14
Ajay Dua, Secretary, Department of Industrial Policy and Promotion as told to Economic Times and published in Economic Times (Delhi edition) dated 9th April 2006. Section 82 to 94. Economic Times (Delhi edition) dated 9th April 2006. Sections 99 to 103 of the Patents Act, 1970. Sections 104 to 115 of the Patents Act, 1970. Sections 116 to 117 H of the Patents Act, 1970. Sections 118 to 124 of the Patents Act, 1970. Section 125 to 132 of the Patents Act, 1970. Sections 133 to 139 of the Patents Act, 1970.
15 16 17 18 19 20 21 22
23 24
Section 142 of the Patents Act, 1970. Sections 158 and 159 of the Patents Act, 1970.
Notes
Introduction to FEMA Section
Notes
11
Obey the law, whoever you be that made the law Money speaks sense in a language all nations understand. Pittacus Aphra Behn STRUCTURE
11.1 Introduction 11.2 Extent and Application 11.3 Regulation and Management of Foreign Exchange 11.4. Authorised Person 11.5 Contravention and Penalties 11.6 Adjucdication and Appeal 11.7 Directorate of Enforcement 11.8 Miscellaneous
11.1 Introduction
Notes The Foreign Exchange Management Act, 1999 (FEMA) replaces the Foreign Exchange Regulation Act, 1972 (FERA). FERA aimed at having stringent controls to conserve Indias foreign exchange. FERA was amended in 1993 to bring about certain changes, as a result of introduction of economic reforms and liberalisation of the Indian economy. It was soon realized that FERA has outlived its utility and was replaced by FEMA. FEMA has been brought into force with effect from1-6-2000.1 The objective of FEMA is to facilitate external trade and payments and to promote the orderly development and maintenance of foreign exchange market in India.
11.2 Extent and Application2

FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India owned and controlled by a person resident in India and also to any contravention committed outside India by any person to whom this Act applies.
11.3 Regulation and Management of Foreign Exchange3

a) Dealing in Foreign Exchange: No person, except with the general or special permission of the Reserve Bank of India, shall deal in or transfer any foreign exchange, or make any payment to any person resident outside India, or receive any payment from outside India or enter into any financial transaction in India, to acquire any asset outside India. Dealing in foreign exchange can be done only by authorised person. b) Holding of Foreign Exchange etc.: No person resident in India shall hold, own, possess or transfer any foreign exchange or acquire any immovable property outside India without the sanction of the Reserve Bank of India. Foreign exchange may be drawn from an authorised person for current account transactions and for capital account transactions to such restrictions as may be imposed by the Reserve Bank of India in consultations with the central government. c) Export of goods and services: Every exporter of goods and services shall furnish to the Reserve Bank of India or to such other authority a declaration containing true and correct particulars representing full export value or payment for services. d) Realisation and Repatriation of Foreign Exchange: Persons resident in India shall take all reasonable steps to realise and repatriate the foreign exchange due or accrued within such period and in such manner as may be prescribed. However, certain category of persons are exempt from realisation and repatriation.
11.4 Authorised Person4

The Reserve Bank of India appoints in writing any person as authorised dealer, person or money changer to deal in foreign exchange or in foreign security. The Reserve Bank of India has powers to issue directions to and inspect authorised person.
11.5 Contravention and Penalties6

a) Penalties for Contravention: For any contravention under FEMA the penalty is thrice the sum involved when the amount
is quantifiable otherwise upto Rs. 2 lakhs. If the contravention continues, the penalty of Rs. 500 per day shall be imposed. Any adjudicating authority, may in addition to the penalty, direct confiscation of money, security, currency or property involved. b) Enforcement of orders of Adjudicating Authority (A.A). If a person fails to make payment of penalty within 90 days, he is liable to civil imprisonment. No order for civil imprisonment will be made unless the A.A. has issued a show cause notice. Detention order or arrest warrant may be issued by the A.A. The defaulter shall be detained in civil prison upto 3 years where the demand exceeds Rs. 1 crore and in any other case upto 6 months. He can be released from detention if amount is subsequently paid. Any contravention can be compounded within 180 days from the date of application for this purpose.
Notes
11.6 Adjudication and Appeal7

a) Adjudicating Authority: The central government is empowered to appoint Adjudicating Authorities (A.A) for holding inquiries in their respective jurisdiction on a complaint made in writing. The A.A. has powers of a civil court. All complaints are to be disposed off finally within one year, otherwise reasons are to be given in writing. b) Appeal to Special Director (Appeals): The central government is empowered to appoint Special Director (Appeals) to hear appeal from the orders of A.A. The appeal shall be filed within 45 days from the receipt of the order. The Special Director (Appeals) shall have the powers of the civil court. c) Appellate Tribunal: The central government can establish Appellate Tribunal to hear appeals against the orders of A.A. and Special Director (Appeals). The person appealing has to deposit the levied penalty. The appeal is to be filed within 45 days of the receipt of the order. It is to be disposed off within 180 days, otherwise reasons in writing are to be given. The Appellate Tribunal shall have the powers of the civil court. The Appellate Tribunal and the Special Director (Appeals) shall not be bound by the procedure laid down by the Code of Civil Procedure. They shall be guided by the principles of natural justice and shall have powers to lay down their own procedure. No civil court shall have jurisdiction in respect of matters to be dealt with by A.A., Special Director (Appeals) or Appellate Tribunal. From the orders of the Appellate Tribunal, appeal can be filed in the High Court within 60 days.
Check Your Progress

1. 2. When did FEMA come into force? Does FEMA also leave the state of J&K in the terms of enforceability? Can an individual hold foreign exchange in India? What is the duty of person residing in India, related to the realisation of foreign exchange? What is the Directorate of Enforcement?
11.7 Directorate of Enforcement8

The central government shall establish a Directorate of Enforcement with a Director and other officers as it thinks fit. Other officers not below the rank of Under Secretary to Government of India can also investigate. The officer so appointed shall exercise the like powers which are conferred on the income tax authorities under the Income-Tax Act, 1961, subject to such conditions and limitations as the central government may impose.
3.
4.
11.8 Miscellaneous9
Under this chapter FEMA provides for: a) b) c) Power to make rules and regulations. Power of central government to give directions and suspend the operations of this Act. Death or insolvency shall not abate the action. Liability is only to the extent of inheritance 5.
or estate of the deceased. Notes d) e) f) There are certain presumptions as to documents in certain cases. Contravention by companies. FERA has been repealed.
Summary
The Foreign Exchange Management Act, 1999
The Foreign Exchange Management Act, 1999 (FEMA) replaces the Foreign Exchange Regulation Act, 1949. FEMA extends to the whole of India and to all branches, offices outside India owned and controlled by person resident in India. Dealing in foreign exchange can be done only by authorised persons who are appointed by the Reserve Bank of India. Current account transactions are fully convertible whereas there are some restrictions in respect of capital account transactions. For any contravention of the Act, the penalty is thrice the sum involved when the amount is quantifiable otherwise upto Rs. 2 lakhs. In addition to the penalty, Adjudicating Authority (AA) may order confiscation of money, security or property involved. If penalty is not paid within 90 days, a person is liable for civil imprisonment. If the default in payment of penalty exceeds Rs. 1 crore detention in civil prison shall be upto 3 years and in other case upto 6 months. Person is released from detention if amount is subsequently paid. A.A. is appointed by the Central Government. A.A is required to dispose of complaint within one year. Appeal against the orders of AA is made to the Special Director (Appeals) within 45 days of the receipt of the order. Thereafter appeal can be made to Appellate Tribunal established by the central government. The Appellate Tribunal is required to dispose of appeals within 180 days. No civil court shall have jurisdiction. From the orders of Appellate Tribunal, appeal can be filed in the High Court within 60 days. The central government shall establish a Directorate of Enforcement with a Director and other officers. These officers investigate the matter under the Act and have powers like income tax authorities under the Income Tax Act, 1961.
Review Questions
True or False
1. 2. 3. Foreign Exchange Management Act (FEMA) applies to a branch in England of a company registered in India. A person resident in India can purchase a house in Singapore only after getting permission from the Reserve Bank of India. Director of Enforcement under FEMA has powers of the police officers.

1. Foreign Exchange can be obtained from: a) c) 2. a) c)
Central Government Authorised person
b) d)
State Government Any travel agent b) d) Adjudicating Authority Central Government
Authorised persons are appointed by: Foreign Exchange Appellate Tribunal Reserve Bank of India
Test Questions
1. 2. 3. How is regulation and management of foreign exchange done under the Foreign Exchange Management Act? Who is an authorised person? Discuss briefly the provisions ofcontravention, penalties, adjudication and appeal in the Foreign Exchange Management Act? Notes

1. True 2. True 3. False

1. B 2. C

Following are the answers to Check Your Progress, indicating respective paragraphs for reference: 1) 11.1 2) 11.2 3) 11.3.b 4) 11.3 d 5) 11.7
References
1 2 3 4 5 6 7 8
Vide GSR 371 (E), dated 1-5-2000. Section 1 of the Foreign Exchange Management Act, 1999 (FEMA). Sections 3 to 9 of FEMA. Sections 10 to 12 of FEMA. Sections 13 to 15 of FEMA. Sections 16 to 35 of FEMA. Sections 36 to 38 of FEMA. Sections 39 to 49 of FEMA.
Notes
Company Law Section
Notes
12
Corporations cannot commit treason, nor be outlawed, nor excommunicated, for they have no souls Money speaks sense in a language all nations understand. Sir Edward Coke STRUCTURE
12.1 Meaning and Nature of a Company 12.2 Formation and Incorporation of a Company 12.3 Memorandum of Association 12.4. Articles of Association 12.5 Prospectus 12.6 Membership 12.7 Share and Share Capital 12.8 Borrowings, Loans, Debentures and Investments 12.9 Company Management and Administration 12.10 Company Meetings and Resolutions 12.11 Accounts and Audit 12.12 Prevention of Oppression and Mismanagement
Aphra Behn
Check Your Progress Check Your Progress

Define a company. Define a company. What do you What do you understand by an understand by an Artificial Legal Artificial Legal Person? Person? What is a Common What is a Common Seal? Seal?
1. 1. 12.13 Compromises, Arrangements, Reconstruction and Amalgamation 2. 2. 12.14 Winding Up of a Company 12.15 Corporate Governance 3. 3.
12.1 Meaning and Nature of a Company

Notes
12.1.1 What is a Company?

The word Company has no strictly technical or legal meaning. It implies an association of persons for some common object. The law relating to companies in India is contained in the Companies Act, 1956, as amended up to date. This Act runs into 658 sections and 15 schedules. The text of the law alone occupies more than 700 pages. Endeavour is, therefore, to present some aspects of company law which are relevant for managers.
12.1.2 Definitions of a Company

Section 3(1) (i) of the Companies Act, 1956 (the Act) merely states that a company means a company formed and registered under this Act or an existing company as defined in Section 3(1) (ii). Section 3(1) (ii) lays down an existing company means a company formed and registered under any of the previous companies law. This definition neither gives the meaning of a company clearly, nor defines a company in terms of its features. To understand the meaning of a company, let us see the definition as given by different authorities. a) A company is an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who share the profit and loss arising there-from. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute to it or to whom it pertains are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is often more or less restricted. Lord Justice Lindley b) According to Chief Justice Marshall, A corporation is an artificial being, invisible, intangible existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. As per Prof. Haney, A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.
c)
12.1.3 Characteristics of a Company

The characteristic features of a company are as follows: a) b) Incorporated Association: The company must be incorporated or registered under the Act. Artificial Legal Person: The company, being a juristic person, does not possess the body of a natural being. It exists only in contemplation of law. Separate Legal Entity: Unlike partnership, the company is distinct from the persons who constitute it. In the famous case of Salomon V. Saloman Co. Ltd1., Salomon was leather merchant. He converted his business into a limited company -Salomon and Co. Ltd. The company so formed consisted of Salomon, his wife and five of his children as members. The company purchased the business of Salomon for 39,000, the purchase consideration was paid in terms of 10,000 debenture conferring a charge over the companys assets, 20,000 in fully paid 1 share each and the balance in cash. The company within a year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Salomon himself). And nothing was left for the unsecured creditors. It was held by the House of Lords that the company was validly constituted. The business belonged to the company and not to Salomon.1 Perpetual Succession: A company being an artificial person does not die. Its life is not
Check Your Progress

c) 1. 2. Define a company. What do you understand by an, Artificial Legal Person. What is a Common Seal?
3.
d)
dependant on its members. Prof. Gower aptly puts that no hydrogen bomb could have destroyed a company. e) Limited Liability: The members of a company are only liable to contribute towards payment of its debts to a limited extent, e.g. in a company limited by shares, a members liability is limited to the nominal value of the share. However, the Act provides for unlimited liability company as well. Transferable Shares: The companys shares are capable of being easily transferred. They are traded in a stock exchange market. Common Seal: A company can be held bound by only those documents which bear its signature. Common seal is the official signature of a company. Separate Property: Share holders are not, as per law, part owners of the company or its property. A company being a legal person can hold and own property in its own name. Capacity to Sue and Being Sued: A company, has a distinct legal personality and hence can sue and being sued.
Notes
f) g) h) i)
12.1.4 Kinds of Companies

Companies can be classified on various basis, which are as follows: a) On the basis of mode of incorporationi. Chartered Companies: Like East India Company. This type of company is generally not found in India presently.
ii. Statutory Companies: Which are created by a special Act like Life Insurance Corporation, State Bank of India, Unit Trust of India, Reserve Bank of India. iii. Registered Companies: Are companies registered under the Act. b) On the basis of Liability of Membersiv. Limited by Shares: Where the liability of the members of a company is limited to the amount unpaid on the shares.2 v. Limited by Guarantee: Where the liability of the members of a company is limited to a fixed amount which the members undertake to contribute to the assets of the company in the event of its being wound up.3
vi. Unlimited: Every member is liable for the debts of the company, as in an ordinary partnership, in proportion to his interest in the company.4 c) On the basis of Number of Membersvii. Private: Where the minimum number of member is two and maximum fifty. viii. Public: Where the minimum number of member is seven and maximum number is limited by number of shares. d) Other types of Companiesi. Government Companies: Means any company in which not less than 51% of the paid up share capital is held by the central government and partly by one or more state governments.5
ii. Foreign Company: Means a company incorporated outside India but having a place of business in India.6 iii. Holding and Subsidiary Company7: These are relative terms. A company is a holding company of another, if the other is its subsidiary. A company shall be deemed to be a subsidiary of another if: a. b. That other company controls the composition of its board of directors, or The other company holds more than half in nominal value of its equity share capital.
c. Notes e)
It is a subsidiary of a third company which itself is a subsidiary of the controlling company.
Producer Companies8The companies (Amendment) Act, 2002, has introduced a new type of company known as Producer Companies. Any ten or more individual producers or any two or more producer institutions may form and incorporate a company as a producer company. This type of company shall have special provisions regarding membership and voting rights and its administration.
12.1.5 Distinction Between Private and Public Company S. No.

1. 2. 3. 4.
Private Company
Minimum numbers of members to form a company is 2. Maximum numbers of members should not exceed 50. Right to transfer share is restricted. Prospectus can not be issued.
Public Company
Minimum numbers to form a company is 7. No restriction. Freely transferable. Through prospectus general public is invited to subscribe for shares, debentures or deposits. Must have at least 3. Can only start after receiving the certificate to commence business from Registrar of Companies. Necessary. Each directors appointment requires separate resolution. Not more than 12 without the approval of central government. At least 2/3 of directors must retire by rotation. Not more than 11% of net profit (Not more than 5% to single Manager/ Director). Five members. Rs. 5 lakh. Not so exempted. Can accept public deposits (Subject to Secs 58A, AA, AAA & B) Must do so.
5. 6.
Number of directors must be at least 2. Commence business immediately after getting the certificate of incorporation. Directors consent to work, as a director with Registrar is not necessary. Directors can be approved by a single resolution. Number of directors may be increased to any number. Directors are not required to retire by rotation. Managerial remuneration no restriction. Quorum for general meeting 2 Can be registered with a paid up capital of Rs. 1 lakh. Exempted from filing of various returns. Cannot accept deposits from the public. Need not hold a statutory meeting or file a statutory report.
7.
8. 9. 10. 11.
12. 13. 14. 15. 16.
12.1.6 Lifting the Corporate Veil

The main advantage of forming a company is to have a separate legal entity. At times, the facade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as lifting the corporate veil. Generally, courts do not interfere and essentially go by the principle of separate entity as laid down in the Salomons case, it may be in the interest of members and in public interest to identify and punish the persons who misuse the medium of corporate personality. The circumstances under which the courts may lift the corporate veil may broadly be grouped under the following two heads: a) Under Statutory Provisions: The advantage of distinct entity and limited liability may not be allowed in certain circumstances. Such cases are: i. Reduction of Membership: When the number of members of a company is reduced below the statutory minimum, and the company carries on business for more than six months, every member who is aware of that fact shall be severally liable for the payment of companys debts, contracted during that time.9 5. Notes
Check Your Progress

4. What are different types of companies on the basis of liability? What do you understand by a Foreign Company? 6. Under which two categories, lifting the corporate veil is possible?
ii. Misrepresentation in Prospectus: In such a case, every director, promoter and every other person, who authorises such issue of prospectus incurs liability towards those who subscribed for shares on the faith of untrue statement.10 iii. Fraudulent Conduct of Business: During winding up of a company, when any business of a company has been carried on with intent to defraud creditors of the company or any other person, those who are knowingly parties to such conduct of business may, be made personally liable.11 iv. Failure to Return Application Money: When a company issues shares to the public, and minimum subscription as stated in the prospectus has not been received within sixty days of the closure of the issue, directors shall be personally liable to return the money with interest @ 15% per annum, in case application money is not repaid within 10 days of the closing of issue.12 v. Mis-description of Name: When the companys name is not mentioned, or not properly mentioned in any document, then any person signing such document shall be personally liable.13
vi. Non-payment of Tax: Under the Income Tax Act, where any private company is wound up and any tax arrears could not be recovered, then every director of such a company shall be jointly and severally liable for payment of tax. vii. Liability of Ultra-vires Acts: Directors and other officers of a company will be personally liable for all those acts which they have done on behalf of a company if the same are ultra-vires the company. viii. Liability of Promoters For Pre-incorporation Contracts: Prior to passing of Specific Relief Act, 1963, would not be borne by the company and promoters are liable for such contracts. ix. Directors With Unlimited Liability: Shall be personally responsible for the debts of the company. x. Holding-subsidiary Company: Every holding company shall attach to its balance sheet copies of balance sheet, profit and loss account, directors reports and auditors report in respect of each subsidiary company.
b)
Under Judicial Interpretations: It is difficult to deal with all the cases in which courts have lifted or might lift the corporate veil. Some such cases are: i. For Determining the Enemy Character of a Company: Famous case establishing this point is Daimler Company Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd.14 The brief facts of this case are that a company was incorporated in London for
Notes
the purpose of selling tyres manufactured in Germany by a German company. Its majority shareholders and all the directors were Germans. On declaration of war between England and Germany in 1914, it was held that since both the decision making bodies, the Board of Directors and the general body of shareholders were controlled by Germans, the company was a German company and hence an enemy company. Accordingly, the suit filed by the company to recover a trade debt was dismissed on the ground that such payment would amount to trading with enemy. ii. For the Benefit of Revenue: In Sir Dinshaw Maneckjee Petil, Re,15 An assessee was receiving huge income by way of dividend and interest income, transferred his investments to four private companies formed for the purpose of reducing his tax liability. These companies transferred the income to D as a pretended loan. Held, the companies were formed by D purely and simply as a means of avoiding tax obligation and the companies were nothing more than the assessee himself. iii. For Prevention of Fraud and Improper Conduct: In Jones v. Lipman16 L agreed to sell a certain land to J. He subsequently changed his mind and to avoid the specific performance of the contract, he sold it to a company which was formed specifically for this purpose. The company had L and a clerk of his solicitors as the only members. J brought the action for specific performance against L and the company. The court looked to the reality of the situation, ignored the transfer, and ordered that the company should convey the land to J. iv. Others: Like where company is used to avoid welfare legislation, or where company is a mere sham or cloak. In Delhi Development Authority V. Skipper Construction company (P) Ltd.17 the Supreme Court held that the fact that the director and members of the family of Tejwant Singh had created several companies and these companies were mere cloaks and that the device of incorporation was really a ploy adopted for committing illegalities and / or to defraud people.
12.2 Formation and Incorporation of a Company

12.2.1 Stages of Incorporation
The complete process of formation of a company may be divided into four stages namely: a) b) c) d) Promotion. Registration/Incorporation. Floatation/Raising of Capital. Commencement of Business.
12.2.2 Promotion
Promotion means the preliminary steps taken for the purpose of registration and floatation of the company. Gerstenberg has defined the term promotion as the discovery of business opportunities and the subsequent organization of fund, property and managerial ability into a business concern for the purpose of making profits therefrom. Persons who perform the task of promotion are called promoters. The word promoter has not been defined in the Act, although this term has been used in various sections of the Act. Justice Cockburn described a promoter as one who under takes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose.18 L.J. Bowen observed that the term promoter is a term not of law but of business, usefully summing up in a single word-promotion, a number of business operations familiar to the commercial world by which a company is brought into existence.19
12.2.3 Registration/Incorporation of Company

The promoter of the company will submit the following documents with the Registrar of Companies for the registration of the company: a) b) c) d) e) The memorandum of association. The articles of association. A list of persons who have consented to act as directors of the proposed company. A statutory declaration of compliance. Any agreement with the relevant persons of the proposed company. Notes
The Registrar of Companies is to allot a Corporate Identity Number (CIN) to each company registered on or after November 1, 2000. After scrutiny of all these documents and if they are in order, the Registrar of Companies shall issue a certificate of incorporation. This certificate of incorporation given by the Registrar shall be conclusive evidence that all the requirements of the Act have been complied with. In the case of Jubilee Cotton Mills Ltd v. Lewis20, the Registrar issued a certificate of incorporation on January 8, but dated it January 6th, which was the date he received the documents. On January 6th the company made an allotment of shares to Lewis. It was held that the certificate was conclusive evidence of incorporation on Jan 6th and that the allotment was not void on the ground that it was made before the company was incorporated.
12.2.4 Floatation/Raising of Capital

A private company is prohibited from inviting public to subscribe to its share capital. Therefore, when a private company is formed, the requisite capital is obtained from friends and relatives by making its own arrangement. A public company can take either of the following steps: a) b) Issue a prospectus in case public is to be invited to subscribe to its capital, or Deliver a statement in lieu of prospectus where the company has either not issued a prospectus or though it has issued a prospectus it has not proceeded to allot any of the shares offered to the public for subscription.
12.2.5 Commencement of Business

Every private company and a company not limited by shares can commence business immediately on receipt of certificate of incorporation. But a public company limited by shares is debarred from commencing business or borrowing money without the certification of commencement of business. a) Where the company has issued a prospectus it has to satisfy the following conditions: i. The minimum subscription in cash has been received, 7. What are the stages in incorporation of a company. Who is a promoter? Who allots a Corporate Identity Number? ii. Every director of the company has paid on his shares in cash, a proportion equal to the proportion payable on application and allotment on the shares payable in cash. iii. A statutory declaration duly verified by one of the directors or the secretary in the prescribed form, that the above conditions have been complied with, is filed with the Registrar. When the company has complied with the aforesaid conditions, the Registrar will issue a certificate to commence business. b) Where the company has not issued a prospectue - it has to satisfy the following conditions: i. A statement in lieu of prospectus has been filed with the Registrar, ii. Every director of the company has paid on his shares in cash, a proportion equal to the proportion payable on application and allotment on the shares payable in cash. iii. A statutory declaration duly verified by one of the directors or the secretary in the
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8. 9.
10. What is the significance of certificate of incorporation?
Notes
prescribed form, that the above conditions have been complied with, is filed with the Registrar. When the company has complied with the aforsaid conditions, the Registrar will issue a certificate to commence business.
12.3 Memorandum of Association

12.3.1 Meaning and Importance
For the formation of a company one of the first steps is to prepare a document called the memorandum of association. According to the Act, memorandum means the memorandum of association of a company as originally framed or altered from time to time in pursuance of any previous companies law or of this Act.21 This definition however, does not state the nature of this document nor is indicative of its importance. According to Lord Cairns, the memorandum of association of a company is its charter and defines the limitations of the powers of a company. It contains the fundamental condition upon which alone the company is allowed to be incorporated. Thus the memorandum of association is the charter of the company, but it is not unalterable. The memorandum shall be drawn up in such a form as is given in Tables B,C,D and E in Schedule I to the Act. It has to be printed, divided into paragraphs, numbered consecutively and signed by at least 7 persons (2 in the case of private company) in the presence of at least one witness, who will attest the signature(s). Each of the subscribers shall at least take one share.
12.3.2 Contents
The memorandum of a limited company is to contain the following clauses: a) b) c) Name of the Company With limited or private limited as the last word(s) of the name. Registered Office The name of the state in which the registered office is to be situated. Objects of the Company Stating separately: i. The main objects. ii. Incidental or ancillary objects. iii. Other objects not included in (i) and (ii) above. d) e) f) Liability A declaration is made that the liability of the member is limited. Capital The amount of authorised share capital divided into shares of fixed amounts. Association or Subscription The initial members are called subscribers, who sign the memorandum in the presence of one witness.
The above clauses of the memorandum are called compulsory clauses. In addition to these, the memorandum may contain other information, for example, rights attached to various classes of shares. The memorandum cannot contain anything contrary to the provisions of the Act.
12.3.3 Doctrine of Ultra-vires

The word ultra means beyond and the word vires means the powers. Therefore the term ultravires means beyond the powers. In case of a company, it means beyond the powers of the company. The powers of a company are contained in the statute constituting it and the memorandum of association. The rule of ultra-vires was for the first time laid down in the case of Ashbury Railway Carriage and Iron Company Ltd. v. Riche.22 In this case the company was formed with the object to make and sell, or lend or hire railway carriage and wagons and all kinds of railway plants, to carry on the business of mechanical engineers and general contractors. The company contracted with Riche to finance the construction of railway line in Belgium. The company repudiated the agreement
and was sued for breach of contract. Riche contended firstly, that the contract in question came well within the meaning of the words general contractors, and, was therefore, within the powers of the company, Secondly, that the contract was ratified by the majority of the shareholders. The court (House of Lords) held that the term general contractors must be taken to indicate the making generally of such contracts as were connected with the business of mechanical engineers, otherwise it would authorise the making of contracts of any kind and every description and would, therefore, be altogether un-meaningful. Hence the contract was entirely beyond the objects in the memorandum of association. The effects of ultra-vires transactions are: a) b) c) d) e) Void abinitio - The ultra-vires acts are null and void abinitio (The company is not bound by these acts). Injunction - A member can get an order of restraint (injunction) from the court against such an act (ultra-vires) of the company. Personal liability of directors - For ultra-vires acts of the company, directors will be personally liable. Acquisition of property that is ultra-vires - In such a case companys right over such property is held secured. Directors are personally liable to third parties.
Notes
12.3.4 Alteration of Memorandum

The contents of a memorandum can be altered only in the manner and to the extent provided in the Act. All the clauses of the memorandum, except the subscription clause can be changed. The provisions regarding alteration of clauses can be summarized as follows: a) Alteration of name clause.24 i. For the change of name special resolution by a company and written approval of the central government is required. However no approval of the central government is necessary if the change of name involves only the addition or deletion of the word Private.
ii. When name is identical or too closely resembles the name of an existing company then change of name can be done by passing an ordinary resolution and the written approval of the central government. b) Change of registered office.25 i. From one premises to another premises in the same city, town or village, by passing a resolution of the Board of Directors.
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11. How the capital can be raised by a public company? 12. When can a private company commence its business? 13. What is a Memorandum of Association? 14. What is ultra vires? 15. Which clause of the memorandum cannot be changed?
ii. From one town or city or village to another town or city or village in the same state, by passing a special resolution. Confirmation of Regional Director is required if the jurisdiction of the Registrar of company is changed. A copy of the special resolution and the confirmation of the Regional Director, if required, is to be filed with the Registrar who is also given notice of new location within thirty days. iii. From one state to another state special resolution and confirmation of the central government is required. This change is permissible only for certain purposes as given in Section 17 of the Act (see paragraph 12.3.4 (c) ii). c) Alteration of objects clause: i. Special resolution is passed by the company and a copy of the same is filed with the Registrar within 30 days. a. To carry on its business more economically and more efficiently. b. To attain its main purpose by new or improved means.
ii. Alteration is sought on any of these grounds.26
c. To enlarge or change the local areas of its operations. Notes d. To carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company. e. To restrict or abandon any of the objects specified in the memorandum. f. To sell or dispose off the whole or any part of the undertaking. g. To amalgamate with any other company. d) Alteration of liability clause:27 i. The liability of a member of a company cannot be increased unless the member agrees in writing.
ii. From unlimited liability, it can be made limited by re-registration of the company. e) Alteration of capital clause:28 If the articles authorise a company limited by share capital may by an ordinary resolution alter the capital so as: i. To increase the authorised share capital. ii. To consolidate and subdivide share. iii. To convert shares into stock and vice versa. iv. To cancel shares not taken up.
12.4
Articles of Association
12.4.1 Meaning
According to the Act, articles means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous company laws or of this Act....29 The articles of association of a company are its bye laws or rules and regulations that govern the management of its internal affairs and the conduct of its business. They define the powers of its officers. They also establish a contract between the company and the members and between the members inter se.
12.4.2 Contents of Articles

Articles usually contain provisions relating to the following matters like: a) b) c) d) e) f) g) h) i) j) k)
Different classes of shares and their rights. Procedure of making an issue of share capital and allotment there of. Procedure of issuing share certificates and share warrants. Forefeiture of shares and the procedure of their reissue. Procedure for transfer and transmission of shares. The time lag in between calls on shares, conversion of shares into stock. Directors, their appointment, remuneration, qualifications, etc. Accounts and audit. Lien of shares. Payment of commission on shares and debentures to underwriters. Rules for adoption of preliminary contracts if any.
l) m) n) o) p) q) r)
Re-organisation and consolidation of share capital. Alteration of share capital and buyback of shares. Borrowing power of directors. General meeting, proxies and polls. Voting rights of members. Dividend and reserves. Winding up. Notes
12 .4.3 Alteration of Articles

a) Procedure for alteration: i. Passing of a special resolution. ii. Copy of resolution should be sent to the registrar within 30 days. iii. Copy of altered articles to be registered within 3 months of passing of resolution. b) Limitations regarding alteration of articles: i. Alteration should not be inconsistent with the provisions of the Act or any other statute, and conditions contained in memorandum.
ii. Alteration must not constitute a fraud on the majority. iii. Alteration must not deprive any person of his rights under a contract. iv. Alteration must be bonafide for the benefit of the company as a whole. v. Alteration must not be contrary to the order of National Company Law Tribunal (Tribunal).
vi. An alteration of articles to effect a conversion of a public company into a private company cannot be made without the approval of the central government. vii. No retrospective operation of articles. Note: The Act has been amended and the National Company Law Tribunal (in short Tribunal or NCLT) has been provided in the Act. The central government has not yet constituted NCLT and Company Law Board or the High Court powers are continuing. But NCLT has been used.
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16. When does the company require the confirmation from Regional Director to change its registered office? 17. What do you understand by the Article of Association? 18. What is the procedure regarding alteration of articles?
12.4.4 Binding Force of Memorandum and Articles

The following are the legal implications: a) b) c) d) The company is bound to its members. Each member is bound to the company. Each member is bound to other members so far as rights and duties arising out of the articles are concerned. Neither the company nor the members are bound to outsiders.
Notes
12.4.5 Difference Between Memorandum of Association and Articles of Association S. No.

1. 2. 3. 4.
Memrandum
Charter of company. Defines the scope of the activities. Supreme document. Must for every company.
Articles
Regulations for Internal Management. Rules for carrying out the objects of company. Subordinate to the memorandum. Company limited by shares need not have it. (Table A of Schedule 1 may be adopted). Can be altered by special resolution. Act ultra-vires (but intra-vires the memorandum) can be ratified.
5. 6.
Strict restrictions, some alterations may require sanction of central government. Act ultra-vires is wholly void and cannot be ratified.
12.4.6 Doctrine of Constructive Notice

The memorandum and articles when registered with the Registrar become public documents and accessible to all. They can be inspected on payment of a nominal fee. Therefore, there is a presumption that any outsider dealing with company has read and understood these documents. This is known as doctrine of constructive notice. It is a negative doctrine, acting only against the outsiders and not the company. In Kotla Venkataswamy v. C. Ramamurthy30 the facts were that the articles of association of a company included a clause that all documents and deeds of the company shall be signed by the managing director, the secretary and working director on behalf of the company. A mortgage deed was signed by the secretary and a working director only. It was held that the mortgage was invalid in spite of the fact that the plaintiff acted in good faith and the money was utilised for the company. The mortgagee should have consulted the articles of association before executing the mortgage deed.
12.4.7 Doctrine of Indoor Management

The rule of constructive notice proved too inconvenient for business transactions, particularly where the directors or other officers of the company were empowered under the articles to exercise certain powers subject only to certain prior approvals or sanctions of the shareholders. Whether those sanctions and approvals had actually been obtained or not could not be ascertained. This is the Doctrine of Indoor Management. Persons dealing with the company in good faith have a right to assume that the internal requirements prescribed in public documents (memorandum and articles) have been observed. In other words, persons are not bound to enquire into regularity of internal proceedings. There are certain exceptions to this doctrine and they can be summarised as: a) b) c) d)
Where the outsider had knowledge of irregularity. In case of forgery. Negligence on the part of the outsider. Acts outside scope of apparent authority.
The doctrine of indoor management was propounded in the case of Royal British Bank v. Turquand.31 In this case the directors of a company were authorised by the articles to borrow on bonds, as authorised by the shareholders. The directors gave a bond without the authority of any resolution. It was held that the company was liable on the bond, as T was entitled to assume that the resolution of the company in general meeting had been passed.
Notes
12.5 Prospectus
12.5.1 Definition
According to the Act, prospectus means 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.32
12.5.2 Essentials of Definition

The definition of prospectus gives the following essential features: a) b) c) d) Document. Subscription. Invitation to public. Offer to public. 50 or more persons constitute public as per the amendment of the Act in 2000.
12.5.3 Necessary Pre-Requisites of Prospectus

a) b) c) Prospectus must be Dated: There are two dates relevant-one is the date of issue and the other is the date of publication. Prospectus must be Signed: It must be signed by the director(s) or proposed director(s) or by their agents who have such authority in writing. Prospectus must be Registered: It must be registered with the registrar of companies. Prospectus must be issued within 90 days from delivery date for registration.
12.5.4 Contents of Prospectus

Prospectus is the window through which an investor can look into the soundness of a companys ventures. It consists of the following: a) Matters specified in Part I of Schedule II-It includes general information like name and address of the company, its objects, number and classes of shares, particulars of directors, and auditors, underwriters, details regarding the securities being issued, outstanding litigation, management perception of risk factors and details of any issue within past 3 years. Matters listed in Part II of Schedule II - It contains reports by the auditors and the accountants, consent of directors, auditors etc. and some other statutory information. Matters given in Part III of Schedule II- This would include : i. For a company carrying on business for less than 5 financial years, then the reference is to the number of financial years for which the business has been carried on.
b) c)
ii. If the prospectus is issued more than 2 years after the date at which the company is
Notes
entitled to commence business, particulars of the signatories to the memorandum and shares subscribed for by them and details of preliminary expenses need not be given. iii. Statements by experts - Prospectus also contains statements made by experts like engineer, valuer, or an accountant. Experts need to give their consent in writing. Experts not connected with the formation of the company are included in the category of experts.
12.5.5 Golden Rule of Prospectus

There should be full frank and honest disclosure of all facts in the prospectus. These facts should be scrupulously accurate. There should not be any error of commission (mis-statements) nor any error of omission (non disclosure of relevant facts). Thus the golden rule of prospectus is that the true nature of the companys venture to be disclosed.
12.5.6 Mis-statements in Prospectus and Liability

There should not be any mis-statements in the prospectus. Mis-statements are, saying that something is expected when in reality it is not or saying that the directors have an intention to do something when they have no such intention. Any mis-statements lead to the following liability: a) b) Civil: This consists of liability against the company and against the directors, promoters and experts. This may include rescission of contract, damages or compensation. Criminal: Fine upto Rs. 50,000 or imprisonment upto 2 years or both. If there is a fraud, penalty is increased to fine upto Rs. 1 lakh, or imprisonment upto 5 years or both. In case of allotment on fictitious names imprisonment can extend upto 5 years.
12.5.7 Deemed Prospectus

When a company allots shares or debentures to the public through the medium of issue houses, then the issue houses invite subscription from the public through their own offer documents. Such an offer document by the issue houses is treated as a prospectus by the company and known as a deemed prospectus or prospectus by implication.
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19. Who should sign the prospectus? 20. What is the stipulated time period for registering the prospectus? 21. When is a deemed prospectus issued? 22. What is an error of omission? 23. Who is the administrating authority with regard to prospectus? 24. When should a promoter prepare a statement in lieu of prospectus?
12.5.8 Statement in lieu of Prospectus

Where a public company does not invite public to subscribe for its shares, but arranges to get money from private sources, it need not issue a prospectus to the public. In such a case the promoters are required to prepare a draft prospectus known as statement in lieu of prospectus. It should contain the information required to be disclosed by Schedule-III of the Act. The statement In lieu of prospectus must be filed with the Registrar at least three days before any allotment of shares or debentures are made.
12.5.9 Shelf Prospectus and Information Memorandum

Shelf Prospectus means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in the prospectus. This is valid for a period of one year from the date of opening of the first offering of the shelf prospectus. For subsequent offering, information memorandum updating the information under the various heads will have to be filed and entire set comprising of shelf prospectus and the information memorandum shall constitute the prospectus and have to be circulated to the general public. This will help to reduce the expenses of preparation and issue of prospectus on the part of the issuer and will inform the investors up-to-date position of the issue.
12.5.10 Red Herring Prospectus

A red-herring prospectus is a prospectus, which does not have complete particulars on the price of securities offered and quantum of securities offered. Examples - when companies have resorted to red herring prospectus are Jet airways, Maruti Udyog, Suzlon, and Oriental Bank of Commerce. Notes
12.5.11 Services and Exchange Board of India (SEBI) -The Administrative Authority
The Companies (Amendments) Act, 2000, in relation to prospectus, has made SEBI as the administrative authority. Any complaint about violations regarding the prospectus should be made to SEBI which is now vested with powers to inquire into such complaints and punish those who are found guilty.
12.6 Membership
12.6.1 Introduction
Persons who collectively constitute the company as a corporate entity are members or shareholders.
12.6.2 Definition
a) b) c) The subscribers to the memorandum. Who agrees in writing to become member and whose name appears in the register of members. Who holds equity share capital and whose name is entered as beneficial owner in the records of the depository.
12.6.3 Pre-Requisites for Becoming a Member

a) b) The agreement in writing to take shares of the company. The registration of name in the register of members.
12.6.4 Distinction between Member and Shareholder

The words member, shareholder and holder of shares are used interchangeably and at times called synonymous. But there are some differences between member and shareholder and they can be summarised as follows:
S. No.
1. 2. 3. 4.
Shareholder
Is a member. Person who owns a bearer share warrant is a share holder. A legal representative of a member is a shareholder. No shares are allotted to a subscriber to the memorandum.
Member
May not be a shareholder because the company may not have a share capital. He is not a member as his name is struck off the register of members. Does not become a member until he apples for registration. a subscriber to the memorandum is member.
12.6.5 Who may become a Member?

Notes Subject to the provisions of the Act, the memorandum and articles the position of certain persons who may become a member of a company is as follows: a) Minor: As a minor is not competent to contract, an agreement by a minor to take shares is void, and hence he cannot be a member of a company. In case of fullypaid shares, minor can become member, if he acquires the shares by transfer or transmission.33 Insolvent: An insolvent may be a member of a company so long as his name appear in the register of members, he is a member and is entitled to vote even though his shares vest in the Official Receiver or Assignee. Partnership Firm: A partnership firm is not a legal person and as such it cannot be a member of a company. However, the partnership firm may hold shares in a company in the Indvidual or joint names of partners. Foreigner: A foreigner may become a member of a company subject to the provisions of the Foreign Exchange Management Act, 1999. Company: A company may, if so authorised by its articles, become a member of any company. Trade Union or Society: A registered trade union or a society can become member of a company. President of India, Governor of a State or Collector of a District: Whereas President of India and Governor of a state may hold shares in their official position but the Collector of a district cannot become a member of a company.
b)
c)
d) e) f) g)
12.6.6 Modes of Acquiring Membership

A person may become a member of a company in any of the following ways: a) b) Membership by Subscription: The subscribers to the memorandum of association are deemed to have agreed to become its members. Membership by Application and Registration: A person who agrees in writing to become a member and whose name is entered in the register of members is a member of the company. A persons name may be registered in any of the following ways: i. By application and allotment ii. By transfer iii. By transmission
12.6.7 Rights of a Member

The various rights of a member can be grouped under the following categories: a) b) Statutory - Given by various provisions of the Act. Contractual or otherwise - Given by virtue of the contract as provided in the memorandum or articles.
12.6.8 Register of Members34

A company shall keep a register of members and enter therein the following particulars: a) b) c)
Name, address and the occupation of each member. Shares held by each member and the amount paid up on those shares. Date at which each person was entered in the register as a member.
d)
Date at which any person ceased to be a member. Notes
12.6.9 Index of Members35

A company with more than fifty members shall keep an index of members.
12.6.10 Termination of Membership

A persons membership ceases when he/his: a) b) c) d) e) f) g) h) Transfers his shares. Shares are forfeited by the company. Surrenders his shares. Shares are sold by the company to enforce its lien. Dies. Is adjudged insolvent. Shares have been redeemed by the company. Rescinds the contract of membership on fraud or misrepresentation.
12.7 Share and Share Capital

12.7.1 Meaning of Share
The capital of a company is divided into certain indivisible units of a fixed amount. These units are called shares. According to the Act Share means a share in the share capital of a company, and includes stock except where a distinction between stock and share is expressed or implied.36 Share may also be defined as Interest in the company entitling the owner thereof to receive proportionate parts of profits, if any, and of a proportionate part of the assets of the company upon liquidation.
12.7.2 Meaning of Share Certificate

A share certificate is issued by a company under its common seal. It specifies the shares held by a member and is prima-facie evidence of the title of member to the shares. Each share is distinguished by an appropriate number.
12.7.3 Meaning of Stock

Stock is the aggregate of fully paid up shares, consolidated and divided for the convenient holding into different parts. It may be transferred or split up into fraction of any amount, without regard to the original face value of share. Stock can be validly issued only when shares are fully paid up.
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25. What is a Red Herring Prospectus? 26. What are the prerequisites for becoming a member? 27. Who all are competent to become a member? 28. What are the contractual rights of a member?
12.7.4 Difference Between Share and Stock S. No.

1. 2. 3.
Share
Has a nominal value. May not be fully paid up. Transferable in round numbers.
Stock
Has no nominal value. Always fully paid up. Transferable in fractions.
S. No.
Notes 4. 5. 6.
Share
Can be issued directly. Has a distinctive number. All shares of a class are of denomination.
Stock
Cannot be issued directly. No such number. May be different equal denomination.
12.7.5 Types of Shares

There are two types of shares: a) b) Preference share. Equity or ordinary share. This type of share can be further divided into: i. With voting rights; or ii. With differential right as to dividend, voting or otherwise.
12.7.6 Characteristics of Preference Shares

Preference shares have two characteristics: a) b) They have preferential rights to be paid dividend during the life time of company. They have preferential right to the return of capital when the company goes into liquidation.
12.7.7 Types of Preference Shares

a) Cumulative or non-cumulative: With regard to the payment of dividends, preference shares may be cumulative or non-cumulative. A cumulative preference share confers a right on its holders to claim fixed dividend of the past and the current year out of future profits. The fixed dividend keeps on accumulating until it is fully paid. Participating or non-participating: Participating preference shares are those shares which are entitled to a fixed preferential dividend and, in addition carry a right to participate in the surplus profits along with equity shareholders. Redeemable or irredeemable: Redeemable preference shares are issued by a public limited company, to be redeemed either at a fixed date or after a certain period of time during the lifetime of the company. Conditions for issue of such shares are laid down in Section 80 of the Act. Convertible or non convertible: Convertible preference shares are those which would be convertible into equity shares after a specified period.
b)
c)
d)
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29. Can a foreigner become a member of a company? 30. What is a stock and how it differs from a share? 31. How many types of shares are there?
12.7.8 Share Warrant

A public company limited by shares, if so authorised by its articles, may issue, with the previous approval of the central government, with respect to any fully paid up shares, a warrant stating that the bearer of the warrant is entitled to share specified therein. The shares become transferable by mere delivery of the share warrant.37
12.7.9 Distinction Between Share Warrant and Share Certificate

Notes
S. No.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Share Warrant
Issued only by public companies. Provision in articles and approval from central government. Only for fully paid up shares. Holder is not a member of a company, unless the articles so provide. Transferred by mere delivery. No stamp duty payable on transfer. By usage-a negotiable instrument. Does not constitute share qualification of a director. Holder cannot present a petition for winding up. Dividend is payable to the holder of share warrant on presentation of the relevant coupon attached to the share warrant.
Share Certificate
Issued by public and private companies. It is a statutory obligation and none is necessary. For all shares. He is a member. For transfer of shares. Stamp duty is payable on tranfer of shares. Not so considered. It does. Holder can present such a petition. Dividend is paid to the holder of a share certificate by the issue of a dividend warrant.
12.7.10 Transfer of Shares

One of the important features of a company is that its shares are transferable. Some of the important aspects of the Act relating to transfer of shares are: a) b) Time Within Which Transfer Must be Registered: Is within two months of the application of transfer. Refusal of Transfer: Where the articles of a company give power to the board to refuse registration of a transfer of shares; such power must be exercised by a resolution of the Board. The Board must act in the interest of the company and bonafide. Transfer Instrument Must be Valid and Proper: A proper instrument of transfer is lodged with the company by the buyer with valid signature of the seller. The company after satisfying the validity of instrument of transfer, shall record the transaction. Appropriate stamps are to be affixed on the transfer deed. Appeal Against Refusal to Register: The transferor or transferee may appeal to the Tribunal (NCLT) against any refusal of the company to register the transfer or against any failure on its part within a period of 2 months, either to register the transfer or to send notice of its refusal to register the same. This period of two months shall reckon from the receipt of the notice of such refusal. Forged Transfer: An instrument on which the signature of the transferor is forged is called a forged transfer. A forged transfer can never confer ownership upon the transferee thereof,
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32. What is a share warrant. 33. How can the transfer of shares be refused by the company? 34. When the transfer of shares is called Forged transfer?
c)
d)
e)
however genuine the transaction may appear. Notes f) Transfer of Shares Under Depository System: Is governed by the provisions of the Depositories Act, 1996.
12.7.11 Transmission of Shares

Transmission of shares takes place: a) b) c) When the registered shareholder dies. When he is adjudicated an insolvent. Where the shareholder is a company, and it goes into liquidation.
12.7.12 Nomination of Shares

Every holder of shares or debentures may, at any time, nominate, a person to whom his shares or debentures shall vest in the event of his death. The nomination shall be in the prescribed form and lodged with the company.
12.7.13 Forfeiture of Shares

A companys articles usually contain a power for it to forfeit the shares of a member who fails to pay calls within a certain time after they fall due. Forfeiture of shares must be exercised: a) b) c) d) In accordance with articles. After giving a proper notice. After passing a resolution for forfeiture. Bonafide and in good faith.
12.7.14 Surrender of Shares

Surrender of shares means voluntary return of shares by the shareholder to the company for cancellation. There is no provision for surrender of shares either in the Act or in Table A. However, the articles of some companies may allow surrender of shares as a short cut to the long procedure of forfeiture.
12.7.15 Buy-Back of Shares by a Company

Section 77(1) of the Act provides that a company limited by shares or a company limited by guarantee having a share capital cannot buy its own shares except when reduction of capital is effected. The Companies (Amendment) Act, 1999, vide sections 77A, 77AA and 77B (effective from 31-10-1998) and as amended by the Companies (Amendment) Act 2002 (effective from 2310-2001) and the guidelines issued by SEBI and the Department of Company Affairs allow companies to purchase their own shares. The relevant provisions are: a) Sources to Buy Back i. Free Reserves: In case shares are bought back out of free reserves then an equal sum shall be transferred to capital redemption reserve account. This can be used for issue of fully paid bonus shares.
Check Your Progress

35. Does a company have a power to forfeit the shares? 36. What can be the sources of a buyback? 37. Is a register mandatory to be maintained by a company in buyback?
ii. Securities Premium Account. iii. Proceeds of Any Shares or Other Specified Securities: However no buy back shall be made out of the proceeds of an earlier issue of the same kind of shares/securites. b) Conditions for Buy Back: No company shall purchase its own shares unless:
i.
The buy back is authorised by its Articles. Notes a. Not applicable if the buy back is less than 10% of the total paid up capital and free reserves of the company. b. Such buy back is authorised by a Boards resolution. No offer of buy-back is made within one year of the preceding year.
ii. A special resolution is passed.
iii. The buy-back is or less than 25% of the total paid up capital and free reserves of the company. In any financial year not to exceed 25% of its total paid up equity capital in that financial year. iv. The ratio of debt owed by the company is not more than twice the capital and its free reserves. The central government may prescribe a higher ratio for a class or classes of companies. v. Shares/securities are fully paid up. vi. For listed shares of companies, as per guidelines issued by SEBI. vii. For unlisted shares guidelines can be prescribed by the central government. c) Notice of the Meeting: The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating: i. A full and complete disclosure. ii. The necessity for the buy back. iii. The class of security of buy back. iv. The amount to be invested. v. d) i. The time limit for completion of buy back. From the existing security holders on a proportionate basis. Sources of Buy-Back: The buy back may be: ii. From the open market. iii. From odd lots. iv. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. e) Declaration of Solvency: A declaration of solvency is to be filed with the Registrar and SEBI (for listed companies only). The declaration of solvency states that the company is capable of meeting its liabilities and will not be rendered insolvent within one year of the date of declaration adopted by the Board. This declaration is to be signed by at least two directors of the company one of whom shall be the Managing Director, if any. Destruction of the Securities: The company shall extinguish and physically destroy the securities so bought back within seven days of completion of buy back. Further Issue of Shares: On completion of buy back of shares/securities, the company shall not make further issue of the same kind of shares/securities within a period of six months except: i. Bonus shares. ii. Conversion of warrants. iii. Stock option schemes or sweat equity. iv. Conversion of preference shares or debentures into equity shares. h) Maintenance of Register: The company shall maintain a register of the: i. Securities so bought.
f) g)
e)
ii. Consideration paid. Notes i) iii. Dates of cancellation, extinguishing and physically destroying of the securities. iv. Other particulars as prescribed. Filing a Completion Return: A company shall file a completion return within thirty days of completion of buy back with the Registrar and SEBI (for listed companies) with particulars as prescribed. Penalties: In case of any default, a person is imposed a fine upto Rs. 50,000 or imprisonment upto to 2 years or both. Prohibition for Buyback: No company shall directly or indirectly purchase its own shares/ securities. i. Through any subsidiary company including its own subsidiary company. ii. Through any investment company or group of investment companies. iii. If a default by the company in repayment of deposit or interest payable thereon, redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of any term loan, or interest payable thereon to any bank or any financial institution is subsisting. iv. In case such company has not complied with provisions of: Section 159, (Annual return to be made by company having share capital) Section 207, (Penalty for failure to pay dividend within 30 days) and Section 211, (Form and content of balance sheet and profit and loss a/c)
j) k)
12.7.16 Sweat Equity Shares38

a) Meaning: The expression sweat equity shares means equity shares: i. Issued by the company to employees or directors at a discount. ii. For consideration other than cash for providing know how. iii. Making available rights in the nature of intellectual property rights or value additions. b) Conditions for Issue: i. Is authorised by special resolution ii. The resolution specifies the number of shares, current market price, the consideration, if any, and the class of directors or employees to whom such equity shares are to be issued.
Check Your Progress

38. How long shall a company wait, after commencement of business, to issue sweat equity shares? 39. How many types of share capital are there? 40. What is alteration the capital?
iii. Not less than one year has at the date of the issue elapsed since the date on which the company was entitled to commence business. iv. The sweat equity shares of a company whose equity shares are listed on a recognised stock exchange, are issued in accordance with the regulations made by SEBI.
12.7.17 Classification of Share Capital

Share capital can be classified, based on usage as follows:
Classification of Share Capital Based on Usage Nominal, Authorised, Registered Capital Issued Capital Subscribed Capital Called-up Capital Paid-up Notes
12.7.18 Kinds of Share Capital

a) b) Preference share capital Equity or ordinary share capital
12.7.19 Alteration of Capital

a) b) c) d) e) Increase: By issuing new shares. Consolidation: By division into shares of larger amount. Conversion: Of fully paid shares into stock. Sub-division: Into shares of smaller amount. Cancellation: Of shares which have not been taken up.
12.7.20 Reduction of Capital

A company limited by shares, if so authorised by its articles, may by special resolution, which is to be confirmed by the Tribunal (NCLT) reduce its share capital in any of the following manner: a) b) c) d) e) a) By reducing or extinguishing the liability of members for uncalled capital. By paying off or returning capital which is in excess of the wants of the company; Pay off paid-up capital on the understanding that it may be called up again. A combination of the preceding methods. Write off or cancel capital which has been lost or is not represented by available assets. The creditors are entitled to object where the reduction of share capital is involved.
12.8 Borrowings, Loans, Debentures and Investments

Notes
12.8.1 Borrowing Powers of a Company

a) Introduction: A company needs money to finance its activities. A part of this requirement is met by issue of shares; for the rest the company has to resort to public borrowing. Borrowing is incidental to trading. The exigencies of commerce render such a power necessary. A trading company has implied power to borrow unless prohibited by its memorandum or articles. A non-trading company requires express powers to borrow. This power is taken in its memorandum or articles. Where the memorandum authorises the company to borrow, the articles provide as to how and by whom these powers will be exercised. A public company, having a share capital, cannot exercise borrowing power unless certificate to commence business is obtained by it. Exercise of Borrowing Power and Limitations: The power to borrow is exercised by the directors. Directors act as agents and this power is subject to two limitations: i. Statutory Limits: No borrowing is permissible beyond the aggregate of the paid up capital of the company and its free reserves (i.e. reserves not set apart for any specific purpose) unless prior sanction is obtained in general meeting.
b)
ii. As contained in the memorandum or articles.
12.8.2 Meaning of Loan

Loan includes debentures or any deposit of money made by one company with another company, not being a banking company.
12.8.3 Debenture
a) Definition: According to the Act, debenture includes debenture, stock, bonds, and any other securities of a company, whether constituting a charge on the assets of the company or not.39 Characteristic Features of a Debenture Are: i. It is issued by the company and is in the form of a certificate of indebtedness. ii. It is of a series but can be a single debenture.
b)
Check Your Progress

41. Who has the power to borrow? 42. What is a Loan? 43. What do you understand by investments? 44. What is the significance of a unanimous board resolution? c)
iii. It usually specifies the date of redemption. It also provides for the repayment of principal and interest at specified date(s). iv. It generally creates a charge. v. It is a movable property. vi. A debenture holder has no right of voting in companys meetings. Kinds of debentures: Debentures may be of the following kinds: i. Bearer or unregistered ii. Registered iii. Secured iv. Unsecured or naked v. Redeemable vi. Irredeemable or perpetual.
vii. Convertible or non-convertible. Convertible debentures can be fully or partly convertible.
Notes
12.8.4 Investments
a) Meaning: The word investments in its natural connotation, would include any property or right in which money or capital is invested. The word investments in a limited sense would mean the investing of money in shares, stock, debentures or other securities. Rules for Investments: Some of the rules for investments are: i. Investments are to be held in companys own name, except an investment company.
b)
ii. Qualification shares are to be in respect of nominee director or nominee holders. iii. Holding shares in a subsidiary company may be in the name of nominee. iv. Certificates or letters of allotment are to be in the custody of the company. v. Register of investments not held in companys own name is to be maintained.
12.8.5 Inter Corporate Loans and Investments40

a) Ceiling on Loans, Guarantees, Investments, etc.: No company shall, directly or indirectly: i. Make any loan to any other body corporate. ii. Give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person, by any body corporate. iii. Acquire by way of subscription, purchase or otherwise the securities of any body corporate, exceeding 60% of its paid up share capital and free reserves or 100% of its free reserves, whichever is more.In case the limit is exceeded special resolution is required. b) Guarantee by the Board: The Board may give guarantee, without being previously authorised by a special resolution, if: i. A resolution is passed in the meeting of the Board authorising to give guarantee. ii. There exist exceptional circumstances which prevent the company from obtaining previous authorisation by a special resolution passed in a general meeting for giving a guarantee. iii. The resolution of the board under (i) is confirmed within 12 months, in a general meeting of the company or the annual general meeting held immediately after passing of the board resolution, whichever is earlier. c) Notice: Of such resolution shall indicate clearly. i. The specific limits. ii. The particulars of the body corporate where loan, guarantee or security to be given. iii. The purpose of the investment, loan, security or guarantee. iv. Special sources of funding and such other details. d) Unanimous Board Resolution: No loan or investment shall be made or security given by the company unless the resolution sanctioning it is passed at the meeting of the board with the consent of all the directors present at the meeting and the prior approval of the public financial institution where any term loan is subsisting, is obtained. Loan at Bank Rate: No loan to any body corporate shall be made at a rate of interest lower
e)
than the prevailing bank rate. Notes f) Not Applicable to a Company in Default of Public Deposits: No company which has defaulted in complying with Section 58A (Public deposits) shall directly or indirectly: i. Make any loan to any body corporate. ii. Give any guarantee, or provide a loan made by any person to, or to any other person by any body corporate. iii. Acquire, by way of subscription, purchase or otherwise the securities of any other body corporate till such default is subsisting. g) Keeping of a Register: Every company shall keep a register showing the following particulars in respect of every investment or loan made, guarantee given or security provided by it in relation to any body corporate namely: i. The name of the body corporate. ii. The amount, terms and purpose of the investment or loan or security or guarantee; iii. The date on which the investment or loan has been made. iv. The date on which the guarantee has been given or security has been provided in connection with the loan. h) Other Rules About Register: i. Entries to be made chronologically within seven days of transaction. ii. Register shall be kept at registered office and open for inspection as the register of members. iii. Extracts or copies can be taken. i) j) Guidelines: Central government may prescribe guidelines for the purpose of this section. Not Applicable: Nothing contained in this section (372A) shall apply: i. To any loan made, any guarantee given or any security provided for any investment made by: a. A banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of financing industrial enterprise, or of providing infrastructural facilities. b. A company whose principal business is the acquisition of shares, stock, debentures or other securities. c. A private company, unless it is a subsidiary of a public company. ii. To any investments made in shares allotted in pursuance of Section 81 (1)(A) (Rights issue). iii. To any loan made by a holding company to its wholly owned subsidiary. iv. To any guarantee given or any security provided by a holding company to its wholly owned subsidiary. v. k) To acquisition by a holding company by way of subscription, purchase or otherwise, the securities of its wholly owned subsidiary. If default is made in complying with the provisions of this section, other than the provision relating to keeping of a register, the company and every officer of the company who is in default shall be punishable with imprisonment which may extend to two years or with fine which may extend to Rs. 50,000.
Penalties: i.
ii. If default is made in complying with the provisions relating to keeping of a register, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 5,000 and also with a further fine which may extend to Rs. 500 for every day after the first day during which the default continues. iii. No punishment of imprisonment, if loan is repaid in full. iv. Imprisonment is proportionately reduced, when loan is paid in part.
Notes
Check Your Progress

45. What penalties may be attached to the company and its each officer, who is found of violating legal provisions relating to intercorporate loans and investments? 46. Who cannot become a director? 47. Are there any professional qualifications required to become a director? 48. What is the nominal value of qualification shares?
12.9
Company Management and Administration
12.9.1 Definition of Director

According to the Act, director includes any person occupying the position of director, by whatever name called.41 A company is an artificial legal person and the directors as a body endow the artificial legal person with human face that can act and react.
12.9.2 Who are Directors?

The persons, through whom a company acts and does its business, are termed as directors. They are collectively known as board of directors. They are the brains of the company. A director is a person having control over the direction, conduct of a company. Board of directors or Board in relation to a company, means the board of directors of the company.
12.9.3 Who may be Appointed as Director?

No body corporate, association or firm can be appointed director of a company. Only an individual can be appointed.
12.9.4 Minimum and Maximum Number of Directors Private Company

Minimum * Maximum * * Both minimum and maximum number of directors may be as provided in the articles. For example, the articles may fix 6 as the minimum and 10 as maximum. 2
Public Company
3
12.9.5 Number of Directorships

A person cannot hold office at the same time as a director in more than 15 companies.
12.9.6 Qualifications for Directors

a) b) The Act prescribes no academic, professional or share qualifications. Articles may provide for any qualifications.
c) Notes
Where share qualification is fixed by articles then the Act42 provides: i. Qualification shares must be taken within 2 months after appointment. ii. Nominal value of qualification shares must not exceed Rs. 5000 or one share where its value exceeds Rs. 5000. iii. Share warrants will not count for this purpose.
12.9.7 Disqualifications of Director

The following persons are disqualified for appointment as director of a company: a) b) c) d) A person of unsound mind; An undischarged insolvent; A person who has applied to be adjudged as an insolvent and his application is pending; A person who has been convicted by a court of an offence involving moral turpitude and sentenced to imprisonment for six months, and a period of five years has not elapsed from the date of the expiry of the sentence; A person whose calls in respect of shares of the company held for more than 6 months have been in arrears; A person who is disqualified for appointment as directed by an order of the Tribunal (NCLT) under section 203 of the Act (which deals with power of the Tribunal to restrain fraudulent person from managing company); A person who is a director of a public company which: i. Has not filed the annual accounts and annual returns for 3 financial years commencing on and after 1.4.1999.
e) f)
g)
ii. Has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more. Note: 1. 2. 3. 4. The disqualifications mentioned in (d) and (e) above may be removed by the central government by a notification in the Official Gazette. A private company which is not a subsidiary of a public company may, by its articles, provide for additional grounds. A director who has been removed by the central government shall not be a director for five years. A director disqualified under (g) above shall be ineligible for appointment as a director of any other public company only and this disqualification shall last for 5 years.
12.9.8 Appointment of Directors

Directors can be appointed in the following ways: a) First Director: The first directors are usually appointed by name in the articles, or in the manner provided therein. When the articles do not provide for the appointment of first directors, the subscribers to the memorandum, shall be deemed to be the first directors of the company. Appointment of Directors by Company: The directors must be appointed by the company in general meeting. Two-third of the total number of directors must retire by rotation. In other words only one-third of the total number of directors can be non-rotational directors. Appointment of Directors by the Board: The board of directors can exercise the power to appoint directors in the following three cases:
b)
c)
i.
Additional directors. Notes
ii. Filling up the casual vacancy. iii. Alternate directors. d) Appointment of Directors by Third Parties (Nominee Directors): When the government, foreign collaborators, holding companies, financial institutions, or other lenders, etc., nominate a director to represent their interest on the board, he is called a nominee director. Appointment of Directors by Proportional Representation: Ordinarily, directors are appointed by simple majority vote. As a result, shareholders controlling 51% or more votes may elect all directors and the minority as high as 49% may find no representation on the board. To enable the minority shareholders to have a proportionate representation on the board, the Act43 gives an option to companies to appoint directors through a system of proportionate representation by any of the following methods: i. Single Transferable Vote: A quota of votes is fixed. A person gets elected if he gets the required number of votes fixed as quota. Suppose votes cast are 600 and there are 5 seats. Thus the quota will be 101 calculated as follows:
e)
600 +1 = 101 Votes 5+1

ii. Cumulative Voting: The total number of votes cast would be equal to the total number of shares multiplied by the number of directors to be elected. Thus, if there are 1000 shares and five directors to be elected, the total number of votes cast would be equal to 5000. A candidate getting 1000 votes should be declared elected. Now assuming that the minority holds 20% of shares, i.e. 200 shares, the total votes which the minority can cast in favour of one or more candidate would be equal to 200 x 5 = 1000. Thus this minority shareholder can elect one director. f) g) Appointment by Central Government: The central government can appoint directors on an order passed by the Tribunal (NCLT). Appointment by Small Shareholders: A public company having a paid-up capital of 5 crore rupees or more, and one thousand or more small shareholders may have a director elected by such small shareholders. The term small shareholder means a shareholder holding shares of nominal value of Rs. 20,000 or less.
Check Your Progress 12.9.9 Consent for Appointment

Before a person is appointed as a director, his prior written consent is required to be signed and filed with the Registrar and the Company. 49. Can a person of unsound mind become the director of a company? 50. When can board of directors appoint the directors of a company? 51. Who is a small shareholder? 52. Does central government have the power to remove a director? If yes, then how?
12.9.10 Removal of Directors

Directors can be removed in the following ways: a) By Shareholders: Shareholders have the option to remove the directors by passing an ordinary resolution. Company receives a special notice for the removal of the director before the expiry of his term of office. The notice must disclose the ground on which the director is proposed to be removed. Director has a right to make representations. By Central Government: The central government has the power to make reference to the Tribunal (NCLT) against any managerial personnel, with a request to inquire into as to whether or not such a person is fit and proper person to hold the office of director. On the findings of the Tribunal, the central government may remove the director. By Tribunal (NCLT): Where an application has been made to the Tribunal (NCLT) against oppression and mismanagement of companys affairs, the Tribunal (NCLT) may order the
b)
c)
termination of the agreement of the company with the director. Notes
12.9.11 Resignation by Directors

There is no express provision in the Act relating to resignation of directors. The Act, however, indirectly acknowledges this right as the Act stipulates that no director is entitled to any compensation if he resigns his office.44 Articles of a company may provide for resignation of directors. Resignation to be valid must be addressed to the company. A director cannot withdraw his resignation without the consent of the company. When a director resigns, two formalities are to follow: First, this fact is to be entered in the register of directors. Second, a return to be filed with the Registrar within 30 days of the resignation becoming effective. When the company does not comply with the second formality, the affected director may face some difficulty.
12.9.12 Legal Position of Directors

It is difficult to state the exact legal position of a director. The Act does not define their position clearly. A director acts as an agent, a trustee, managing partner or as employee but he is none of them. M.R. Jessel has succinctly put the position of a director in these words: Directors have sometimes been called as trustees or commercial trustees, and sometimes they have been called managing partners; it dos not matter much what you call them so long as you understand what their real position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. They stand in a fiduciary position towards the company in respect of their powers and capital under their control.
12.9.13 Powers of the Board of Directors

The Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do. However, the board cannot exercise any power or do any act or thing which is directed or required, whether by the Act, or any other Act, or by the memorandum or articles, to be exercised by the company in general meeting.
12.9.14 Power to be Exercised by Resolutions Passed at Boards Meeting

The board shall exercise the followings powers by means of resolution passed at boards meeting: a) b) c) d) e) f) g) The power to make calls. The power to issue debentures. The power to borrow money otherwise than on debentures. The power to invest funds. The power to make loans. The power to buy-back of shares. Others - This will cover the following: i. To fill casual vacancy in board. ii. Sanctioning of a contract in which a director is interested. iii. Recommend rate of divided at the Annual General Meeting. iv. To make political contribution.
12.9.15 Powers to Be Exercised by the Company in General Meeting

a) b) c) d) e) Sale, lease or disposal of the undertaking. Showing any concession regarding payment of debts. Make investment of the amount of compensation received. Contribution to charitable and other funds. Borrowing monies exceeding the aggregate of the paid-up capital and free reserves of the company. 53. Can a director choose to withdraw his/her resignation? 54. What power does the board possess through resolutions? 55. What are the limitations with regard to a directors power? Notes
Check Your Progress
12.9.16 Duties of Directors

Some of the duties of directors are: a) b) c) d) e) Duty of good faith. Duty to take reasonable care. Duty to disclose interest. Duty to participate in committees of the board like Audit Committee or Investors Grievance Committee. Duty to attend board meetings.
12.9.17 Limitation on the Powers of Director

a) b) c) Where the directors actions are found to be malafide. Where the Board becomes incompetent to act. Deadlock in the board.
12.9.18 Managing Director

a) b) c) Meaning: A director who is entrusted with substantial powers of management which would not otherwise be exercisable by him. Number of companies: Of which one person may be appointed Managing Director is two. Tenure of appointment: Is five years but eligible for re-appointment for another term of five years.
12.9.19 Managerial Remuneration

The total managerial remuneration payable by a public company or a private company which is subsidiary of a public company to its directors (or manager) in respect of any financial year must not exceed eleven per cent of the net profits of any financial year. For a whole time director or a managing director, the remuneration shall not exceed five per cent of the net profits for one such director, or if there is more than one such director, ten per cent for all of them taken together.
12.10 Company Meetings and Resolutions

12.10.1 Introduction
A company being an artificial legal person, can only act through some human intermediary. The various provisions of the Act and rules empower members to do certain things. All decisions of
the company are taken in meetings. Notes
12.10.2 General
a) b) Requisites of a Valid Meeting: It must be duly convened, legally constituted and properly conducted. Notice of Meeting Must be Proper and Adequate: For general meetings at least 21 clear days notice must be given to every member and auditor of the company. It must specify the date, time and place of meeting. Chairman of the Meeting: Every meeting is presided over by the chairman who is to conduct the proceedings of the meeting properly. The chairman is either the chairman of the board or elected for every meeting. His main role is to maintain order and decorum in the meeting. Quorum: The quorum is generally laid down in the articles. In the absence of any provision in the articles, the quorum is 5 members for public and 2 members for private company. The articles can not provide for a smaller quorum. Voting: To ascertain the sense of the house the chairman of the meeting can use any of the following: i. Acclamation (By cheering or clapping) ii. Voice vote iii. Division iv. Show of hands v. Ballot (which can be open or secret) vi. Poll (According to the number of shares held by a member. A proxy can only vote on a poll, unless the articles may provide otherwise, say permitting a proxy to vote on a show of hands also) f) g) Agenda: Every general meeting has an agenda to be sent to every member. An agenda is the statement of business to be conducted in a meeting. Minutes: The decisions taken in a meeting are recorded as minutes of the meeting. These minutes shall be evidence of the proceedings recorded therein.
c)
d)
e)
12.10.3 Kinds of Meetings

The kinds of meetings of a company are shown below:
Meetings of a Company
Shareholders Directors Creditors and Debenture Holders
General Meetings
Class Meetings
Statutory Meetings
Annual General Meetings
Extra-ordinary Meetings
12.10.4 Statutory Meeting

a) Object: The main purpose is to enable the members to know at an early date the financial position and prospects of the company and also to provide them an opportunity of discussion on various matters arising out of promotion and formation of a company. When Held: Only Once in the life time of the company. It is to be held within a period of not less than one month but not more than six months from the date the company is entitled to commence business. This is the first meeting of the shareholders. Not Required to be Held: A private company is not required to hold a statutory meeting. This meeting is also not required to be held by a public company not having share capital or has unlimited liability or a government company. Notice: At least 21 days notice is to be given. Statutory Report: Is presented in this meeting. Its contents include, total shares allotted, total amount of cash received, an abstract of receipts and payments, details of contract, directors, brokerage and commission. In case of default: Penalty is Rs. 5000 and is also a ground for winding up. Notes
b)
c)
d) e)
f)
12.10.5 Annual General Meeting (AGM)

a) b) c) Which company to hold: Every company either public or private. When to be held: Every calender year, i.e. once annually. Gap between two AGM: i. First AGM: May be held within 18 months from the date of incorporation. First AGM must be held not later than 9 months from the date of closing of financial year.
ii. Subsequent AGM: There must be one meeting held in each calendar year. The gap between two AGMs must not be more than 15 months. This period can be extended to 18 months by the Registrar. Meeting must be held not later than 6 months from the close of the financial year. iii. Extension of time: Registrar can give extension time upto a maximum of 3 months. iv. Business to be transacted: Ordinary business like consideration of annual accounts, declaration of dividend, appointment of directors and auditors or any special business may be transacted. v. Notice: 21 days. vi. Default: Central government can give directions as it thinks expedient. Penalty provided is Rs. 50,000 or in case of continuing default Rs. 2500 per day.
Check Your Progress

56. What is the maximum number of companies a person can associate with as MD? 57. Who presides the meeting in a company? 58. In what ways a member can vote? 59. What is the notice period for a statutory meeting? 60. What business has to be transacted in AGM? 61. What is a Motion?
12.10.6 Extraordinary General Meeting (EGM)

All general meetings other than the AGM shall be EGMs. Some of the points relating to EGM are: a) b) When to be convened: For transacting some urgent or special business that may arise between two AGMs, e.g. removal of a director/auditor. Business to be transacted: All business transacted in EGM is called special business and accompanied by an Explanatory Statement.
c) Notes
Who may call: An EGM may be called by: i. The board on its own. ii. The directors on requisition, if the requisitionists are the holders of 1/10 of total voting power. iii. The requisitionists themselves, if the board does not call the meeting within 45 days of the deposit of a valid requisition. Meeting must be held within 3 months of the date of deposit of requisition. iv. The Tribunal (NCLT).
d) e)
An institutional shareholder can requisition an EGM.45 All reasonable expenses incurred by the requisitionists by reason of the failure of the board to call a meeting shall be repaid to the requisitionist by the company.
12.10.7 Board Meeting

a) b) When to hold: Atleast once in every three calendar months and 4 meetings every year.46 Notice: To be given to every director in writing. No form or period of notice is laid down. Usually a weeks notice is sufficient. The notice must state, the date, time and place of meetings. Quorum: 1/3 of the total strength or two, whichever is higher. Passing of resolution by circulation is permissible.
c) d)
12.10.8 Motion
a) b) Meaning: A proposal under consideration by members in a meeting before it is voted upon. Rules as to Motion: The following are the rules as to motion: i. Should be positive in terms and should always be in writing. ii. Within power, scope and relevant to business. iii. Comply with the provisions of the Act, memorandum and articles. iv. Duly proposed by any member in a meeting. v. Should not be withdrawn before consent.
12.10.9 Resolution
a) b) Meaning: Any motion voted upon and agreed to in a meeting and entered in minutes. In other words, a motion when passed, with or without amendment, is called a resolution. Types of Resolution: i. Ordinary resolution ii. Special resolution iii. Resolutions requiring special notice c) d) What is an Ordinary Resolution: A motion passed by simple majority of the members voting at a general meeting. Special Resolution: The votes cast in favour, by whatever means, by members present should not be less than three times the votes cast against the resolution. Intention as special resolution should be specified in the notice or intimation of the meeting. Some of the matters for which special resolution is required are to alter objects clause of memorandum or to alter articles.
e)
Resolution Requiring Special Notice: Notice of the intention to move the resolution should be given to the company not less than 14 clear days before the meeting at which it is to be moved. Examples - appointing an auditor other than the retiring one, removing a director before expiry of period of his office.
Notes
12.10.10 Passing of Resolutions by Postal Ballot47

a) Conditions of Applicability: i. Listed public company shall get any resolutions passed by postal ballot on subjects so declared by the central government. Some of the subjects so declared are, alteration in the object clause of the memorandum, buy-back of own shares, sale of the undertaking of the company.
ii. Send a notice to shareholders along with the draft resolution and shareholders to send their vote within 30 days of posting of the letter. iii. Notice to be sent by registered post. A.D. or by any other method as prescribed with a pre-paid postage envelope. b) Penalties: i. For fraudulently defacing or destroying the ballot paper, or declaration of identity of the shareholder, imprisonment upto 6 months or fine or both.
ii. For any other default fine upto Rs. 50,000. Note: Postal ballot includes voting by electronic mode.
12.11 Accounts and Audit

The Act contains a number of provisions relating to accounts and audit designed to ensure that members of a company are furnished with all the necessary information relating to its affairs, without giving away any information which would be detrimental to the interests of the company.
12.11.2 Books of Account

Every company is required to maintain proper books of account with respect to: a) b) c) d) e) All receipts and expenditure of money. All sales and purchases of goods by the company. The assets and liabilities of the company. Every three months summarised accounts of all branch offices-in or outside India. In case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material, labour or other items of cost as may be prescribed by the central government. Books of accounts should necessarily give a true and fair view of the state of affairs of the company. Books are to be kept on accrual basis and as per double entry system of accounting. Books are to be kept at the registered office. However, a company may keep books at any
Note: 1. 2. 3.
Notes
other place in India as the board of directors may decide. In such an event, the company has to file full particulars with the Registrar within 7 days of such decision.
12.11.3 Inspection of Books of Account Check Your Progress

62. How many types of resolutions are there? 63. Who can inspect the books of account? 64. How long the books of accounts shall be preserved? 65. Who can be an auditor? Books of account and other books are open for inspection by: a) b) c) d) Any director The Registrar Authorised officers of the central government. Authorised officers of SEBI (for listed companies only).
A shareholder has no statutory right to inspect books of account. However, if the articles specifically provide for such a right then he can inspect.48
12.11.4 Preservation of Books of Account

Books of account of every company are to be preserved for a period of eight years.
12.11.5 Authentication of Accounts

Every balance sheet and profit and loss account of a company (except a banking company) shall be signed on behalf of the board, by its manager or secretary, if any, and by not less than two directors, one of whom shall be the managing director, where there is one. They are approved by the board, before signing. After approval and signature, they are handed over to the companys auditor for his report.
12.11.6 Circulation and Adoption of Annual Accounts

A copy of annual accounts (Balance sheet and profit and loss account) auditors report, and directors report, shall be sent to every member of the company, not less than 21 days before the meeting (AGM). They are adopted in the AGM.
12.11.7 Filing of Annual Accounts

Every company is required to file with the Registrar three copies of annual accounts within thirty days from the date they were laid before the company at the AGM.
12.11.8 Who can be an Auditor?

A person is qualified to be an auditor of a company if he is a practicing chartered accountant within the meaning of the Chartered Accountants Act, 1947.
12.11.9 Disqualifications of an Auditor

The following entities or persons are disqualified to be appointed as an auditor of a company: a) b) c) d) A body corporate. An officer or employee of the company. Partner/employee of an officer or employee of the company. Indebted to the company for an amount exceeding Rs. 1000 or guarantor or who had given security in connection with the indebtedness of any third person.
e)
Disqualified for appointment as auditor of any body corporate which is: i. The companys subsidiary, Notes ii. Its holding company, or iii. A subsidiary of its holding company.
f)
A person holding any security carrying voting rights of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000 (viz., 1412-2000).
12.11.10 Appointment of Auditor

a) b) First Auditor: Is appointed by the board, if not then by the company in general meeting. Subsequent Auditor: Is appointed every year by the members in AGM by passing an ordinary resolution.
12.11.11 Tenure of Appointment

An auditor is appointed from the conclusion of one AGM until the conclusion of the next AGM.
12.11.12 Rights of Auditor

The rights of an auditor are: a) b) c) d) e) Access to books, accounts and vouchers. To obtain information and explanation. To visit branch offices and right to access to books, accounts etc. To receive notice of general meeting and to attend. To receive remuneration on completion of his work.
12.11.13 Duties of Auditor

His duties are: a) b) c) Acquaintance with the Act, memorandum and articles; To make report to members; Others: i. Statutory report. ii. Prospectus. iii. Assistance in investigation. iv. Following accounting standards.
12.11.14 Auditors Report

a) Obligations to make an inquiry relating to: i. Loans and advances made by the company. ii. Transactions of the company. iii. Personal expenses charged to revenue account. iv. Receipt of cash for shares allotted.
b) Notes
Matters that are to be stated in the auditors report: i. Obtained all information and explanations. ii. Proper books of account have been kept by the company and report from branches received. iii. Auditors report of branch office, not audited by him. iv. Accounts render true and fair view of the affairs of the company. v. Balance sheet and profit and loss account are in agreement with books of account.
vi.
Compliance of accounting standard.
12.11.15 Cost Audit49

It is also a part of audit to verify the costs of manufacture or production of an article on the basis of accounts as regards utilisation of material or labour or other items of cost, maintained by the company. Such an audit shall be conducted by a cost accountant within the meaning of the Cost and Works Accountant Act, 1957.
12.11.16 National Advisory Committee on Accounting Standard (NACAS)50

The central government may constitute NACAS, to advise the central government on the formulation and laying down of accounting policies and accounting standards for adoption by companies. The central government has already constituted NACAS.
12.11.17 Audit Committee51

Some of the provisions relating to audit committee are: a) b) c) d) e) f) g) Applicable to every public company having paid up capital of not less than Rs. 5 crores. This is a committee of the board. It shall consist of not less than three directors. The terms of reference shall be specified by the board. Its composition shall be disclosed in the annual report. It shall have authority to investigate into any matter specified in section 292A of the Act or referred to by the board. It shall have full access to information kept by the company. The recommendations on any matter relating to financial management including the audit report, shall be binding on the board. If the board does not accept the recommendation, it shall record the reasons there for and communicate such reasons to the shareholders. The chairman of the audit committee shall attend AGM.
h)
12.12 Prevention of Oppression and Mismanagement

12.12.1 The Principle of Majority Rule
The management of companies is based on the rule by majority, like any democratic set up. The principle of majority rule is often described as the rule in Foss v. Harbottle.52 Briefly the facts in this case were that two minority shareholders alleged that directors and solicitors of the company were guilty of fraudulent acts which resulted in loss to the company. They decided to take action for damages against the directors. The court dismissed the suit of the minority shareholder on the
ground that the acts of the directors were capable of confirmation by the majority of shareholders and held that the proper plaintiff for wrongs done to the company is the company itself, and not the minority shareholders, and as such the company could act only through its majority shareholders. The majority rule has many inherent advantages like: a) b) c) If a company has suffered any financial loss, it is the company and not the minority shareholders who can sue. If every individual member were given unfettered right to decide there would be endless litigation. There is a need to preserve right of majority to decide.
Notes
Check Your Progress

66. How are the auditors appointed? 67. What is NACAS and what does it do? 68. What are the main provisions for the audit committee? 69. What is termed as oppression?
12.12.2 Exceptions to the Majority Rule

There are many exceptions to the majority rule. One of them is - where prevention of oppression and mismanagement is applicable.53
12.12.3 Meaning of Oppression

The term oppression has not been defined in the Act. Lord Cooper has given the meaning of the term as The essence of the matter seems to be that the conduct complained of should, at the lowest, involve a visible departure from the standards of their dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely.54 The complaining member must show that he is suffering from oppression in his capacity as member and not in any other capacity. The oppression must be of continuing nature.
12.12.4 Conditions Precedent for Mismanagement

The affairs of the company are being conducted or such affairs are likely to be conducted in a manner which is: a) b) Prejudicial to public interest. Prejudicial to the interest of the company.
12.12.5 Relief from Oppression and Mismanagement

In case of oppression of members and mismanagement of company, a requisite number of shareholders can apply for appropriate relief to: a) b) c) Note: The powers of the court or Company Law Board are transferred to the National Company Law Tribunal (in short NCLT) by the Companies (Amendment) Act 2002. The central government is in the process of formation of NCLT. As on date, the powers are exercised by courts or Company Law Board. Hence, in this section NCLT or Tribunal has been used. The Tribunal (National Company Law Tribunal (NCLT)) for winding up. The Tribunal (National Company Law Tribunal (NCLT)). The central government.
12.12.6 Application to NCLT and Relief by it

A requisite number of shareholders can apply for appropriate relief to NCLT. NCLT may give relief if it is of the opinion that the companys affairs are being conducted: a) In a manner prejudicial to public interest.
b) Notes
In a manner oppressive to any member(s).
12.12.7 Who can Apply for Relief55

Requisite number of members should sign on the application: a) Company having share capital: i. Not less than 100 members or 1/10 of the total number of its members, whichever is less.
ii. By any member(s) holding not less than 1/10 of the issued share capital. b) c) Company not having share capital: 1/5 of the total number of member of the company. Besides members the following can also apply: i. The central government or any person authorised by the central government. ii. Trustees of a shareholder/member. iii. A legal representative of a deceased member.
12.12.8 Notice of Application to be Given to the Central Government

The notice of every application made to the Tribunal (NCLT) under sections 397/398 of the Act for the prevention of oppression or mismanagement must be given by the Tribunal (NCLT) to the central government. The central government can make any representation which the Tribunal will consider before making a final order.
12.12.9 Acts held as Oppressive

The court has held following acts as oppressive: a) b) c) d) e) f) g) h) i) Not calling a general meeting and keeping shareholders in dark. Non-maintenance of statutory records and not conducting affairs of the company in accordance with the Act. Depriving a member of the right to dividend. Transfer of shares held by company to some shareholders otherwise than by making an offer to all. Allotment of shares by directors in a manner by which majority of shareholders is reduced to minority. Failure to distribute the amount of compensation received on nationalisation of business of company among the members, where required to be distributed. Countermanding decision of the board who controls majority voting power, and not allowing board to perform its functions. If sale of assets is made by a company to some of its directors and simultaneously giving them loan to purchase the same. Issue of further shares benefiting a section of the shareholders.
12.12.10 Acts held as not Oppressive

The court has held the following acts as not oppressive: a) b)
An unwise, inefficient careless conduct of a director. Not declaring dividend when company is making loss. Non-holding of the meeting of the directors.
c)
d) e) f) g)
Failure to maintain proper records of the company. Drawing remuneration by a director to which he is not legally entitled. Negligence and inefficiency in managing the affairs of the company. Increasing the voting rights of the share held by the management. Notes
Check Your Progress 12.12.11 Majority can also Apply for Relief
Relief can be granted if the application is made by majority shareholders who have been rendered completely ineffective by the questionable acts of a minority group. 70. Which authorities deal with oppression & mismanagement? 71. Who can apply for relief from oppression & mismanagement? 72. What is known as amalgamation?
12.12.12 Acts Held As Mismanagement

a) b) c) d) e) f) g) h) i) j) Serious in-fight between the directors. Illegal constitution of the board of directors. Gross neglect of interest of the company by sale of its only assets. Diversion of the funds to benefit the majority. Operation of bank account by an unauthorised person. Advance of loans without execution of a document. Continuation of managing director in office after the expiry of his term. Sale of assets at low price and without compliance with the Act. Violation of statutory provisions and those of articles. Violation of the condition of the companys memorandum.
12.12.13 Acts held as not Mismanagement

a) b) Building up of reserves. Merely because company incurs loss, it cannot be that it is mismanaged.
c) Removal of secretary by majority decision of the board unless it is shown that the removal has prejudicially affected the interest of the company or public interest. d) e) Removal of the director and termination of the works managers service. Arrangement with creditors in companys bonafide interest.
12.12.14 Powers of the Tribunal (NCLT)

The Tribunal (NCLT) has all the necessary powers to end oppression as well as mismanagement. Some of the powers are: a) b) c) d) e) f) The regulation of conduct of the companys affairs in future. Purchase of shares or interest of any member of the company by other member or by the company. Reduction of the share capital. Termination, setting aside or modification of any agreement between the company and the managing director/director/manager. Termination, setting aside or modification of any agreement between the company and any third party. Setting aside of any transfer, delivery of goods, payment, execution or other acts relating to
property. Notes g) h) Any other matter considered just and equitable. Prevent the change in the board.
12.12.15 Power of the Central Government

The central government has also the following powers: a) b) Power to prevent oppression or mismanagement. Power to remove managerial personnel.
12.13 Compromises, Arrangements, Reconstruction and Amalgamation

12.13.1 Meaning of Compromise
Compromise is a term which implies existence of a dispute such as relating to rights. It means settlement or adjustment of claims in a dispute by mutual concessions. If the members are required to give up their rights entirely, it will not be a compromise.
12.13.2 Meaning of Arrangement

The term arrangement is of very wide import. An arrangement embraces a far wider class of agreements than a compromise. All modes of re-organising share capital, can properly form part of an arrangement with members. According to the Act, the expression arrangement includes a reorganisation of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or by both these methods.56 An arrangement may also involve: a) b) c) Debenture holders being given an extension of time for payment. Creditors agreeing to receive in part payment of the claims and the balance in shares or debentures of the company. Preference shareholders giving up their rights to arrears of dividends or agreeing to accept a reduced rate of dividend in the future.
12.13.3 Compromise and Arrangement

When a company has a dispute with members or creditors, a scheme of compromise may be drawn up. But, where there is no dispute and there is need for readjusting the rights or liabilities of members or creditors the company may resort to a scheme of arrangement with them. A company has an implied power to compromise/ arrangement. Compromises/arrangements can be discussed under the following two heads: a) Compromise/arrangement when the company is a going concern - This can be done between a company and its creditors or any class of them or between a company and its members or any class of them. When a proposal is made, the company or any creditor or member may apply to the NCLT (Tribunal) for compromise. NCLT then calls a separate meeting of each class of creditors/ members. Meeting is held and conducted as NCLT directs. Proper notice of meeting and full particulars of the scheme is given to all interested parties, including shareholders and the central government. NCLT sanctions the compromise if it is approved by a majority representing 3/4th in value of creditors/members at the meeting. Any scheme which is fair and reasonable and made in good faith will be sanctioned. A certified copy of
NCLTs order is filed with the Registrar, then only the order has any effect. An appeal lies to the Appellate Tribunal. NCLT has the power to supervise the carrying out of the compromise/arrangement. If the NCLT is satisfied that the compromise/arrangement cannot be worked satisfactorily it may make an order for the winding up of the company. The procedure to be followed is summarised below: i. Application to the Tribunal. ii. Meeting of members or creditors. iii. Resolution by three-fourth majority. iv. Tribunals sanction. v. Binding on all members and creditors. vi. Copy of the Tribunals order to be filed with the Registrar. vii. Stay of suit, if applied for. viii. Appeal. b) Compromise / arrangement during the winding up of company - Liquidator may apply to the NCLT for compromise/arrangement. He may exercise the powers of compromise/ arrangement with the sanction of the NCLT. In case of voluntary winding up the sanction of a special resolution of the company is necessary.
Notes
Note: The powers of court are transferred to the National Company Law Tribunal (NCLT), in short Tribunal by the Companies (second amendment) Act, 2002. The central government is in the process of formation of the Tribunal. As on date, the powers are exercised by courts. Hence in this section Tribunal or NCLT is used.
12.13.4 Reconstruction and Amalgamation

Arrangements and compromises can take place for the purposes of reconstruction and amalgamation of companies. a) Meaning of Reconstruction: When a company transfers the whole of its undertaking and property to a new company, under an arrangement by which the shareholders of the old company are entitled to receive some shares or other similar interest in the new company. A reconstruction is made for any of the two purposes: i. b) To enlarge the operations of the company. ii. For reorganisation. Meaning of Amalgamation: This term is not defined in the Act. It implies combination of two or more companies or the business of two or more companies into one company or into the control of one company. Difference Between Amalgamation and Reconstruction: Amalgamation involves the blending of two or more concerns, and not merely the continuance of one concern; reconstruction implies the carrying on of an existing business in some altered form, so that persons interested in the business may remain substantially the same. Take-over and Merger: Distinction - amalgamation/reconstruction may take the form of take-over or merger. In a take-over the direct or indirect control over the assets of the acquired company passes to the acquirer, in a merger the shareholding in the combined enterprise will be spread between the shareholders of the two companies. Forms of Reconstruction/Amalgamations: A reconstruction/amalgamation may take any of the following forms:
c)
d)
e)
i. Notes f)
By sale of undertaking.
ii. By sale of shares. iii. By a scheme of arrangement. Duties of the Tribunal (NCLT) with respect to Reconstruction/Amalgamation: i. To see that the scheme is reasonable and fair. ii. To ascertain the wishes of the members. iii. To see that the scheme is designed to overcome difficulties and re-establish the business.
12.13.5 Amalgamation of Companies in National Interest (Section 396)

Where the central government is satisfied that it is essential in the public interest that two or more companies should amalgamate, then the central government may order the amalgamation of those companies into a single company with such constitution, with such property, powers, rights, interests, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order. Any member or creditor who stands to lose by the amalgamation is to be given compensation. The amount of compensation is to be assessed by the central government and has to be published in the Official Gazette. The books and papers of a company which have been amalgamated with, or whose shares have been acquired by, another company, must not be disposed of without the prior permission of the central government.
12.14 Winding up of a Company

12.14.1 Meaning of Winding up
Winding-up of a company represents the steps for the last stage in its life. It means a proceeding by which a company is dissolved. According to Prof. L.C.B Gower, Winding-up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator, called liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.57 Winding up of a company differs from insolvency of an individual in as much as a company cannot be made insolvent under the insolvency law. Besides, even a solvent company can be wound-up.
Check Your Progress

73. What are the modes of winding up? 74. What is the stipulated period for commencing business activities after incorporation, and its effect? 75. Who presents the petition for compulsory winding up of a company?
12.14.2 Modes of Winding up

There are two modes of winding-up. These modes are: a) b) Compulsory winding-up under orders of the National Company Law Tribunal (NCLT)*. Voluntary winding-Up.
*Note: The powers of court are transferred to the National Company Law Tribunal by the Company (Amendment) Act, 2002. The central government is in the process of formation of this Tribunal. As on date, the powers are exercised by courts. Hence in this section Tribunal/NCLT has been used.
12.14.3 Grounds for Winding up by the Tribunal (NCLT)58

A company may be wound up by the Tribunal on the following grounds: a) By the company passing a special resolution: This ground may not be resorted to very much as the members may prefer to go for voluntary winding up as the same may be more economical and speedier. Default in holding statutory meeting or in delivering statutory report to the Registrar: This clause is not applicable for a private company. The NCLT may instead of making a winding up order direct that the statutory meeting be held or the statutory report be delivered. Failure to commence business within a year from the date of incorporation or suspension of business for a whole year: The suspension must be of entire business and not a part of it. Reduction in membership below the minimum required: The minimum number is 7 for a public company and 2 for a private company. The company carries on business for more than 6 months while the number is so reduced. Inability to pay its debts of Rs. 1 lakh : What is important to note that the company must be commercially insolvent. Tribunal is of the opinion that it is just and equitable: The Tribunal may order winding up under this clause in the following cases: i. When the main object of the company has substantially failed.59 ii. When there is a complete deadlock in the management of the company.60 iii. Where there is a mismanagement and there is no practical possibility of remedying it.61 iv. When the company is a bubble, i.e. it never had any business - such companies are commonly called as fly-by-night companies. v. g) h) When there is oppression of minority shareholders. Default of companys filing its balance sheet and profit and loss account on annual return for any five consecutive financial years. If the company has acted against the interests of sovereignty and integrity of India, the security of the state, friendly relations with foreign states, public order, decency or morality. If the Tribunal is of the opinion that the company should be wound up as it has become sick and is unlikely to become viable in future. Notes
b)
c) d)
e) f)
i)
12.14.4 Who may Petition for Winding-up62

A petition for the compulsory winding-up of a company may be presented by: a) b) c) d) e) f) g) h) The company. Any creditor. Any contributory. Any combination of creditor, company or contributory acting jointly or separately. The Registrar. Any person authorised by the central government. The official liquidator. The central government or state government.
The Supreme Court of India has ruled that the workers of a company cannot prefer a winding-up petition against a company. They are entitled to appear and be heard in support of or in opposition
to the winding-up petition.63 Notes
12.14.5 Statement of Affairs to be Filed on Winding-up64

Every company is to file with the Tribunal a statement of its affairs along with the petition for winding up. When the company is opposing a petition for winding up, a statement of affairs is to be filed by the company. The statement of affairs shall include details like names and addresses of directors, company secretary, location of assets of the company and their value, debtors and creditors with their addresses, workmen and other employees and any outstandings to them and such other details as the Tribunal may direct.
12.14.6 Consequences of Winding-up Order by the Tribunal

The important consequences of the winding up order by the Tribunal are as follows: a) b) c) d) e) f) g) h) i) Intimation to be sent to the official liquidator and the Registrar. Filing of winding up order with the Registrar within 30 days. Notification of order in the Official Gazette. Winding-up order is deemed to be notice of discharge for employees. Suits stayed unless the Tribunal gives leave to continue. Order operates in the interests of all creditors and contributories. Official liquidator is normally the liquidator, If not, then liquidator is selected from a panel. Boards powers come to an end. On the commencement of winding-up, the limitation remains suspended in favour of the company till one year after the winding-up order is made.
12.14.7 Action by the Tribunal

a) b) Statement of Affairs to be made available to the liquidator; Tribunal may direct for the constitution of a Committee of Inspection.
12.14.8 General Powers of the Tribunal in Compulsory Winding-up

a) b) c) d) e) f) g) h) i) j) k) l) m)
To stay winding-up. To settle the list of contributories. To require delivery of property to the liquidator. To set-off claims. To make calls. To order payment into bank of moneys due to the company. To exclude creditors not proving on time. To adjust the right of contributories. To order costs. To summon persons suspected of having the property of the company. To order public examination of promoters, directors, etc. To arrest an absconding contributory. To order the dissolution of the company.
12.14.9 Duties of Liquidator

Liquidator has the following duties: a) b) c) d) e) f) g) h) i) j) To conduct proceedings in winding-up. To make a report. To take custody of companys property. To comply with directions of the creditors or contributories or the Committee of Inspection. To summon meetings of creditors and contributories. To obtain directions from the Tribunal. To keep statutory books. To get accounts audited. Central governments control of liquidator. Information as to a pending winding up. Notes
12.14.10 Powers of the Liquidator

a) Exercisable with the sanction of the Tribunal: i. To institute or defend any suit in the name and on behalf of the company; ii. To carry on the business of the company; iii. To sell the immovable/movable property of the company; iv. To raise money on the security of the company; v. To do all such other things as may be necessary for the winding-up of the company;
vi. To pay, compromise or settle with any class of creditors; vii. To appoint advocate, attorney. viii. To compromise any call, liability or debt. b) Exercisable without the sanction of the Tribunal: i. Do all acts, execute all deeds, receipts and other documents; ii. Inspect the records and returns of the company with the Registrar; iii. Claim in the insolvency of any contributory; iv. Draw, accept, make any bill of exchange in the name of the company; v. Appoint any agent.
12.14.11 Voluntary Winding-up

a) Kinds - There are two types of voluntary winding up: i. b) Members voluntary winding-up ii. Creditors voluntary winding-up Effects of voluntary winding-up - Voluntary winding-up has the following effects: i. On status of company. ii. Corporate powers to continue until dissolution. iii. Boards powers to cease on liquidators appointment. iv. Effect on companys employees.
v. Notes c)
Avoidance of transfer of shares.
Members voluntary winding-up, conditions to be satisfied: The following two conditions are to be satisfied in members voluntary winding-up: i. Declaration of solvency to be made. ii. Shareholders resolution to be passed.
Check Your Progress

d) 76. What power does a liquidator can exercise irrespective of sanction by the Tribunal? 77. How many types of voluntary winding up are there? 78. Give differences between members and creditors voluntary winding-up. e)
Provisions applicable to members voluntary winding-up: i. Appointment of liquidator. ii. Boards powers to cease on appointment of a liquidator. iii. Power to fill a vacancy in the office of liquidator. iv. Notice of appointment of liquidator to be given to the Registrar. v. Power of liquidator to accept shares etc. as consideration sale of companys property.
vi. Duty of liquidator to call creditors meeting in case of insolvency. vii. Duty of liquidator to call a general meeting at the end of each year. viii. Final meeting and dissolution. ix. Alternative provisions as to annual and final meeting in case of insolvency. Provisions applicable to creditors voluntary winding-up: i. Meeting of creditors. ii. Notice of resolution to be given to the registrar. iii. Appointment of liquidator. iv. Appointment of a Committee of Inspection. v. Fixing of liquidators remuneration. vi. Boards power to cease on appointment of a liquidator. vii. Powers to fill a vacancy in the office of a liquidator. viii. Power of liquidator to accept shares etc. as consideration for sale of company property. ix. Duty of a liquidator to call meeting of a company and creditor at the end of each year. x. Final meeting and dissolution.
12.14.12 Difference Between Members and Creditors Voluntary Winding-up Sl. No.
1. 2. 3. 4. 5.
Members Voluntary Winding-up

Directors declaration of solvency is a must. Meeting of members and passing a resolution is required. No Committee of Inspection. Members have dominating control. Members appoint the liquidator.
Creditors Voluntary Winding-up

No such declaration is required. No meeting of members is necessary. Such a Committee may be constituted. Creditors have dominating control. Creditors have choice over members.
Sl. No.
Members Voluntary Winding-up

Liquidator exercises some of his powers with the sanction of a special resolution of members.
Creditors Voluntary Winding-up

Sanction of the tribunal of the committee of inspection or of meeting of creditors.
Notes
6.
12.15 Corporate Governance

Corporate governance was a relatively unknown subject to the public till about 1980s. In the last two to three decades it has become a buzzword. With outbreak of corporate scams in various countries the need for corporate governance has come to the fore.
12.15.2 Historical Evolution of Corporate Governance

A spate of scandals and corporate collapses in the late 1980s and 1990s led shareholders and banks to express concern about the safety of their investments. Corporate failures of Bank of Credit and Commerce International (BCCI), Robert Maxwells Mirror Groups News International arose out of poor governance practices. With a view to prevent the recurrence of business failures, London Stock Exchange in May 1991 set up Cadbury Committee under the Chairmanship of Sir Adrian Cadbury. Cadbury Committee was constituted to draft a Code of Best Practices for the U.K. Corporations. This committee submitted its report and associated Code of Best Practices in December 1992. It was for Sir Ronald Hampel (the chairman of ICI) Committee on Corporate Governance to assess the import of Cadburys recommendations and developing further guidance. Thereafter there was Richard Greenbury (Mark and Spencer chief) Committee on Directors remuneration. All these developments with regard to corporate governance led Turnbull Guidelines in September 1997. These developments in U.K. had significant influence on India. Confederation of Indian Industries (CII) appointed a National Task Force headed by Rahul Bajaj, who submitted a Desirable Corporate Governance in India - a Code in April 1998 containing 17 recommendations. Thereafter Securities and Exchange Board of India (SEBI) appointed a Committee under the chairmanship of Kumar Mangalam Birla. This committee submitted its report on 7 May 1999, Containing 19 Mandatory and 6 non-mandatory recommendations. SEBI implemented the report by requiring the Stock Exchanges to introduce a separate clause 49 in the Listing Agreements. In April 2002 Ganguly Committee report was made for improving corporate governance in Banks and Financial Institutions. The central government (Ministry of Finance and Company Affairs) appointed a Committee under the chairmanship of Mr. Naresh Chandra on Corporate Audit and Governance. This committee submitted its report on 23 December 2002. Finally SEBI appointed another committee on Corporate Governance under the chairmanship of N. R. Narayan Murthy. This committee submitted its report to SEBI on 8 Feb. 2003.65 SEBI thereafter revised clause 49 of the Listing Agreement, which has come into force with effect from 01 January 2006. Some of the recommendations of these various committees were given legal recognition by amending the Companies Act in 1999, 2000 and twice in 2002. With a view to gear company law for competition with business in developed countries, the central government (Ministry of Company Affairs) appointed an expert committee under the chairmanship of Dr Jamshed J Irani in December 2004. The Committee submitted its report to the Central Government on 31 May 2005.66 The Central Government had announced that the company law would be extensively revised based on
Notes
Dr Iranis Committee Report. Corporate world is awaiting the changes to be made in company law. Parliament had passed the Companies (Amendment) Act, 2006 which envisages implementation of a comprehensive e-governance system through the much-touted MCA-21 project.
12.15.3 Meaning of Corporate Governance

The concept of corporate governance has been used in different perspectives. It started as maximising shareholders wealth and then expanded to maximising all stakeholders wealth. Corporate governance has been defined in many different ways by scholars and agencies. Some of these definitions/meanings are given below: a) b) c) d) e) f) Simply stated, corporate governance is about performance as well as conformance. According to Ada Demb and Friedrich Neubauer, Corporate governance is the process by which corporation is made responsive to the rights and wishes of stakeholders. As per James D. Wolfensohnn, President of World Bank, Corporate governance is about promoting corporate fairness, transparency and accountability. OECD has defined the corporate governance to mean a system by which business corporations are directed and controlled. Cadbury Committee (U.K) has defined corporate governance as (it is) the system by which companies are directed and controlled. According to Y C Deveshwar, chairman of ITC, corporate governance refers to the structure, systems, and processes in a corporation, that are considered most appropriate to enhance its wealth generating capacity. Salim Sheikh and William Ress in their treatise Corporate Governance and Corporate Control stated that corporate governance is also concerned with the ethics, values and morals of a company and its directors.A review of various definitions and views brings out that in its simplistic form corporate governance is an umbrella term encompassing various issues concerning senior management, board of directors, shareholders and other corporate stakeholders.
g)
12.15.4 Objectives of Corporate Governance

Good governance is integral for the existence of a company. The main objectives of good corporate governance are: a) b) c) d) To promote a healthy environment for long-term investment. To create a trust in the corporate and in its abilities. To promote business development. To improve the efficiency of the capital markets. To enhance the effectiveness in the service of the real economy. To exercise effective control on corporate affairs by the board at all times.
Check Your Progress

79. What is transparency? 80. What does oversight mean? 81. What is the principal of corporate governance say about External audit?
e) f)
12.15.5 Fundamental Principles of Corporate Governance

Governance style may be as different as the nature of companies. For this reason, both Cadbury Committee and Rahul Bajaj Committee had stated that there is no unique structure of corporate governance in the developed world. There is no one size fits all structure for corporate governance. Every company may have its own governance style. Despite uniqueness of styles, there are some fundamental principles of corporate governance. These principles are given below: a) Ethics: A company must observe ethical standards. Deviation from ethical principles corrupts organisational culture and undermines stakeholder value.
b)
Transparency: It involves the explaining of companys policies and action to those to whom it owes responsibilities. Transparency leads to appropriate disclosures without endangering companys interest. In the case of Enron, the shareholders value was destroyed because it did not share its setbacks with the shareholders. Accountability: It signifies that the Board of Directors are accountable to shareholders and management is accountable to the Board of Directors, and shareholders. Accountability provides impetus to performance. Trusteeship: There exists the principle of trusteeship on the Board of Directors who must act to protect and enhance shareholders and other stakeholders value. Mahatma Gandhi had advocated this principle. Empowerment: It unleashes creativity and innovation throughout the organization by truly vesting decision-making powers at the most appropriate levels in the organisational hierarchy. Fairness to all Stakeholders: It involves a fair and equitable treatment of all stakeholders who participate in the corporate governance structure. Oversight: It means the existence of a system of checks and balances. It should prevent misuse of power and facilitate timely management response to change and risks. External Audit: It must be independent and penetrating. Regulatory Regime: There must be an appropriate regulatory regime to back these obligations. Whistle Blower Policy: Companies should adopt a policy for Whistle blowers. This was specifically recommended by Narayan Murthy Committee.
Notes
c)
d)
e) f) g) h) i) j)
12.15.6 Conclusions
a) Practice prevalent in different modes: Corporate governance is a practice which is being followed by the corporates all over the world. Each country may adopt its own form of corporate governance. No single definition: It is a dynamic concept and can be defined in many ways. It is not defined in only one manner. Drawn from diverse fields: Corporate governance is drawn from diverse fields like laws, economics, ethics, politics, management, finance, etc. Mere law is not sufficient: Corporate governance goes far beyond company law. In India company law has been amended to include better corporate practices like audit committee, directors responsibility statement, voting by postal ballot. Strict implementation of the law is essential. Accounting standard: In all the developed countries accounting standards have been devised and followed. India has also evolved its own accounting standards which are required to be followed by all companies. Professional and competent directors: The key to good corporate governance is a well functioning, informed Board of Directors. The board should have a core group of professionally acclaimed and accredited non-executive directors. Evaluation: Corporate governance can now be evaluated and corporate governance rating has come to stay. Many Indian companies like ITC, Infosys, Grasim have been evaluated and awarded corporate governance rating by agencies like CRISIL or ICRA.
b) c) d)
e)
f)
g)
In conclusion, it can be said that minimal corporate governance can be achieved by following the law, better governance by having a professional management but best corporate governance is achieved by following ethical practices and principles.
Summary
Notes
Meaning and Nature of a Company

A Company implies an association of persons for some common object(s). A Company under the Act is defined to mean a company formed and registered under the Companies Act, 1956 or under any of the previous company law. A company is characterised by the features like 1Incorporate association, 2- Artificial legal person, 3- Separate legal entity, 4- Perpetual succession, 5- Limited liability, 6- Transferable shares, 7- Common seal, 8- Can hold separate property, 9Capacity to sue and being Companies can be classified on the basis of mode of incorporation into chartered companies, statutory companies and registered company. On the basis of liability of members companies are classified into limited by shares, limited by guarantee and unlimited. Based on number of members, a private company has minimum two and maximum fifty whereas the minimum number in a public company is seven and maximum is limited by number of shares. Other type of companies are government companies, foreign company, holding and subsidiary company and producer company.
Lifting the Corporate Veil

At times, the facade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as lifting the corporate veil. The court may lift the corporate veil under a) statutory provisions, and b) judicial interpretation. Under statutory provisions these are included i) Reduction in membership, ii) Misrepresentation in prospectus, iii) Fraudulent Conduct of business, iv) Failure to return application money, v) Mis-description of name, vi) Non-payment of tax, vii) Liability of Ultra-vires act, viii) Liability of promoters for preincorporation contracts, ix) Directors with unlimited liability, and x) Holding subsidiary company. Under judicial interpretations, courts have lifted corporate veil, i) For determining the enemy character of a company, ii) For the benefit of revenue, iii) For prevention of fraud and improper conduct, and iv) others like where company is avoiding welfare legislation or where company is mere sham or cloak.
Formation of a Company
The whole process of formation of a company may be divided into four stages namely i) promotion, ii) registration, iii) floatation, and iv) commencement of business.Promotion denotes preliminary steps taken for the purpose of registration of the company. The persons who undertake these steps are called promoters. The promoters of the company prepare memorandum and articles of association and other necessary documents. These documents are filed with Registrar of Companies (ROC). ROC after scruitinising these documents and on being satisfied that they are in order, issues the certificate of incorporation. This certificate is conclusive as to all the requirements of the Act with respect to registration have been duly complied with. A private company can commence its business on receipt of certificate of incorporation. A public company has to raise capital and for this purpose issue a prospectus if subscription of capital is sought from public or issue a statement in lieu of prospectus when share capital is sought to be arranged through friends and relatives. To get the certificate to commence business, a public company must have received the minimum subscription viz. 90% of the entire issue on complying with some other formalities, ROC grants the certificate to commence business. Now, a public company can commence its business.
Memorandum of Association
Memorandum of association of a company is an important document. It defines as well as confines the powers of the company. The memorandum of a limited company is to contain its name, the name of the state in which registered office is to be situated; the objects, the liability, and the subscription clause. A company can only act as per the objects given in the memorandum of association. Any action beyond this are Ultra-vires (beyond the powers of the company) and hence void. All the clauses of the memorandum, except the subscription clause can be changed by following the procedure provided in the Act. Notes
Articles of Association
The articles of association of a company are its bye-laws or rules and regulations. It controls the internal management of the company and defines the powers of its offices. It also establishes a contract between the company and the members and between members inter se. Articles are subordinate to memorandum. Articles contain provisions relating to share capital, rights of shareholders, shares and stock, meetings, directors. Articles may be altered by passing a special resolution. Alterations must not be inconsistent with the Act, or any other statute; or it must not be illegal or opposed to public policy and must be in the interest of the company. The memorandum and articles when registered are public documents and can be inspected by anyone on payment of a nominal fee. Thus there is a presumption that any person dealing with company has read and understood these documents. This is known as doctrine of constructive notice. This doctrine is subject to another doctrine namely indoor management. This doctrine of indoor management provides that the persons dealing with the company are not bound to inquire into the regularity of internal proceedings. This relief under indoor management is not available where the outsider has knowledge of irregularity or in case of forgery or even negligence.
Prospectus
A public company normally invites public to subscribe to its share capital. For this purpose a prospectus is required to be issued. A prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other documents inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of a body corporate. The prospectus must be dated, signed and registered with the registrar. Prospectus must contain the information as per Parts I, II and III of Schedule II to the Act. The golden rule of prospectus is that there must be full, frank and honest disclosure of all facts. There should not be any errors of commission or omission i.e. no mis-statements. Any misstatements in prospectus entails civil and criminal liability. Civil liability may include rescission of contract, damages or compensation. Criminal liability entails imprisonment upto 2 years or fine upto Rs 50,000 or both. An offer document by the issue houses offering shares to the public is known as deemed prospectus. Where a public company does not invite public to subscribe for its shares, but arranges to get money from private sources, it need not issue a prospectus. The promoters, in such a case are required to prepare a draft prospectus known as statement in lieu of prospectus. This is also required to be filed with the Registrar. Public financial institutions and scheduled banks have been allowed to file shelf prospectus which will remain valid upto one year. Thus, such institutions and banks need not issue a prospectus every time they offer securities to public. They only need to file an Information memorandum with respect to changes in the financial position, etc. A red herring prospectus is a prospectus which does not have complete particulars on the price of securities offered and quantum of securities offered. SEBI acts as the administrative authority in relation to any complaints relating to prospectus.
Membership
Notes A member means a person who has either subscribed to the memorandum or who agrees in writing to become member and whose name appears in the register of members. A member does not include a bearer of a share warrant. A member is also called a shareholder except in some cases like the legal heir of a member is a shareholder but not member till his name is entered in the register of the members. A company, a foreigner, a registered society or trade union can become members but a partnership firm (although partners in their individual capacity can become members), official receiver or liquidator cannot become a member. A persons membership can be terminated in many ways like on transfer forfeiture, or surrender of shares or when he is adjudged insolvent or when the contract is rescinded.
Share and Share Capital

The capital of a company is divided into a number of indivisible units of a fixed amount. Each of these units is known as a share. A share certificate issued by a company specifies the shares held by a member and is prima-facie evidence of the title of member to the shares. Stock is the aggregate of fully paid shares, consolidated and divided for the convenient holding into different parts. It may be transferred or split up into fractions of any amount. There are two types of shares namely preference shares or ordinary shares. Ordinary or equity shares can now be issued with disproportionate rights as to voting or dividend. Preferenceshares have preferential rights as to dividend or return of capital when the company goes into liquidation. Preference shares can be of many types like cumulative or non cumulative, participating or non-participating, redeemable or irredeemable, convertible or non-convertible . A public company limited by shares, if so authorised by its articles, with previous approval of the central government, with respect to fully paid shares may issue share warrants. This is a bearer document of title to shares specified therein. Share transfer must be effected within two months of the application of transfer. The transfer instrument must be valid and proper. A company has power to refuse transfer against which appeal can be filed within a period of 2 months. There are provisions in the Act for nomination, forfeiture and surrender of shares. A company limited by shares or a company limited by guarantee having a share capital is prohibited from buying its own shares. The Companies (Amendment) Act, 1999 has, however, allowed purchase of its own shares by a company subject to the conditions laid down in the Act. The Act divides share capital into two kinds namely preference and equity or ordinary. Share capital can be altered or reduced subject to the conditions provided in the Act.
Borrowings, Loans, Debentures and Investments

Every trading company has an implied power to borrow. A non-trading company, must, in its memorandum or articles, contain an express power to borrow. A public company cannot exercise borrowing power unless certificate to commence business is obtained by it. No borrowing is permissible beyond the aggregate of the paid up capital of the company and its free reserves unless prior sanction is obtained in general meeting. Loan includes debentures or any deposit of money by one company with another company. Debentures may be of many types like registered or unregistered, secured or unsecured, redeemable or irredeemable, convertible or non-convertible. Investments for the purposes of the Act means the investing of money in shares, stock, debentures or other securities. Investments made by a company must be made and held in companys own name. All certificates or letters of allotment must be in the custody of the company. Inter corporate loans and advances are subject to various provisions of the Act.
Company Management and Administration

The Act defines a director as including any person occupying the position of a director by whatever name called. The persons through whom a company acts and does its business are termed as
directors, collectively known as Board of Directors. Only an individual can be appointed as a director. Minimum number of directors in a private company is two and in a public company three. Maximum number is as provided in the articles. A person can hold directorship, at the same time, in upto 15 companies. The Act provides no qualifications but enumerates certain disqualifications for directorship like insolvency, unsound mind etc. First directors are appointed by subscribers to memorandum. Subsequent directors are appointed by shareholders or by third parties or by the central government. Casual, additional and alternate directors are appointed by the Board. The Act also provides appointment of director by small shareholders. Before appointing a director, his prior consent is required to be signed with the Registrar and the company. Directors can be removed by shareholders, central government or the Tribunal (NCLT). It is difficult to state the exact legal position of a director. Although a director acts as agent, trustee, managing partner or employee, yet he is none of them. The board shall be entitled to exercise all such powers and to do all such acts and things, as the company is authorised to exercise and do. However, the board cannot exercise any power or do any act or thing which is exercisable by the company in general meeting. Directors duties include to act in good faith, to take reasonable care and to disclose interest. Managing director is a director who is entrusted with substantial powers of management and his tenure is five years and eligible for reappointment.
Notes
Company Meetings and Resolutions

Company can only act through persons who take various decisions in meetings. A valid meeting must be duly convened, legally constituted and properly conducted. General aspects of meetings relate to chairman, notice, voting, agenda and quorum. Meetings of company can be of a) shareholders, b) directors, and c) creditors and debenture holders. Shareholders meetings include statutory meeting, annual general meeting, extraordinary general meeting and class meetings. A motion is a proposal under consideration by members in a meeting before it is voted upon. A resolution is any motion voted upon and agreed to in a meeting and entered in minutes. Resolutions are of two types - ordinary or special. When a motion is passed by simple majority of the members voting at a general meeting, it is called ordinary resolution. Special resolution is when the votes cast in favour, should not be less than three times the votes cast against. Resolutions requiring special notice mean that the notice of intention to move the resolution should be given to the company not less than 14 clear days before the meeting at which it is to be moved. The Act also provides passing of resolutions by postal ballot.
Accounts and Audit

Every company is required to maintain proper books of account with respect to all receipts and expenditure, sales and purchases, assets and liabilities and summarised account of all branch offices. These books are to be kept on accrual basis and as per double entry system of accounting. Books of account can be inspected by any director, registrar, authorised officers of central government and of SEBI. These books are to be preserved for 8 years. Balance sheet and profit and loss account are required to be authenticated (signed by atleast two directors). Annual accounts (Balance sheet and profit and loss account) are to be sent to every member, filed with the registrar and adopted in the AGM. An auditor of a company is a practising chartered accountant. Disqualifications for an auditor entail a body cooperate, an officer/employee, indebted to the company for over Rs 1000 or disqualified for appointment as auditor of any body corporate which is the companys subsidiary or its holding company or a subsidiary of its holding company. First auditor is appointed by the board and subsequent auditor by shareholders. Under the Act, the auditor has certain rights and duties and he is required to submit an auditors report. The Act also has provisions for cost audit, National Advisory Committee on Accounting Standard and for Audit Committee.
Prevention of Oppression and Mismanagement

Notes The management of companies is based on the rule of majority. One of the exceptions to this rule is where prevention of oppression and mismanagement is applicable. Oppression has not been defined in the Act. It means visible departures from the standards and a violation of the conditions of fair play. The term mismanagement would mean that the affairs of the company are being conducted or such affairs are likely to be conducted in a manner which is prejudicial to public interest or prejudicial to the interests of the company. In case of oppression of members and mismanagement of company, a requisite number of shareholders can apply for appropriate relief to the Tribunal for winding-up, or the Tribunal / central government for appropriate relief. Requisite number of members who should sign such an application in respect of company having share capital is not less than 100 members or 1/10 of the total number of its members, which ever is less, or by any member(s) holding not less than 1/10 of the issued share capital. In case of a company not having share capital, requisite number is 1/5 of the total number of members of the company. The notice of every application made to the Tribunal for the prevention of oppression and mismanagement must be given by the Tribunal to the central government. The central government can make any representation which the Tribunal will consider before making a final order. Relief can be granted if the application is made by majority shareholders who have been rendered completely ineffective by the questionable acts of a minority group. The Tribunal has all the necessary powers to end oppression as well as mismanagement. Some of the powers are a) the regulation of conduct of the companys affairs in future, b) purchases of shares by another member, c) reduction of share capital, d) termination or modification of any agreement with the director or any third party, e) setting aside of any transfer of any property, f) prevent the change in the board, or g) any other matter considered just and equitable. The central government has also the powers to prevent oppression or mismanagement and to remove managerial personnel.
Compromises, Arrangements, Reconstruction and Amalgamation

Compromise means settlement or adjustment of claims in a dispute by mutual concessions. The expression arrangement includes a re-organisation of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or by both these methods. Compromise/arrangement when the company is a going concern involve the procedure for an application to the Tribunal, meeting of creditors/ members, resolution by 3/4th majority, sanction by the Tribunal, binding on all members and creditors, Tribunals order to be filed with the registrar and is appealable. Compromise/arrangement during the winding up ofcompany entails that the liquidator may apply to the Tribunal. Reconstruction means when a company transfers the whole of its undertaking and property to a new company, under an arrangement by when the shareholders of the old company are entitled to receive some shares or other similar interest in the new company. A reconstruction is made to enlarge the operations of the company or for reorganization. The Term amalgamation implies combination of two or more companies or the business of two or more companies into one company or into the control of the company. Where the central government is satisfied that it is essential in the public interest that two or more companies should amalgamate, then the central government may order the amalgamation of those companies into a single company.
Winding up of a Company
Winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator, called liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights. There are two modes of winding up: a) b)
Compulsory winding up or under order of the Tribunal. Voluntary winding up.
A company may be wound up by the Tribunal on these grounds namely a) By the company passing a special resolution, b) Default in holding statutory meeting or in delivering statutory report to the registrar, c) Failure to commence business within a year from the date of incorporation, d) Reduction in membership below the minimum required, e) Inability to pay debt of Rs. one lakh, f) When in the opinion of the Tribunal it is just and equitable, g) Default of companys filing its balance sheet, h) If the company has acted against the interests of sovereignty and integrity of India, and i) When the company has become sick and is unlikely to become viable in future. A petition for winding up may be made by the company, any creditor, any contributory, the registrar, any person authorised by the Central Government, the official liquidator or the central or state government. Every company is to file with the Tribunal a statement of affairs along with the petition for winding up. When the company is opposing a petition for winding up, a statement of affairs is to be filed by the company. The consequences of the winding up order by the Tribunal are i) Intimation is sent to the official liquidator and the registrar, ii) Winding up order is filed with the registrar within 30 days, iii) The order is notified in the Official Gazette, iv) Winding-up order is deemed to be notice of discharge for employees, v) Suits stayed unless the Tribunal gives leave to continue, vi) Order operates in the interests of all creditors and contributories, vii) Official liquidator is the liquidator, and viii) Boards powers come to an end. The Tribunal hands over the statement of affairs to the liquidator and may direct the constitution of a Committee of Inspection. Besides this the Tribunal has general powers like, to stay winding up, to settle the list of contributories, to set off claims, to make calls, to order payment into bank of money due to the company, to exclude creditors not proving on time, to adjust the right of contributories, to summon persons suspected of having the property of the company, to order public examination of promoters, directors etc., to arrest an absconding contributory, to order costs and to order the dissolution of the company. Liquidators main duty is to conduct the winding-up process. He discharges all the functions of the board so long as the company is not dissolved/liquidated. For discharge of his duties he has certain powers. His powers can be divided into two parts - one exercisable with the sanction of the Tribunal - like to carry on business of the company, to sell the property of the company, to raise money, to compromise etc., and second exercisable without the sanction of the Tribunal like inspect the records and returns of the company with the registrar, or appoint any agent. Voluntary winding-up is of two kinds a) Members voluntary winding-up, and b) Creditors voluntary winding-up. Voluntary winding-up has effects i) On status of company, ii) Corporate powers to continue until dissolution, iii) Boards power to cease on liquidators appointment iv) On companys employee, and v) Avoidance of transfer of share. In members voluntary winding up two conditions are to be satisfied - firstly a declaration of solvency is made and secondly shareholders resolution is to be passed. In both types of voluntary winding-ups a meeting of shareholders or creditors is held. Liquidator is appointed and notice of his appointment is given to the registrar. Boards powers cease on appointment of the liquidator. Any vacancy in the office of liquidator is filled and a final meeting is held where a resolution for the dissolution of the company is passed. Although both members and creditors can resort to voluntary winding up of a company, yet there are some differences in these two types of voluntary winding up.
Notes
Corporate Governance
This term has gained importance in the last two to three decades. A spate of scandals and corporate collapses in the late 1980s and 1990s led shareholders and banks to think about the safety of their investments. In U.K. first Cadbury Committee, followed by Hampel and finally Greenbury Committee were constituted. In India also there were a number of committees which submitted their reports from 1998 to 2005. First Rahul Bajaj Committee by CII in April 1998, then Kumar Mangalam Birla Committee by SEBI in May 1997. Thereafter, in April 2002, Ganguly Committee for Banks and Financial Institutions. The central government appointed Naresh Chandra Committee which submitted its report on 23 Dec. 2002. Finally SEBI appointed Narayan Murthy Committee which submitted its report to SEBI on 8 Feb. 2003. As a result SEBI revised clause 49 of the
Notes
listing agreement which is effective from 1 Jan 2006. To amend company law, central government appointed an Expert Committee under the chairmanship of Dr. J. J. Irani. This Committee submitted its report on 31 May 2005. The changes in company law are awaited. The concept of corporate governance has been used in different perspectives. Many authors have defined this term in different ways. It is an umbrella term - encompassing the system by which companies are directed and controlled. The main objectives of good corporate governance are i) to promote healthy environment for long term investment, ii) to create a trust in the corporate, iii) to promote business development, iv) to improve the efficiency of the capital markets, v) to enhance the effectiveness in the service of the real economy, and vi) to exercise effective control on corporate affairs by the board at all times. There are some fundamental principles of corporate governance like i) ethics, ii) transparency, iii) accountability, iv) trusteeship v) empowerment vi) fairness to all stakeholders viii) oversight, viii) external audit, ix) regulatory regime and x) whistle blower policy. In conclusion it can be said that good corporate governance is a must but its models vary from country to country and company to company. There is no one cap which fits all sizes. Law alone can bring minimal corporate governance, for a better corporate governance the management has to be professional but the best corporate governance is possible only when ethical principles and practices are adopted.
Review Questions
True or False
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. The property of the company is the property of its members. One man company is a perfectly valid company Promoter is neither a trustee nor an agent of the company he promotes but stands in a fiduciary position towards it. The memorandum of association is an unalterable charter of a company. A prospectus must state truth and nothing but truth. Companies are prohibited from buying their own shares. In a company all shareholders are members but all members need not be shareholders. All investments made by a company must be held by it in its own name. Only members can be appointed directors of a company. Every meeting, in order to be valid, must be duly convened, properly constituted and conducted. A board of directors meeting must be held once every two months. Every year the auditors are appointed by the board of directors. A majority, who has been rendered completely ineffective by the questionable acts of a minority group, cannot complain of oppression or mismanagement. Compromise implies existence of dispute such as relating to rights. Every company is required to file, along with the petition for winding-up, with the Tribunal, a statement of its affairs.
Practical Problems
1.
Akhil and Bharat were only two members of a private limited company. Both of them have been killed in an air crash. Does this company cease to exist?
2. 3.
All the seven signatures on a memorandum of association were forged by a person and a certificate of incorporation was duly obtained. Is the certificate of incorporation valid? The directors of a company were authorised by the articles to borrow on bonds such sums of money as should from time to time, by a resolution of the company in general meeting, be authorised to be borrowed. One director gave a bond to Tara without the authority of any such resolution. Is the company liable on the bond? Amar purchased from Dalal 1000 shares of a company on the basis of prospectus containing wrong statement. What remedies are available to Amar against the company? Madhur, a director of ABC Ltd, died in a bomb blast. It has been decided to appoint Murali in his place. Will the company be required to call extraordinary general meeting to approve the latters appointment as a director? One general meeting was called by a company in December 2003. The meeting was adjourned to March 2004 and then held. Subsequently meeting was held in February 2006. Is the company liable for any irregularity? A company has 100 members. It sends notice of the general meeting to all of them. 20 members do not attend the meeting. Out of 80 members who are present 20 abstain from voting. How many members should vote in favour of a resolution if it is to be passed as a special resolution? X,Y,Z, Directors of a company were the major shareholders of the company. X was the chairman of the company. At a meeting of the Board of Directors, it was decided to increase the share capital. Y and Z did not have the money to take up additional shares and feared that in consequence, X would corner all shares and become predominant in the company. So a general meeting was called and it was resolved that the present members alone shouldnot benefit from the prosperity of the company, but others also should share, and a special resolution was passed that the new shares may be offered to about a dozen persons who were not members of the company. X rushed to the Tribunal, complaining of oppression, saying that Y and Z wanted to throw him out as director and chairman of the company and they had passed a special resolution to bring about a change in management. Will X succeed? After a scheme of amalgamation was approved by majority of shareholders and creditors, some of the members requisitioned an EGM to challenge the exchange ratio, which according to them was not fair and reasonable. The scheme was pending in the Tribunal (NCLT). Can the directors refuse to call EGM? There are only two members of a company and both of them are not on speaking terms. Can the company be wound up on this ground?
Notes
4. 5.
6.
7.
8.
9.
10.
Test Questions
1. 2. 3. 4. 5. 6. 7. 8. Define a company and explain the features of a company. Explain the concept of Corporate veil and state the circumstances when it can be lifted. Distinguish between a public limited company and a private limited company. Describe various stages of incorporation of a public limited company. A Joint stock company is an artificial person created by law with a perpetual succession and a common seal. Do you agree with this definition of a company? A company is a legal entity distinct from its members. In what cases do the courts ignore this principle? Explain what is meant by a holding company and a subsidiary company. Give examples. Briefly describe the documents to the filed with the Registrar of Companies prior to incorporation.
9. Notes 10. 11. 12. 13.
Who is a promoter? Discuss his legal position in relation to a company he promotes. Explain. What are the clauses of the memorandum of association of a company? Comment on the memorandum of association is an unalterable charter of a company. Write a short note on Doctrine of ultra-vires. Differentiate between memorandum and article of association. Write short notes on: a. b. Doctrine of indoor management. Doctrine of constructive notice.
14. 15. 16. 17. 18. 19.
The Memorandum of Association is the fundamental law or a charter defining the objects and limiting the powers of a company. Explain. Why is it necessary for a company to have a registered office? Can the registered office of a company be changed? The doctrine of ultra vires is an illusory protection to the shareholders and a pitfull for third parties. Discuss. What are Articles of Association? How can they be altered? Discuss the limit upon the powers of a company to after or add to the Articles of Association. A prospectus must state truth and nothing but truth. Do you agree? Explain. Write short notes on: a. b. Shelf prospectus and information memorandum. Statement in lieu of prospectus.
20. 21. 22. 23. 24.
Define prospectus. When is a company not required to issue a prospectus? What is a prospectus? What are its contents? Is it obligatory for a company to file prospectus or a statement in lieu of prospectus with the Registrar of Companies? In a company all shareholders are members but all members need not be shareholders. Explain. In what ways may a person i) become, ii) cease to be, a member of company? Distinguish between: a. b. Share and stock. Share warrant and share certificate.
25. 26. 27. 28.
What are the conditions required to be complied with for a company to buy-back its shares? Give various classifications of capital and discuss the procedure for reduction of share capital. Define share, What are the different types of shares that may be issued by a company? What are preference shares? Explain what is meant by i) Cumulative and non-cumulative preference shares and ii) Participating and non-participating preference shares.
29. 30. 31. 32. 33.

What are the legal requirements which a company must comply with while borrowing? Discuss the provisions of company law regarding inter-corporate loans and investments. What is the statutory limitation to the borrowing power of the directors of a company? Define director. What are the qualifications and disqualifications of a director? How are directors appointed and removed?
34. 35. 36.
What is the legal position of a director in a company? Explain the powers of the Board of Directors. A casual vacancy has occured in a public company due to a director vacating his office before his term expires. How is the vacancy to be filled? The exact position of directors with regard to a company is hard to define. They are not servants of the company but are rather in the position of managing partners. Discuss this statement and bring out the exact position of directors in a company. Explain various meetings of shareholders. What is a motion? Explain types of resolutions. Write short note on passing of resolution by postal ballot. What books of accounts are required to be kept by a company? Explain the law relating to authentication, adoption and filing of annual accounts. Who can be an auditor of a company and what are his disqualifications, rights and duties? The will of majority must prevail Is the principle of a company management. Are there any exceptions to this rule? Majority will have its way but the minority must be allowed to have its say. Discuss this proposition with reference to prevention of oppression and mismanagement in a company. A, B and C own respectively 50%, 30% and 20% of the issued share capital of a company and A and B are its directors. The company has made good profits but the directors refuse to recommend the declaration of dividend and A and B, as majority shareholders, pass a resolution at a general meeting to the effect that their remuneration as directors shall be 90% of the profits. To wind up the company would, in this case, unfairly prejudice the minority shareholder. What alternative remedy is available to C and how may it be appled? What is meant by oppression? How does the Companies Act, 1956 attempt to prevent oppression and mismanagement? Explain the terms Compromise, Arrangements, Reconstruction and Amalgamation. What do you understand by winding-up of a company? What are the various modes of winding-up? Explain duties and powers of the liquidator. What is corporate governance? Explain its historical evolution. Explain principles of corporate governance.
Notes
37. 38. 39. 40. 41. 42. 43. 44.
45. 46. 47. 48. 49. 50.

1. False 8. True 15. True 2. False 3. True 9. False 10. True 4. False 11. False 5. True 12. False 6. False 13. False 7. True 14. True
Answers to Practical Problems

1. 2. No, a company is an entity distinct from its members. Death, insolvency or retirement of its members, therefore, leave the company unaffected. Yes, the certificate of incorporation given by the registrar in respect of any company shall be conclusive evidence that all the requirements of the Act have been complied with in respect of registration and matters precedent thereto. Yes, the company was liable on the bond, as Tara was entitled to assume that the resolution of the company in general meeting has been passed. (Doctrine of Indoor-Management).
3.
4. Notes 5.
Amar shall have no remedy against the company, there being no privity of contract between Amar and the company. The vacancy being a casual vacancy can be filled by the board of directors at its meeting. It may also be filled in a general meeting. Thus, there is no need to call an extra-ordinary general meeting for this purpose. The Act (Sec. 166) requires a company to hold its annual general meeting every calendar year. So there should be one meeting per year and as many meetings as there are years. Thus in this case the meeting held in March 2004 is actually the meeting of December 2003. Since, next meeting is held only in Feb. 2006, the meeting of2004 has been missed. Under these circumstances, unless permission of the registrar was obtained for extension of time which may be granted upto a period of 3 months under certain special circumstances, the company shall be proceeded against. For a valid special resolution, votes cast in favour must at least be 3 times the votes cast against the resolution, if any. Those who abstain are not to be counted. Thus, 3/4th of 60 i.e. at least 45 members must vote in favour of the resolution. No, seeking change in management does not, prima-facie, amount to oppression. The conduct of majority does not show any lack of probity, unfair conduct, or prejudice in the exercise of legal and proprietary rights as a shareholder. No, director cannot refuse to call EGM requisitioned by members in this case. The Tribunal cannot prevent a company from holding an EGM for considering the proposed modification of a scheme. Yes, company can be wound up on just and equitable ground as there was a deadlock in management.
6.
7.
8.
9.
10.

1) 6) 12) 18) 24) 30) 36) 41) 47) 52) 57) 62) 67) 72) 77) 12.1.1, 2) 12.1.3(b), 3) 12.1.3(g), 4) 12.1.4(b), 5) 12.1.4(d)(ii), 12.1.6(a&b), 7) 12.2.1, 8) 12.2.2, 9) 12.2.3, 10) 12.2.3, 11) 12.2.4, 12.2.5, 13) 12.3.1, 14) 12.3.3, 15) 12.3.4, 16) 12.3.4(b)(ii), 17) 12.4.1, 12.4.3, 19) 12.5.3(b), 20) 12.5.3(c), 21) 12.5.7, 22) 12.5.5, 23) 12.5.11, 12.5.8, 25) 12.5.10, 26) 12.6.3, 27) 12.6.5, 28) 12.6.7, 29) 12.6.5(d), 12.7.4, 31) 12.7.5, 32) 12.7.8, 33) 12.7.10(b), 34) 12.7.10(e), 35) 12.7.13, 12.7.15(a), 37) 12.7.15(h), 38) 12.7.16(b)(iii), 39) 12.7.18, 40) 12.7.19, 12.8.1(b), 42) 12.8.2, 43) 12.8.4, 44) 12.8.5(d), 45) 12.8.5(k), 46) 12.9.2, 12.9.6(a), 48) 12.9.6(c)(ii), 49) 12.9.7(a), 50) 12.9.8(c), 51) 12.9.8(g), 12.9.10(b), 53) 12.9.11, 54) 12.9.14, 55) 12.9.17, 56) 12.9.18(b), 12.10.2(c), 58) 12.10.2(e), 59) 12.10.4(d), 60) 12.10.5(c)(iv), 61) 12.10.8(a), 12.10.9(b), 63) 12.11.3, 64) 12.11.4, 65) 12.11.8, 66) 12.11.10, 12.11.16, 68) 12.11.17, 69) 12.12.3, 70) 12.12.5, 71) 12.12.7, 12.13.4(b), 73) 12.14.2, 74) 12.14.3(c), 75) 12.14.4, 76) 12.14.10(b), 12.14.11(a), 78) 12.14.12
References
1 2 3 4 5 6
(1895) AII. E.R. Rep. 33 Section 12 (2) (a) of the Companies Act. Section 12 (2) (b) of the Companies Act Section 12 (2) (c) of the Companies Act Section 617 Section 591
7 8 9
Section 4 Sections 581 A to 581 ZT Section 45 Section 62 Section 69 Section 147 [1916] 2 AC 307 AIR 1927 Bom. 371 [1962] AII. E.R. 442. [1996] A SCALE 202 (SC) In Twycross v. Grant 1872. 2 C.P.D. 496 at page 541 In Whaley Bridge Printing Company v. Green [1880] 5 B.D. 109 at page 111 [1924] A.C. 1958 Section 2 (28) [1875] LR 7 HL. 653 23Section 16 Sections 21 and 22 25Section 146 26Section 17 27Section 38 28Section 94 29Section 2(2) (1934) 4 Comp. Cas. 289 = AIR 1939 Mad. 579 (1856) 6 E. and B. 327 Section 2(36) Nandita Jain v. Bennett Coleman and Co. Ltd., Appeal No. 27 of 1972 Section 150 Section 151 Section 2(46) Section 114 Section 79A - Inserted by the Companies Section 372 A - inserted by the Companies Section 542 Notes
10 11
12 13 14 15 16 17 18 19 20 21 22 24 30 31 32 33 34 35 36 37 38
(Amendment) Act, 1999 w.e.f. 31.10.1998 39Section 2(12)

40
(Amendment) Act, 1999 w.e.f. 31.10.1998 41Section 2(13) 42Section 270 43Section 265 44Section 318
45
Life Insurance Corporation of India v. Escorts Lalita Rajya Lakshmi v. Indian Motor Co. Section 292A inserted by the
Ltd. [1986] Tax LR 1826(SC) 46Section 285 47Section 192A

48
Ltd[1962] 32 Comp. Cas. 207 49Section 233B 50Section 210A

51
Companies (Amendment) Act 2000 based on the recommendations of Kumar Mangalam Birla Committee Report
52 54
[1843] 2 Hare 461 53Sections 397, 398
Lord Cooper in the Scottish case of Elder v. Elder and Watson Ltd 1952 SC 49 Scotland. It was cited with approval by Justice Wanchoo, (afterwards chief justice) of the Supreme Court of India in Shanti Prasad Jain v. Kalinga Tubes [1965] 1 Comp LJ 193, 204 = AIR 1965 SC 1553 = [1965]
1 SC A 556 Notes
55 56 57 58 59 60 61 62 63 64 65
Section 397. Section 390(b) Modern Company Law, 4th ed., p. 789 Section 433 German Date Coffee Co. Re (1882) 20 Ch. D. 169 Yendje Tobacco Co. Ltd. Re (1916) 2 Ch. 426 Rajamundary Electric Supply Corp. Ltd. v. Nageshwara Rao, AIR (1956) S.C. 213 Section 439 National Textile Workers Union v. P.R Ramakrishnan [1983] 53. Comp. Cas. 184 (SC) Section 439A - Vide Companies (Second Amendment) Act, 2002
Summary of all these Committees Reports can be seen in Corporate Governance- Global Concepts and practices by Dr S.Singh (Excel Books) 1st Ed. 2005 in Part IV (from Page 285 to page 419)
66
Expert Committee Report on Company Law is published in Corporate Law Advisor June (2) 2005 from page 112 to 204 = 200566 CLA (st) 112

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Law and Business Section

1.1 Law and Society

What is Business Law?

Sources of Business Law in India

Sources of Business Law in India Notes

Judicial Decisions or Case Law

Customs and Usages

English Common Law

Law Merchant or Maritime Usage

1.5.1 English Law

1.5.2 Judicial Decisions or Case Law

Check Your Progress

1.5.3 Customs and Usages

1.5.4 Indian Statutes

1.5.5 Business Law and Managers

Check Your Progress

Answers to True or False

Answers to Check Your Progress

Law of Contract Section

Basis and Extent of The Law of Contract

2.3 Meaning of Contract

In the form of an equation, it can be shown as under:

2.4 What is an Agreement?

Check Your Progress

2.5 What is an Enforceability of Agreement?

2.6 Essential Elements of A Valid Contract

2.6.1 Proposal and Acceptance

2.6.2 Intention to Create Legal Relations

2.6.3 Lawful Consideration

2.6.4 Capacity of Parties

2.6.5 Free Consent

Check Your Progress

2.6.6 Lawful Object

2.6.7 Writing and Registration

2.6.9 Possibility of Performance

2.6.10 Agreement not Expressly Declared Void

Contacts may be classified as follows:

2.7.1 On the Basis of Enforceability

2.7.2 On the Basis of Mode of Creation

2.7.3 On the Basis of the Extent of Execution

Proposal (Offer) and Acceptance

2.8.1 Meaning of Proposal

2.8.2 Essentials of a Proposal

2.8.3 Legal Rules Regarding a Valid Proposal

2.8.4 Lapse and Revocation of Proposal

2.8.6 Essentials of a Valid Accptance

Check Your Progress 8. What are the essential

2.9 Communication of Proposal, Acceptance and Revocation

2.10.2 Essentials of a Valid Consideration

Check Your Progress

2.10.3 No Consideration No Contract

2.11 Capacity of Parties

2.11.2 Who is a Minor?

2.11.3 Position of Agreements by Minor

2.11.4 Persons of Unsound Mind

2.11.5 What is a Sound Mind?

2.11.6 Position of Agreement with Persons of Unsound Mind

2.11.7 Persons Disqualified by Law

2.12 Free Consent

2.12.1 Meaning of Consent Check Your Progress

2.12.2 Free Consent

2.12.3 Effect of Absence of Free Consent