Business Law

1. What is the difference between valid, void or voidable contract. Please explain the instances
when a contract becomes valid, void or voidable contract.

Answer:

Introduction:

The Indian Contract Act defines a contract as “An agreement enforceable by law”. Thus, in
short, it can be summarized that a promise that involves a consideration is an agreement, and the
agreement that is legally enforceable by law is a contract.

Section 10 of the Act says, “all agreements are contracts that are made by the free consent of the
parties, competent to contract, for a lawful consideration and with a lawful object and are not
hereby expressly declared to be void”.

Thus, Sections 2(h) and 10 of the Act state that there are some essential elements of a valid
contract. If any of these elements is not satisfied by an agreement, it will affect the validity and
will not form a valid contract.

On analyzing the contents of Sec. 10. It is revealed that the following are the essentials of a valid
contract:-

a) Offer and acceptance.

b) Legal relationship.
c) Consensus-ad-idem.
d) Competency of parties.
e) Free consent.
f) Lawful consideration.
g) Lawful object.
h) Not declared to be void.
i) Certainty and possibility of performance.
j) Legal formalities.

Concept and Application:

Valid Contracts - If a contract has all of the required elements, it is valid and enforceable in a
court of law. Valid contract is that which is enforceable at law. It creates legal obligations
between the parties. It enables one party to compel another party to do something or not to do
something.

In case of valid contract all the parties to the contract are legally responsible for the performance
of a contract. If one party breaks the contract other has right to be enforced through the court.
Example - 1:

A homeowner (who is over the age of 18 and of sound mind) signed a contract with the
appliance store to buy a refrigerator. The homeowner pays for the refrigerator and the appliance
store presents the refrigerator for the home owner to take home.

Example - 2: Shivappa proposes sell his one acre land to Santosh for one lac and the parties are
capable to do the contract by law. So this contract is valid. If Shivappa fails to deliver the land
Santosh can sue him in the court for the delivery of land. On other hand Santosh fails to make the
payment, Shivappa can sue him for the recovery of payment.

Void Contracts - A void contract is not a contract and has no effect in a court of law and cannot
be enforced in a court of law. Most commonly, a void contract will be missing one or all of the
essential elements needed for a valid contract. Neither party needs to take action to terminate it,
since it was never a contract to begin with.

The section 2(j) of the Act defines a void contract as “A contract which ceases to be enforceable
by law becomes void when it ceases to be enforceable”. This makes all those contracts that are
not enforceable by a court of law as void.

Example - 1:

A contract that was between an illegal drug dealer and an illegal drug supplier to purchase a
specified amount of drugs for a specified amount. Either one of the parties could void the
contract since there is no lawful objective and hence missing one of the elements of a valid
contract.

Example - 2:

A agrees to pay B a sum of Rs 10,000 after 5 years against a loan of Rs. 8,000. A dies of natural
causes in 4 years. The contract is no longer valid and becomes void due to the non-enforceability
of the agreed terms.

Voidable Contracts - A voidable contract is a contract which may appear to be valid and has all
of the necessary elements to be enforceable, but has some type of flaw which could cause one or
both of the parties to void the contract. The contract is legally binding, but could become void. If
there is an injured party involved, the injured party or the defrauded must take action, otherwise
the contract is considered valid.

"An agreement which is enforceable by law at the option of one or more of the parties, there to
but not at the option of the other or others is a voidable contract".
Example - 1:

A contract entered into with a minor could be voidable.

Example - 2:

Mr. Qadir threatens to shoot Mr. Shah to purchase a car for one lac. Mr. Shah agrees the contract
was made by coercion and is voidable at the option of Mr. Shah.

Void Contract Voidable Contract

“A contract which ceases to be enforceable by “An agreement which is enforceable by law at
law becomes void when it ceases to be the option of one or more of the parties thereto,
enforceable”. but not at the option of the other or others, is a
voidable contract.”
A contract becomes void if either it lacks the A contract becomes a voidable contract when
essential elements, the law changes drastically at least one of the parties reserves its consent
or the terms of the contract change such that it or the consent of one of the parties was not free
is no longer possible to enforce the contract in at the time of the formation of the contract.
a court of law.
Void contracts can’t be fulfilled. The validity and enforceability of the voidable
contract depend on the choice of the unbound
party. If the unbound party decides to repudiate
the contract it becomes void.
This type of contract can’t grant any rights or The right to rescind a voidable contract is
considerations to any of the involved parties. retained by the unbound party.

Conclusion:

There are many contracts which are valid, but sometimes due to certain circumstances, they
cease to be enforceable which makes them a void contract because it is impossible that the
contract is to be further executed. Similarly, many people unlawfully induce or persuade the will
of another person to enter into a contract, which becomes voidable at the option of the party
whose consent was so induced.
2. Please give at least two (2) real life examples on how the recent amendments in Companies
Act, 2013 has brought about sweeping changes in corporate scenario of India.

Answer:

Introduction:

The President of India accorded his assent to the Companies (Amendment) Act, 2017 (the
"Amendment Act") on 3 January 2018. The Central Government notified the Amendment Act on
the same day. However, the provisions of the Amendment Act will come into force on the date
or the dates notified by the Central Government.

Concept and Application:

1. Appointment of Managerial Personnel – Insight on amendments notified on 12th Sep

2018:

As on 12th September 2018, Ministry of Corporate Affairs has notified Section 66 to 70 of

Companies Amendment Act, 2017, introduced Companies (Appointment and Remuneration of
Managerial Personnel) Amendment Rules, 2018 and amended schedule V of Companies Act,
2013.

Applicability: Public Companies

The amendments brought out are summarized as follows:

Approval of Central Govt. is required in two cases:

a) When the appointee is not complying with provisions of Part I of Schedule V.

b) When the special resolution could not be passed for appointment of person above the age
of 70 years, however, company has received higher votes in favour compared to against.

In both the circumstances, the company may apply to Central Government in Form MR-2.

Interest of stakeholders, if company has defaulted:

For payment of remuneration exceeding limits or waiver of recovery of excess remuneration

paid, prior approval of banks, financial institutions, non convertible debenture holders or secured
creditors will be required, in case the company has defaulted in payment of their dues before
general meeting.

Excess Remuneration, Waiver and duty to report:

Directors shall repay the excess remuneration to the Company within a maximum period to 2
years. However, the company on passing of special resolution within 2 yrs from the date the
amount becomes refundable may waive such recovery with prior approval of banks, financial
institutions, non convertible debenture holders or secured creditors will be required, in case the
company has defaulted in payment of their dues.

Further, duty is casted on auditors to report payment of remuneration in conformity with the
provisions of the Act and disclose any excess remuneration.

Schedule V – Amendments

1. No person shall be eligible for appointment as a managing or whole-time director or a

manager if he had been sentenced to imprisonment for any period or to a fine exceeding one
thousand rupees, for the conviction of an offence under any of the following Acts – Three new
acts has been introduced under the above head

a) The Insolvency and Bankruptcy Code, 2016,

b) The Goods and Services Tax Act, 2017 &
c) The Fugitive Economic Offenders Act, 2018

2. No restriction on payment of remuneration on passing of special resolution considering

parameters as defined under rule 6.

3. Restriction of payment to companies’ managerial personnel under special economic zone is

removed.

4. Concept of current relevant profit is removed as Part II is modified to such extent.

2. Significant Beneficial Ownership – Sec 90 r/w Companies (Significant Beneficial Owner)

Rules, 2018:

Every individual, who acting alone or together, or through one or more persons or trust,
including a trust and persons resident outside India, holds beneficial interests, of not less than
10% in shares of a company or the right to exercise, or the actual exercising of significant
influence or control as defined in clause (27) of section 2, over the company. (The act has
provided for a upper limit of 25% holding in shares – however as specified in the rules 10%
holding in shares is taken into account).

Non Applicability: Individual does not include – Mutual Funds, Alterative Investment Funds,
Real Estate Investment Trusts and Infrastructure Investment Trusts regulated under SEBI Act.

Shares means: Global depository receipts, compulsorily convertible preference shares or

compulsorily convertible debentures.

Application to NCLT:
If the information sought under Form No. BEN-4 is not received or satisfactory, the company
can apply to the tribunal as within 15 days of expiry of 30 days for an order directing that the
shares in question be subject to restrictions with regard to:

a) Transfer of interest;
b) Suspension of all rights attached to the shares;
c) Restrictions on the transfer of interest attached to the shares in question;
d) Suspension of the right to receive dividend in relation to the shares in question;
e) Suspension of voting rights in relation to the shares in question;
f) Any other restriction on all or any of the rights attached with the shares in question.

The tribunal on hearing may pass any order within 60 days from the date of receipt of application
on the above grounds.

Conclusion:

The Amendment Act is an incremental and natural step towards liberalizing and rationalizing
some of the aspects of the Companies Act. It also removes some drafting ambiguities plaguing
the Companies Act. It has also sought to align the provisions of the Companies Act with other
statutes, like securities laws and the regulations of the Reserve Bank of India. To that extent, it is
a welcome step.
3. Arun and Smitha are good friends since a long time. Smitha is in need of a house loan with a
bank and Arun has agreed to be a be a co-applicant cum “guarantor” to help Smitha secure the
house loan. Smitha after taking possession of the Flat started defaulting payments of the house
loan and absconded. In light of the above instance, you are called to advise the bank on the
following queries:

a. What is the contract between Arun, Smitha and the bank termed as? Identify Arun, Smitha and
the bank according to their roles in such contract?

Answer:

Introduction:

There is a “CONTRACT OF GUARANTEE” between Arun, Smitha and the Bank.

‘A contract of guarantee is a contract to perform the promise or discharge the liability of a third
person in case of his default”.

The contract of guarantee is also known as the Contract of Suretyship. Section 126 of the Indian
Contract Act, 1872 defines the Contract of 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. The person
who gives the guarantee is called the “surety”. Surety is also known as Guarantor.

It is a contract in which one party promises to perform the promise or to discharge the liability
incurred by the third party in case of his default. In this case there are three parties. The person
who gives the guarantee is known as surety. The person in default of whose the guarantee is
given is known as the principle debtor. The person to whom the guarantee is given is known as
creditor.

Concept and Application:

Arun = Arun has agreed to be a be a co-applicant cum “guarantor” hence he acts as a Surety.

Smitha = Smitha is taken the house loan hence he is Principle Debtor.

Bank = Banks gives the loan hence it is the Creditor.

Conclusion:

A “contract of guarantee" is a contract of to perform the promise or discharge the liability, of the
third person in case of his default. The person who gives the guarantee is called the “Surety"; the
person in respect of whose the default the guarantee is given is called the “principal debtor", and
the person to whom the guarantee is given is called the “Creditor". A guarantee may be either
oral or written.
The function of a contract of guarantee is to enable a person to get a loan, or goods on credit, or
an employment. Some person comes forward and tells the lender, or the supplier or the employer
that he (the person in need) may be trusted and in case of any default,"I undertake the
responsibility". For example in the old case of Birkmyr v Darnell the court said: “If two come to
a shop one buys and the other to give him credit, promises the seller, ‘If he does not pay you, I
will’."

This type of collateral undertaking to be liable for the default of another is called a “Contract of
guarantee". In English law a guarantee is defined as “a promise to answer for the debt, default or
miscarriage of another." It is collateral engagement to be liable for the debt of another in case of
his default. “Guarantee are usually taken to provide a second pocket to pay if the first should be
empty."
b. Does the bank have any right against Arun? If yes please explain in detail? If, Arun
voluntarily offers to pay the loan to the Bank, what are his rights? Please explain in detail?

Ans:

Yes the bank has right against Arun.

The rights of Bank (creditors) against Arun (Surety) are as follows:

 The bank is entitled to demand payment from the Arun as soon as the Smitha (principal
debtor) refuses to pay or makes default in payment. The liability of the Arun (surety)
cannot be postponed till all other remedies against the Smitha (principal debtor) have
been exhausted. In other words, the bank (creditor) cannot be asked to exhaust all other
remedies against smitha (principal debtor) before proceeding against Arun (surety). The
creditor also has a right of general lien on the securities of the surety in his possession.
This right, however, arises only when the principal debtor has made default and not
before that.
 Where Arun (surety) is insolvent, the bank (creditor) is entitled to proceed in the surety's
insolvency and claim the pro rata dividend.

The rights of Arun if he voluntarily offers to pay the loan to the Bank:

Rights of Arun (Surety) is classified under three heads:

Rights against the Creditor: In case of fidelity guarantee, the surety can direct creditor to
dismiss the employee whose honesty he has guaranteed, in the event of proved dishonesty of the
employee. The creditor’s failure to do so will exonerate the surety from his liability.

Rights against the Principal Debtor: It includes the following:

 Right of Subrogation: Section 140 lays down that where a surety has paid the guaranteed
debt on its becoming due or has performed the guaranteed duty on the default of the
principal debtor, he is invested with all the rights which the creditor has against, the
debtor. In other words, the surety is subrogated to all the rights which the creditor had
against the principal debtor. So, if the creditor loses, or without the consent of the surety
parts with any securities (whether known to the surety or not) the surety is discharged to
the extent of the value of such securities (Section 141). Further, the creditor must hand
over to the surety, the securities in the same condition as they formerly stood in his
hands.
 Right to be indemnified: The surety has a right to recover from the principal debtor the
amounts which he has rightfully paid under the contract of guarantee.
Rights against Co-Sureties: Where a debt has been guaranteed by more than one person, they
are called co-sureties. Section.146 provides for a right of contribution between them. When a
surety has paid more than his share or a decree has been passed against him for more than his
share, he has a right of contribution from the other sureties who are equally bound to pay with
him.