BUSINESS LAW

BUSINESS LAW NOTES INDIAN CONTRACT ACT 1872

DEFINITIONS 1. CONTRACT : An agreement enforceable by law is a contract. 2. AGREEMENT : Every promise and every set of promises forming consideration for each other is called an agreement 3. PROMISE A proposal when accepted becomes a promise

PROPOSAL When one person signifies to another his willingness to do or abstain from doing something with a view to obtain the assent of that another he is said to make a proposal. Note-The words offer and proposal are used interchangeably. RULES OF A PROPOSAL I. It must be intended to create legal relations and must have legal consequences.

It is necessary that the agreement must have an express reference to the legal relations between the parties. A mere family or social engagement is not a contract in the eyes of law. Illustration Calling a friend for a dinner party. Case - Balfour v/s Balfour Facts:- Husband and wife were enjoying holidays in London. By the time they were to return to their native place in Sri Lanka, wife fell sick and was advised by the doctors to stay back. Husband promised to pay a monthly allowance for her medication and other daily expenses. For some months husband kept his promise but failed to remit the promised amount.

Held:- The court held that Mrs. Balfour cannot enforce the obligation as there was not intention to give rise to a legal obligation. II. A proposal may be general or specific. (a) Specific proposal It is made to a specific person or a group of persons and it can be accepted only by the person/group to whom the proposal is made. Eg- K offers to sell his 2004 model Chevrolet Car to B. Only B can accept or reject it. (b) General proposal It is made to the public at large. It creates liability of the offered in favour of any person who fulfils the conditions of the offer. It is not necessary for the offeree to be known to the offered at the time of making the offer. A stranger, by complying with the conditions of the offer, is deemed to have accepted the offer. Eg- K advertises in the newspaper that any person who found his lost dog can get a reward of Rs.5000. Any person who finds the dog can claim the reward.

III.

The terms of a proposal must be certain and not loose.

Illustrations 1) A habitual racegoer offers to buy a horse from a horse owner and agrees to pay Rs. 5,000/- if the horse proves lucky to him. The terms of this offer are loosely bound. 2) H offers to sell 10 tons of oil. Offer is ambiguous as to what oil he is offering to sell. But if H deals only in sesame oil, then the offer cannot be construed as vague. 3) L offered to take a house on lease for 3 years at Rs. 100000 per annum, on the condition that the house was put through thorough repair and drawing rooms handsomely decorated according to the present style. Held the agreement was too vague to result in a contract. IV. It must be distinguished from an invitation to offer

When a person proposes certain terms on which he is willing to negotiate and invites the other party to make an offer on those terms, he is said to be making an invitation to offer. An offer when accepted results into a contract, whereas an invitation to offer when accepted results into an offer. Illustrations Calling for tenders, railway time tables, window display, price lists, issue of prospectus by a company are invitations to offer and not offers.

V.

It must be communicated.

An offer is complete, only when it is communicated to the person to whom it is made. Without communication, there can neither be an offer, nor an acceptance.
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Case - Lalman Shukla v/s Gauridutt Facts:- Gauri Dutt had sent his servant Lalman to find out his nephew who had absconded. Later on, Gauri Dutt announced a reward of Rs. 501 to anyone who might find the boy. Lalman found the boy and after some time claimed the reward. Held:- Lalman cannot claim the reward as he had no knowledge of the existence of an offer when he found the boy.

ACCEPTANCE A. RULES 1. Acceptance must be communicated to the person who has made an offer. Mental acceptance, failure to answer or silence on part of the offeree is not acceptance, as it is not communicated. However for a general offer, no acceptance is necessary, if it is made by complying with the terms of the offer.(Carbolic Smoke Ball Case) Eg- A offers to B to sell his house in a prime locality for Rs. 25 lakhs. B had made up his mind to purchase it, but does not say anything to A. There is no acceptance as it is not communicated. 2. Acceptance must be communicated by the person to whom an offer has been made. Acceptance shall be made only by the person to whom the offer was made. However, in case of general offer, acceptance can be inferred from any member of the public, by their adherence to the terms of the offer.

3. Acceptance must be communicated in the prescribed manner only else it is not binding on the proposer. If the offered prescribes a mode of acceptance, then it shall be made in that mode only. If acceptance is communicated in some other manner and the offered remains silent, he is deemed to have consented to the acceptance, even if it not in the prescribed manner. When no mode is prescribed, it shall be made in some usual and reasonable manner. Eg- A sends a letter to B offering to sell his old carriage and asks B to reply by telegram. B shall reply only by telegram and not otherwise. Even if B accepts otherwise, A can insist on receiving a telegram. If A does not so insist within a reasonable time, he is deemed to have assented to Bs acceptance in such mode as had been made by B. 4. Acceptance must be absolute and unqualified. If the person to whom an offer is made accepts the same subject to some conditions, it is called qualified acceptance and is not binding on the person who makes the proposal. In other words, a valid acceptance can be only for the exact terms of the offer as proposed by the offered. Acceptance with a variation constitutes a counter offer and is not a valid acceptance.
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Illustrations 1) A prospective buyer offers to buy an article from a seller at a certain price to be paid after three months. Seller accepts the offer provided cash is immediately paid. Such an acceptance is not binding on the offered. 2) J offers to sell his cow to K. K replies that he would buy it only if he gave the calf along with it. This is not a valid acceptance as it is qualified. 5. An offer once rejected is dead and cannot be accepted unless it is revived. Illustration Counter offers. 6. Acceptance should emanate from an offer. Acceptance should only be in response to an offer i.e acceptance cannot precede an offer. Eg- X cannot say that he accepts to buy Ys house without an offer from Y. ACCEPTANCE THROUGH POST In case of acceptance through post, the communication of acceptance is complete, a) as against the proposer, when the letter of acceptance is put in the course of transmission to him; and b) as against the acceptor, when it comes to the knowledge of the proposer. Eg- H, in response to Gs offer, communicates his acceptance by post. As regards G, communication of acceptance is complete when the letter is posted. And as regards H, acceptance is said to be communicated when the letter reaches G. Note:- The proposer becomes bound only when a properly addressed and adequately stamped letter is posted. REVOCATION OF A PROPOSAL - Section 5 Revocation means 'withdrawing' or 'taking back.' A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. When a proposal is revoked, offer comes to an end. Section 6 A proposal can be revoked in any of the following four ways1. By communication of notice of revocation by the proposer to the other party. 2. By lapse of time prescribed in such proposal for its acceptance. If no time is so prescribed, by the lapse of a reasonable time. What is reasonable time will depend upon the facts and circumstances of each case. 3. By failure of the acceptor to fulfil a condition precedent to acceptance.
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4. By death or insanity of the proposer. REVOCATION OF ACCEPTANCE - Section 5 An acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor, but not afterwards. COMMUNICATION OF REVOCATION Section 4 Communication of revocation is complete, i) ii) as against the person who makes it, when it is put in the course of transmission to the person to whom it is made so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge.

Illustrations1) A revokes his proposal by telegram. The revocation is complete as against A when the telegram is despatched. It is complete as against B, when B receives it. 2) Facts - M agreed on Monday to sell his property to N by a written agreement which stated that this offer to stay open till Saturday 10 a.m. In the meantime on Wednesday, M enters into a contract to sell the property to P. N, who was sitting in the next room at that time, hears about the deal between M and P. On Friday, N accepts the offer and delivers to M the letter of acceptance. Is Ns acceptance valid? Held - Acceptance is made before the revocation of the offer by M and well within the specified time limit set by M in his letter of offer. - Overhearing by N does not amount to valid revocation by M. - Hence, Ns acceptance is perfectly valid. - The treatment would have been different if, before acceptance by N, M had formally communicated his revocation to him.

BUSINESS LAW NOTES-

CONSIDERATION Section 2 (d) DefinitionWhen At the desire of the promisor, Promisee or any other person Has done or abstained or, does or abstains or promises to do or to abstain from doing
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Something Such act, abstinence or promise is called consideration for the promise. Every Contract consists of two parts: (i) promise and (ii) consideration for the promise. Promises are often made in return for a promise, for example, a buyer purchases the goods for a price. Price for the promise is consideration here. Promise for a promise in return is 'consideration' RULES RELATING TO CONSIDERATION 1. Consideration must move at the desire of the promisor. It is to be noted hat consideration should always move at the desire of the promiser. When moving at the instance of a third party, it cannot constitute valid consideration. However, consideration may not benefit the promiser. It may be for the benefit of the third party. 2. Consideration may move from the promisee or any other person. In this context, any other person is referred to as stranger to consideration. It means that as long there is consideration for the promise, it is immaterial who has furnished it. Eg A, by a Gift Deed, transferred certain property to her daughter, with a direction that the daughter should pay an annuity to As brother, as had been done by A. On the same day, the daughter executed a writing in favour of As brother, agreeing to pay annuity. Afterwards, she declined to fulfill her promise saying that no consideration ha moved from her uncle. Held that words promise or any other person clearly shows that the consideration need not necessarily move from the promise, it may move from any other person. Hence, As brother was entitled to maintain the suit. 3. Consideration may be past, present or future. Examples (a) Past Consideration : A renders some services to B at Bs request in November. In December, B promises to pay a sum of Rs. 10000 to A for his services. Services of A=Past Consideration. (b) Present Consideration : This consideration moves simultaneously with the promise. Cash Sales goods and cash change hand to hand instantly. (c) Future or Executory Consideration : This is to move at a future date. It takes a form of a promise to be performed in future. A promises B to deliver him 100 bags of sugar at a future date. B promises to pay for it on delivery 4. Consideration may be an act of doing or abstaining from doing something or it may be an act of forbearance or abstinence. 5. Consideration need not be adequate. Eg K promises to sell a house worth Rs.8 lakhs for Rs. 2 lakhs only. The transaction is valid even if the consideration is inadequate. 6. Consideration must be real and not illusionary. Illusory consideration renders a transaction void. Eg Consideration is not valid if it is
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(a) physically impossible (e.g to discover treasure by magic) (b) legally not permissible (e.g to murder a person) (c) uncertain (e.g to pay a reasonable salary for the services rendered because what is reasonable cannot be easily ascertained in all contexts) 7. Consideration must not be unlawful, illegal, immoral or opposed to public policy.

Importance of Consideration According to Section 25 an agreement without consideration is void Exceptions: 1. Agreement made on account of natural love and affection provided it is expressed in writing and registered under law.[Section 25(1)] Examples (a) An elder brother, on account of natural love and affection, promised to pay the debts of his younger brother. Agreement was put to writing and registered. Held, agreement was valid. (b) A husband, by a registered agreement promised to pay his earnings to his wife. Held, the agreement, though without consideration, was valid. (c) A Hindu husband by a registered document, after referring to quarrels and disagreements between himself and his wife, promised to pay his wife a sum of money for her maintenance and separate residence. Held that the promise was unenforceable as natural love and affection was missing. 2. Promise to compensate for past voluntary services. [Section 25(2)] A promise made without consideration is valid if it is a promise to compensate wholly or in part, a person who has voluntarily done something for the promisor. 3. Promise to pay a time-barred debt. [Section 25(3)] A debt barred by limitation cannot be recovered. Hence, a promise to pay such a debt is without any consideration. Eg A owes B Rs. 10000 but the debt is barred by the Indian Law of Limitation. A signs a written promise to pay Rs.8000 on account of the debt. This is a valid contract. 4. Completed Gifts. The rule does not apply to completed gifts, i.e gifts given and accepted without any consideration. 5. Bailment. Consideration is not necessary to effect a valid bailment of goods. It is called Gratuitous Bailment. 6. Charity.
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If a person promises to contribute to charity and on this faith, the promisee undertakes a liability to the extent not exceeding the promised susbscription, the contract shall be valid. Eg Case Law : Kedarnath v/s Gorie Mohammad :The defendant had agreed to subscribe Rs. 100 towards construction of a Town Hall at Howrah. On faith of the promise, The Secretary called for plans and entrusted work to contractors and undertook liability to pay them. Held, agreement was enforceable being one supported by consideration in the form of a detriment to the Secretary who had undertaken a liability to the contractors on the faith of the promise made by the defendant. 7. Consideration is not necessary for the creation of an agency.

Condition v/s consideration Chappel and company v/s Nestle & company The defendant company offered a gramophone record for 1 sh. & 6 d. and 3 wrappers of their chocolate. Held : Three wrappers of the chocolate is valid consideration and not a condition restricting the number of buyers who can purchase gramophone records since this would increase the sale of chocolates.

ESSENTIALS OF A VALID CONTRACT SECTION 10 All agreements are contracts if they are made i. with free consent ii. of parties competent to contract iii. for a lawful object and lawful consideration; and iv. are not expressly declared to be void PARTIES COMPETENT TO CONTRACT SECTION 11, 12 Persons who are majors Persons who have completed 18 years of age, and Persons of sound mind A person is said to be of sound mind for the purpose of making a contract, when he is capable of understanding it and forming a rational judgement as to the effects of the contract upon him. The above requirements are applicable only to natural persons.
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Artificial persons like companies can enter into a contract in their own name. EXPLANATIONS 1. A person usually of sound mind but occasionally of unsound mind, cannot make a contract when he is of unsound mind. e. g. a person under the influence of a drug or a drink 2. A person usually of unsound mind but occasionally of sound mind can make a contract when he is of sound mind. e.g. a person suffering from a disease of epileptic feats.

CONSENT

SECTION 13

Two persons are said to consent each other when they agree upon the same thing in the same manner.

FREE CONSENT SECTION 14 A consent is said to be free when it is not caused by 1. Coercion 2. Undue influence 3. Fraud 4. Misrepresentation 5. Mistake COERCION Committing or threatening to commit any act forbidden by Indian Penal Code; or
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Unlawful detaining or threatening to detain the property of any person to the prejudice of any person with the intention of causing any person to enter into a contract. EFFECT The contract is voidable at the option of the person whose consent is so obtained UNDUE INFLUENCE 1. One of the parties is in a position to dominate the will of the other 2. The dominating party uses that position to obtain unfair advantage over the other Dominating Position (a) Where he holds a real or apparent authority over the other or (b) Where he stands in a fiduciary relation to the other (c) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental bodily distress

Some illustrations of dominating positionA teacher and a student, a doctor and his patient, a lawyer and his client

Essentials1. There must be an intention to deceive. 2. The act must be done by a party to a contract or with his connivance or by his agent. 3. There must be a false representation of a fact, i.e., suggestio falsi. 4. There must be an active concealment of a fact of which he has the knowledge and duty to disclose, i.e. , suppressio veri. 5. Here must be a false promise, i.e. , a promise made without any intention to perform it. 6. Any other act or omission which the law considers to be fraudulent or fitted to deceive which is done with the obvious intention to commit fraud. 7. The party so induced must have acted upon it and suffered loss SILENCE WHEN FRAUD Mere silence as to facts likely to affect the willingness of a party to enter into a contract is not fraud, unless it is the duty of the person keeping silence to speak or where his silence is equivalent to speech. DUTY TO SPEAK arises where a party holds a real or fiduciary relation to other. e. g. insurance contracts Change of circumstances

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If the circumstances prevailing on the date of agreement materially change and are known to one party only. Case- A doctor sold goodwill to another doctor for a price. Before the actual date of sale he fell sick and could not attend his clinic. The patients went to another doctor and this resulted in fall of goodwill. This fact was not known to the buying doctor. Held- It is the duty of a person having knowledge of changed circumstances to inform the other doctor. If he does not inform, he is guilty of fraud. Half truths Half truths or half silence is also fraud. Case- A landlord, while selling his land to a builder, informed that the land owned by him was subject to a right reserved by the local municipal authorities to open 2 public streets via that property. Actually, the municipal authorities had a right to open 3 public streets. Held- Half truths is a fraud

VOID AGREEMENTS SECTION 26 Agreement in restraint of marriage Agreement in restraint of marriage of any person, other than a minor, is void. SECTION 27 Agreement in restraint of trade Any agreement whereby anyone is restrained from carrying on a lawful trade, profession or business of any kind is to that extent void. To carry on any lawful trade or profession is a fundamental right guaranteed by the Constitution of India and it cannot be taken away by making an agreement. Note:- Restraint may not be absolute. A partial restraint is also void. Exceptions a) i) Statutory Sale of goodwill

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A person who sells the goodwill of a business may agree not to carry on similar business within local limits and for a reasonable period. This is a valid restraint. ii) Partnership

Partners of a firm may mutually agree not to carry on a similar business either directly or indirectly during the subsistence of partnership.. An outgoing partner may also be restrained from doing the business competing with the firm provided the limits are reasonable. b) Judicial i) ii) Exclusive Dealing Agreements- Dealer who wants to be a sole dealer in an area giving assurance of business to the manufacturer. Service Agreements- A bond signed by an employee giving an undertaking not to join the competitor for a certain no. of years after resignation. An undertaking by an employee to the employer as to minimum no. of years of service Business Combinations- An agreement between manufacturers/traders/businessmen as to the demarcation of area of operation so as to avoid ruthless competition.

iii)

SECTION 28 Agreement in restraint of legal proceedings. An agreement whereby anyone is restrained absolutely from exercising his lawful rights by resorting to courts or tribunals is to that extent void

Note:- Restraint has to be absolute. Illustration -A contract where parties agree to have jurisdiction of Mumbai courts only is not void. Exception- Arbitration Illustration The parties to the contract decide that in case of dispute none of them shall go to any court and the dispute shall be referred to the arbitration of an independent third person. SECTION 29 Ambiguous/ Uncertain agreements Agreements the meaning of which is not certain or capable of being made certain are void. Illustrations13

1) A agrees to sell his horse to B. B in consideration agrees to pay Rs.5000 if the horse is lucky to him. 2) Ramesh agrees to sell 500 litres of oil to Suresh. The agreement is void since it does not specify the type of oil. 3) Ramesh who deals in coconut oil only, agrees to sell 500 litres of oil to Suresh. The agreement is valid since it is implied that he is to sell coconut oil.

SECTION 30 Wagering Agreements Agreements by way of wager are void and no suit shall be brought for anything alleged to be won on any wager. Essentials of a wager a) Uncertain event- Event may be past or future. The parties are uncertain about the outcome. b) Mutual chances of gain or loss Both the parties shall have an opportunity to win or lose. If one party is to win only, it is not a wager. c) The parties do not have any control over the event. d) The parties do not have any other interest in the event except the amount of the bet. Exceptions i) ii) iii) Horse races Government Lotteries Quiz games

TENDER OF PERFORMANCE Section 38 When the parties to a contract offer to perform their respective promises, it is a tender or offer of performance.

ESSENTIALS OF A VALID TENDER OF PERFORMANCE 1. It should be of a proper quality If the contract is to supply basmati rice, the promisor cannot offer any other variety.
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2. It should be of proper quantity If the contract is to supply 100 Kgs., the promisor cannot offer 80 kgs. lying in his stock and balance to be given at a future date. 3. It should be at a proper place If the contract specifies the place of performance, the offer shall be made at that place, else it should be offered at the place where the promise is carrying on his business. 4. It should be at a proper time If the time of performance is specified, the offer shall be made at that time. If no time is specified in the contract, the offer shall be made during normal business hours of the promise. 5. It should be unconditional If the contract for supply of an article is on credit of 3 months, the promisor cannot insist on cash terms while offering to perform If the valid offer or tender of performance is refused by the promisee, tender shall be equal to performance and the promisor shall be entitled to exercise all the rights under the contract, as if he has performed his promise.

ANTICIPATORY BREACH OF CONTRACT Section 39 Where a party to a contract has refused to perform or has disabled himself from performing his promise in its entirety, the promisee may put an end to the contract, unless he has signified by words spoken or written or by conduct his acquiescence in its continuance. Illustration A theatre manager employs a singer to perform concert on 7 consecutive nights. The singer remains absent on 4 th night. The theatre manager can immediately put an end to the contract. However, if the singer after remaining absent on 4 th night turns up on 5 th night and he is allowed to sing by the theatre manager, the contract cannot be terminated before the expiry of 7 th night. The theatre
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manager by his action in allowing the singer to perform on 5 th night, signified his acquiescence in continuance of the contract. The theatre manager is still entitled to claim compensation from singer for his absence on 4 th night. Note Doctrine of anticipatory breach of contract is normally applied to those contracts which involve series of performances.

DOCTRINE OF FRUSTRATION SECTION 56 History of doctrine PARADINE V/S JANE The plaintiff agreed to let out his residential premises to the defendant. Due to outbreak of war, the defendant could not occupy the premises. The court held that defendant is liable to pay the rent. To mitigate the rigour of the above rule, doctrine of frustration was introduced. The doctrine states thatSometimes the parties to the contract are discharged from their respective obligations under the contract, due to supervening impossibility. The contract is then said to be frustrated. In the following cases, the courts have applied the doctrine-

a) Destruction of subject matter A agrees to give his marriage hall on rent to B. Before the date of marriage, the hall is burnt by fire. The contract is frustrated. b) Non occurrence of expected events A cricket match is scheduled between India and Pakistan. Mr. X books the flat of Mr. Y wherefrom the match can be viewed. The wicket is damaged by some hooligans and the match is cancelled. The contract is frustrated. If Mr. X has already paid any amount to Mr. Y, he is entitled to get the refund.
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c) Govt. regulations A agrees to supply liquor to B on a particular day for a specific price. Before the date of performance, the Govt. bans the sale of liquor. The contract is frustrated. EFFECTS OF FRUSTRATION 1) Future obligations are put to an end 2) In respect of obligations already incurred, a right of compensation accrues to the party performing the obligations DOCTRINE OF NOVATION SECTION 62 The parties to the contract may agree to substitute a new contract for it or to rescind or alter it. The original contract need not be performed. Consent of parties to the old as well as new contract is necessary. By virtue of a contract between A and B, B is liable to A to pay Rs. 5000. By virtue of another contract between B and C, C is liable to pay Rs. 5000 to B. A, B and C agree that C will pay Rs. 5000 to A. In this case the original contracts between A and B as well as between B and C are discharged.

APPROPRIATION OF PAYMENTS Where a debtor owing several debts to a creditor, makes payment to the creditor, the following rules applyRules: 1. Where payment of debt to be discharged is indicated (Sec. 59) The debtor has the first right to indicate the debt towards which the payment is to be applied Where the debtor makes express intimation or circumstances imply that the payment is to be applied to the discharge of a particular debt, the payment if accepted must be applied accordingly.
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Illustration Mr. A owes Mr. B, among several debts, Rs. 15,555 which falls due on December 1. He sends a cheque of Rs. 15,555 on December 1 to Mr. B. The payment is to be applied to the discharge of debt due on December 1 only. 2. Where payment of debt to be discharged is not indicated (Sec. 60) If the debtor does not indicate as above, the creditor can appropriate the payment towards any lawful debt, even though it is time-barred 3. Where the debtor does not intimate and the creditor fails to appropriate (Sec. 61) Where neither the debtor nor the creditor makes appropriation, the payment shall be applied in order of time i. e. the first debt shall be deemed to be repaid first, then the next debt and so on till the payment is exhausted, whether the debts are barred by law of limitation or not The above rules do not apply to cases in which principal and interest are due on a single debt

SALE OF GOODS ACT DIFFERENCE BETWEEN SALE AND AGREEMENT TO SELL SALE Nature of contract Agreement to sell is an executory contract . In an executory contract both the parties are yet to perform their mutual promises AGREEMENT TO SELL

Sale is an executed contract. In an executed contract one of the parties has already performed his part of the contract .

Creation of right Agreement to sell creates a jus-in personam i.e. a personal right only against the person for any default in fulfilling his part of the agreement.

Sale creates a jus-in-rem, i.e. right on the goods against the whole world

Passing of property
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In a sale, the property in the goods passes to the buyer with the risk

In an agreement to sell, risk and property does not pass to the buyer immediately

Remedies in case of breach of contact In a sale the the seller is entitled to sue In an agreement to sell the seller has the for the price of the goods and also has a right only to sue for damages for right of lien, stoppage in transit and resale non performance of the contract Risk of loss In case of loss to the goods, in sale, the loss will be borne by the buyer even if the possession of goods is with the seller In an agreement to sell the seller will have to pay for the loss since the ownership in the goods has not passed to the buyer

Insolvency of buyer In a sale the seller must deliver the goods to Official Assignee or Receiver and can claim rateable dividend for the price of the goods

In an agreement to sell the seller may refuse to deliver the goods unless paid for

Insolvency of seller In a sale the buyer is entitled to receive the In an agreement to sell, the buyer has to goods from the Official Assignee or prove the amount he has paid to the Receiver seller and he can only claim a rateable dividend

CONDITION AND WARRANTIES A contract contains some stipulations or terms. These Stipulations are called conditions or warranties. Condition A condition is a stipulation essential to the main purpose of the contract breach of which gives rise to a right to treat the contract as repudiated or broken. 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 or broken.
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IllustrationIf X sells food stuff to Y, it is an essential term of the contract, though it may not be expressly stated, that the food will be fit for human consumption. So, if it is found to contain any poisonous substance, Y will be entitled to reject the food and to repudiate the contract. This essential term is called a condition. On the other hand, if the contract stipulates that the foodstuff should be packed in one kilo boxes but the seller packs it in half kilo boxes, only an auxiliary term of the contract is broken and the buyer cannot repudiate the contract on this ground alone, although of course it is open to him to claim compensation for the loss suffered by him. This auxiliary term is called a warranty. Remedies available to the buyer on breach of condition and breach of warrantyIn case of breach of condition by the seller the buyer has the following remedies: (i) Repudiate the contract and reject the goods (ii) Elect to treat the breach of condition as breach of warranty and claim damages (iii) Waive the condition In case of breach of warranty by the seller the buyer has the following remedies: 1) to file a suit and 2) to claim the damages

Circumstances under which a breach of condition would be held as a breach of warranty only: ( section 13 ) In the following cases breach of condition would be treated as a breach of warranty only: 1) Where the buyer elects to treat breach of condition as a breach of warranty, for example, he claims damages and does not elect to repudiate the contract 2) Where the buyer waives the condition. Once the buyer has waived his right, he cannot afterwards insist on its fulfillment. Waiver may be express or implied. 3) Unless there is an express or implied contract to the contrarya) where a contract of sale is not severable and the buyer has accepted the goods or part thereof or b) where a contract is for specific goods,the property in which has passed to the buyer Illustration- A sells 12 cases to B on credit. B takes delivery of the goods and a fortnight thereafter sells and delivers the same to C on receipt of the price thereof. Both the said sales are by the same samples. C on opening the cases finds that the goods are not in accordance with the sample. C at once gives notice of rejection to B and B gives notice to A. B files a suit against A for the price of goods. C also files a suit against B for the refund of the price paid by him to B. C can reject the goods. He will get his refund of the price. Now, as B has accepted the goods, he cannot treat the contract as repudiated, but can claim damages. Implied conditions and warranties 1. Condition as to title ( Sec. 14) There are three implied conditions on the part of the seller regarding title to the goods: i) In case of a sale, the seller has a right to sell the goods and in the case of an agreement to sell the seller will have the right to sell the goods at the time when the property is to pass

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In the case of Rowland v. Divall, A bought a motor car from B and he used it for 4 months. B had no title to the car. A was forced to return the car to the true owner. Here as there was a breach of implied condition regarding the title, A could recover the purchase money. 2. Sale by Description (Sec. 15) Where there is a contract for sale of goods by description there is an implied condition that the goods shall correspond with the description. Description of goods includes physical appearance of the goods, brand name, a particular trademark, packing particulars etc. e.g. sale of basmati rice, colgate tooth paste 3. Sale by Sample (Sec. 17) There are three implied conditions when the goods are supplied according to the sample 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. The defect shall not be apparent on reasonable examination. It should be a latent one. e.g. engineering goods where proto type is first shown to the buyer. 4. Sale by sample as well as by description ( Sec. 15) Where the sale is by sample as well as by description, the goods shall correspond both with the sample as well as the description. Even if the bulk,, corresponds with the sample but does not correspond with the description the contract is rescinded. 5. Warranty as to quality or fitness ( Sec. 16) As a rule, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale. There is An implied warranty as to the quality or fitness only under the following circumstances: i) Where goods are ordered for specific purpose and the buyer makes it known to the seller expressly or by implication the particular purpose for which the goods are required eatables in a hotel. ii) Where the buyer relies on the sellers skill or judgment . However, if the buyer himself selects the articles there is no implied condition as to fitness purchase of gold ornaments from a goldsmith iii) Where the goods are bought by description from a seller who deals in goods of that description there is an implied condition that the goods shall be reasonably fit for such purpose and be of merchantable quality. However If the buyer has examined the goods the seller is not responsible for any defects in the goods iv) By custom or usage of trade, implied condition of fitness is annexed to a contact of sale 6. Warranty as to quiet possession free from encumbrances: The buyer shall have and enjoy quiet possession of the goods. The buyer shall have a right to sell the goods. The goods shall be free from any charge or encumbrance in favor of any third party not declared or known to the buyer before or at the time when the contact is made.

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CAVEAT EMPTOR Caveat Emptor means let the buyer beware. As a general rule the buyer purchases goods after satisfying himself as to quality and fitness and therefore the buyer purchases the goods at his own risk relying upon his own skill and judgment. ExceptionsIn the following cases doctrine of Caveat emptor does not apply i.e. the seller gives and implied warranty as to quality and fitness of the goods and if the goods are not fit for sale, the seller cannot take the defence under doctrine of Caveat Emptor and he shall be liable for breach of warranty of quality or fitness 1. 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 should not be inconsistent with the express terms of the contract. 2. Fraud : Where the seller is guilty of fraud for example where the seller obtains the consent of the buyer by fraud or conceals a defect the seller is liable. 3. For specific purpose: Where the goods are ordered for specific purpose and the seller is made aware of it and the buyer relies on the skill of judgment of the seller, there is an implied condition that the goods shall be reasonably fit for such purpose. 4. Merchantable quality: Where the sale is by description from the seller who deals in goods of that description there is an implied condition that the goods shall be of merchantable quality.

CONTINGENT CONTRACTS Section 31 A contingent contract is a contract to do or not do something if some event collateral to such contract, does or does not happen A collateral event is one which is neither a performance directly promised as part of the contract, nor the whole of the consideration for a promise. The event is, therefore, independent of the contract and does not form the part of consideration to it. Illustration: A contracts to pay B Rs. 10,000 if Bs house is burnt. This is a contingent contract. [section 31]. Essential Characteristics of a contingent contract: 1. There should be existence of a contingency; happening or non-happening of some event in future 2. Contingency must be uncertain 3. The event must be collateral or incidental to contract. RULES REGADING CONTINGENT CONTRACTS Section 32 Enforcement of contracts contingent on happening of a future uncertain event
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Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void. 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 lifetime. Section 33 Enforcement of contracts contingent on the non-happening of a future uncertain event Contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible, and not before. Illustration: International Cricket Conference (ICC) makes a contract with Steve Bucknor, umpire from West Indies, that he will be the umpire for World Cup Final if West Indies does not enter Finals. The contract becomes enforceable if West Indies is defeated in Semi Final and becomes void if West Indies wins semi final. An Insurance Company agrees to pay a shipping company a sum of money if a ship does not return. The ship is sunk. The contract can be enforced when the ship sinks. Contracts contingent on a specified event happening within a fixed time: [Section 33(1)] Contingent contracts to do or not to do anything if a specified uncertain event happens within a fixed time becomes void if, at the expiration of the time fixed, such event has not happened, or if before the time fixed such event becomes impossible. Illustration: A seller promises to sell certain goods en route London to Mumbai if a certain ship returns within a month. The contract may be enforced if the ship returns within the specified month, and becomes void if the ship is burnt within the month. Section 34 Contracts contingent on the future conduct of a living person 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 further contingencies. Illustration: A agrees to pay B a sum of money if B marries C. But C marries 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.
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Section 35 (2) Enforcement of contingent contracts on specified event not happening within a fixed time Contingent contracts to do or not to do anything if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or before the time has expired, if it becomes certain that such event will not happen. Illustration: Insurance Company promises to pay the policy holder a sum of money if a certain ship does not return within a month. The contract may be enforced if the ship does not return within the month, or is sunk within the month.

Section 36 Agreements contingent on impossible events Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to agreement at the time when it is made. Illustrations: A agrees to pay Rs. 1,000 if B will marry As daughter C. But C was dead at the time of agreement. The agreement is void. Contingent contracts vs. Wagering contracts: All contingent contracts are not wagers. All wagers are contingent agreements. A contingent contract is not void but a wagering contract is void subject to some exceptions such as horse races, govt. lotteries.. In a contingent contract the parties are interested in the occurrence or non-occurrence of the event, whereas in wagering contract the parties are not interested. In case of contingent contract the future event is merely collateral or incidental. In case of wagering contract, the future event is the sole determining factor.

CERTAIN RELATIONS RESEMBLING THOSE CREATED BY CONTRACTS- QUASI CONTRACTS Meaning of Quasi Contract Certain relations between parties resemble those created by contract. Law requires a person who receives the benefit to pay or compensate the person giving the benefit, even though he receives the benefit without any contract.
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There is no contract infact, but is created by law. Such a contract created or constituted by law is called quasi contract. Quasi contracts are also called implied contracts. TYPES OF QUASI CONTRACTS Section 68 Claim for supply of necessaries to person incapable of contracting 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 reimbursed from the property of such incapable person. Illustrations A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from Bs property 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

What are necessaries? What are necessaries as such is a mixed question of fact and law in each case. Things suited to the conditions of incompetent parties, can be classified as necessaries. Necessaries include articles required to maintain a particular person in the state and degree in the life in which he is. Things necessary are those without which an individual cannot reasonably exist. Loan to a minor to save his property from sale in execution of a decree is necessity.

Section 69 Reimbursement of money paid in 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 reimbursed by the other. Illustrations Amitabh holds land in Bihar, on a lease granted by Lalu, the zamindar. The revenue payable by Lalu to the Government being in arrears, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be the annulment of Amitabhs lease. Amitabh to prevent the sale and the consequent annulment of his own lease, pays to the government the sum due from Lalu. Lalu is bound to make good to Amitabh the amount so paid. Essentials
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There must be a person who is bound by law to make a certain payment. The person paying must himself not be bound to pay. There must be another person who is interested in such payment being made. The payments must have made by such person interested. Interest should exist at the time of payment. The payment must be made bonafide for the protection of ones own interest. The payment must have been made in good faith.

Section 70 Obligation of person to pay for enjoying benefit of a 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. Essentials Act must be lawful. The person must have actually supplied goods or rendered service. Services should have been received without any request. The person doing the act must not have intended to do it gratuitously. The person for whom the act is done must have enjoyed the benefit it.

Illustrations A, a tradesman leaves goods at Bs house by mistake. B treats those goods as his own. B is bound to pay to A for them. A saves Bs property from fire. Now A is entitled to be paid, provided the circumstances show that he did not intend to act gratuitously.

Section 71 Responsibility of finder of goods: A person who finds goods belonging to another and takes them into his custody, is subjected to the same responsibility as a bailee. 1. Duties of Finder of Goods: He must with reasonable diligence trace the true owner.
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He is responsible as a bailee to take due care of the goods as a man of ordinary prudence would take of his own goods.

2. Rights of finder of Goods: He is entitled to the possession of the goods till the true owner is found. He is entitled to retain this good until he receives the lawful charges or compensation for retaining the goods and for care and preservation thereof. However, he cannot sue for such compensation unless a specified reward has been advertised by the owner. He can sell the goods if: the commodity is perishable the owner cannot be found owner refuses to pay the lawful charges lawful charges amount to 2/3rd of the value of commodity found

Section 72 Liability of a person to whom money is paid or thing delivered by mistake or under coercion A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it. Money paid under mistake is recoverable whether the mistake be of fact or of law. Illustration A and B jointly owe Rs. 100 to C. A alone pays the amount to C and B not knowing this fact, pays Rs. 100 over again to C. C is bound to repay the amount to B.

Contract and Quasi Contract Distinguished Contract 1. Contract is an agreement 2. Contract has certain essential elements 3. Full Fledged contract Quasi Contract 1. There is no agreement at all 2. Essentials are absent. 3. Resembles a contract, implied contract

CONTRACT OF INDEMNITY SECTION 124 A contract by which one party promises to save the other from loss caused to himi) by the conduct of the promisor himself or
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ii)

by the conduct of any other person

Illustration:- General Insurance contracts, principal and agent PARTIES TO A CONTRACT OF INDEMNITY Promisor- Indemnifier Promisee- Indemnified or Indemnity holder RIGHTS OF INDEMNITY HOLDER SECTION 125 a) All damages costs and sums can be recovered from the Indemnifier b) Suit for specific performance- if he incurs absolute liability which is covered by the contract of indemnity. CONTRACT OF GUARANTEE SECTION 126 A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. PARTIES TO A CONTRACT OF GUARANTEE Guarantor- Surety Person to whom guarantee is given- Creditor Person for whose protection the guarantee is given- Principal Debtor Example: A and B visit a shop. C is the owner of the shop. B says to C that let A have the goods on credit he does not pay I will. This is a contract of guarantee. Here B is the surety, C is the creditor and A is the principal debtor. RIGHTS OF A SURETY 1) Rights against Principal Debtor a) Subrogation b) Indemnity

2) Rights against creditor a) Right to securities b) Right of set-off

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3) Rights against co-sureties a) Right of contribution INDEMNITY V/S GUARANTEE i) Number of parties Indemnity- 2 persons- Indmnifier and indemnity holder Guarantee- 3 persons Principal debtor, creditor and surety Number of contracts Indemnity- 1 between indemnifier and indemnity holder Guarantee-3 between the creditor and principal debtor, between the surety and the creditor and between the surety and the principal debtor. Nature of liability Indemnity-Primary Guarantee-secondary

ii)

iii)

SURETY'S LIABILITY The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. - Section 128 Co-sureties Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit. - Section 146, 147 CONTINUING GUARANTEE A guarantee which extends to a series of transactions is called a continuing guarantee. A continuing is guarantee is revoked as to future transactionsa) on death of the surety, b) by a notice from the surety to the creditor.

BAILMENT SECTION 148 Bailment is thea) Delivery of goods by one person to another for some purpose
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b) upon a contract that c) They shall be returned or disposed of according to the directions of the person delivering the goods. Delivery- The bailment can be only of movable goods. The delivery can be actual or constructive. (e.g. giving the key of the warehouse is constructive delivery of goods stored in warehouse). Goods- The word Goods does not include money, actionable claims and immovable property Purpose- The goods must have been delivered for some purpose, i.e. use by the bailee or some work to be done on the goods Contract- The goods must have been delivered in pursuance of a contract. Returned/disposed of- There must be an obligation on the bailee to return the goods bailed or dispose of the goods as per the directions of the bailor.

PARTIES TO A CONTRACT OF BAILMENT i) ii) Bailor Bailee

TYPES OF BAILMENT i) ii) Gratuitous (book given to a friend) for reward (car given on hire charges)

PLEDGE SECTION 172 Bailment of goods as security for payment of a debt or performance of a promise is called a pledge. PARTIES i) Pawner ii) Pawnee ALL PLEDGES ARE BAILMENTS BUT ALL BAILMENTS ARE NOT PLEDGES A pledge must satisfy all the essentials of a bailment and in addition there should be an existence of a debt or a promise. DUTIES OF A BAILEE i) Duty of reasonable care- what a man of ordinary prudence would take in case of his own goods
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ii) iii) iv)

v)

Duty not to make unauthorised use- Bailee should not allow a third party to use the goods. Duty to return or dispose of the goods Duty not to mix the goods with his goods- If he mixes the goods with his own goods, he must separate them at his own cost. If the mixture is not separable, the bailor is entitled to a proportionate share in the mixture and also can claim damages if the quality of goods is affected. Duty to return any accretion to goods if a cow gives birth to a calf, bailee must return the cow as well as the calf.

RIGHTS OF A BAILEE i) ii) iii) iv) v) Particular lien To know faults in the goods bailed Claim expenses of bailment Claim losses for defect in title Enforcement of rights- suit in court

THE COMPANIES ACT DEFINITION OF COMPANY - SECTION 3(1)(i) "Company" means a company formed and registered under the Companies Act. DEFINITION AS PER GENERAL LAW A company is an incorporated association, which is an artificial person created by law, having a common seal and perpetual succession NATURE OF CORPORATE FORM AND ADVANTAGES 1.Independent corporate existence Solomon v/s Solomon & Co. 2.Limited Liability 3.Perpetual succession 4.Separate Property 5.Transferable shares 6.Capacity to sue and be sued 7.Professional Management 8.Finances DISADVANTAGES 1.Lifting of corporate veil a) Determination of character Daimler and Co. v/s Continental Tyre and Rubber Co. b) For the benefit of revenue Dinshaw Manekjee Petit Re. Bacha F.Gazdar v/s C.I.T.
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c) Fraud or improper conduct GilFord Motor Co. v/s Horne 2.Formality and expense 3.Company is not citizen

PRIVATE COMPANY- S.3(1)(iii) A private company means a company which has a minimum paid-up share of one lakh rupees and which by its Articlesa) restricts the right to transfer shares b) limits the no. of its members to 50 not including i) present employee-members ii) past employee-members c) prohibits invitation to public to subscribe for shares or debentures d)prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives PUBLIC COMPANY- S.3(1)(iv) Public company means a company whichi) is not a private company ii) has a minimum paid-up share capital of five lakh rupees iii) is a private company which is a subsidiary of a public company. HOLDING & SUBSIDIARY COMPANIES- S. 4 A company shall be deemed to be a subsidiary of another if a) that another controls the composition of its Board of Directors; or b) that another holds more than half in nominal value of its equity share capital; or c) it is a subsidiary of that another's subsidiary

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INCORPORATION OF A COMPANY 1. SELECTION OF A NAME Guidelines to be followeda) Identical or resembling name b) Justifying the business of the company c) Proper prefix d) Use of certain words not allowed- king, emperor e) Certain words are allowed only if conditions prescribed are complied-International f) Phonetic resemblance not allowed g) Translation of existing company's name not allowed The name must contain the word/s Limited/ Private Limited depending upon the type of company. Section 25 Company Features: 1) Established for promotion of art, science, religion, charity, sports etc.- useful objects 2) Income applied in promoting the objects and payment of dividend to members is prohibited. Such companies need not have the word Limited or Private Limited as part of their name. 2. SUBMISSION OF CERTAIN DOCUMENTS i) Memorandum of Association -M/A ii) Articles of Association- A/A iii) Payment of fees and Government stamp duty CLAUSES OF M/A 1. Name 2. Registered Office 3. Objects 4. Liability 5. Capital 3. PAYMENT OF PRESCRIBED FEES AND STAMP DUTY

MEMBERSHIP WHO CAN BECOME A MEMBER 1) 2) 3) 4) 5) 6) Minor- Only if the shares are fully paid-up HUF- No. since it is not a person (natural/artificial) Partnership firm- registered/ unregistered - No. since it is not a person (natural/artificial) Company- Yes, since it is an artificial person Co-operative Society- if registered, yes. Since it is an artificial person Foreigner / Foreign Company-Yes
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LIABILITIES OF A MEMBER 1. Present member- Liability is restricted to the unpaid amount on shares. 2. Past member - If winding up commences within 12 months after ceasing to be a member, continues to be liable if the shares are partly paid up and the transferee of shares fails to pay the amount when called upon.

MEMBERSHIP Definition of member(1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company and on its registration shall be entered as members in its register of members. (2) Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members shall be a member of the company Member v/s Shareholder The words member and shareholder are used interchangeably and generally speaking, apart from a few exceptional cases, they are synonymous. For example, Companies limited by guarantee or unlimited companies may not have share capital and therefore can have no shareholders, but they do have members. Contrarily, the bearer of a share warrant is a shareholder, but not a member, as his name is not entered in the register of members. Who can become a member? a) Minor- Every person who is competent to contract may become a member. A minor being incompetent to contract cannot become a member of a company. However, a minor may be admitted as a member of the company in case of fully paid up shares. (Nandita Jain v/s Bennett Colmon & Co.) b) H.U.F:- Hindu Undivided Family (HUF) being not an artificial person cannot be admitted as a member of a company. c) Partnership Firm- A partnership firm (whether registered or unregistered), not being an artificial person cannot buy shares in its own name. It may buy shares as a part of the assets of the firm, though they will have to be held in the names of individual partners. A firm may be a member of any association or a company licensed under section 25 as a charitable institution. d) Company- A Company being a legal person may become the member of another company. But a company can invest money in another company only if it is so authorized by its memorandum of association. A company cannot however buy its own shares except in a limited manner permitted by section 77

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How to become a member? 1) By subscribing to Memorandum of Association Section 41 of the act provides that the subscribers of the memorandum of association shall be deemed to have agreed to become the members of the company and on its registration shall be entered as members in the register of lenders. Thus, the subscriber of the memorandum is to be treated as having become a member by the very fact of subscription. 2) Qualification shares for a director Under the Companies Act no person is capable of being appointed a director of a public company unless he takes or signs and files with the Registrar an undertaking to take from the company his qualification shares if any. Such directors who have signed an undertaking to take and pay for their qualification shares are also in the same position as subscribers of the memorandum. They are also deemed to have become members automatically on the registration of the company. 3) Allotment public issue A person may become a member by agreeing to take shares in the company by allotment 4) Transfer of shares A person may purchase shares of a company in the open market and then apply to the company to register him as a member. 5) Transmission of shares On the death of a member his executor or the person who is entitled under the law to succeed to his estate gets the right to have the shares transmitted to his name in the companys register of members. 6) Conversion of debentures into shares If the terms of issue of debentures include a term for conversion of debentures into shares, on conversion of debentures into shares a person becomes a shareholder and consequently a member of the company. 7) ESOP/Sweat Equity Where the employees are allotted shares against ESOPs or as sweat equity shares, they become members of the company.

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How a person can cease to be a member? 1) Sale of shares 2) Death or insolvency 3) Amalgamation/merger 4) Forfeiture of shares 5) Surrender of shares 6) Buy back of shares 7) Winding up Rights of a member Some of the important rights enjoyed by members are 1. 2. 3. 4. 5. 6. 7. 8. Right to appoint and remove directors Right to appoint and remove auditors Right to attend meetings Right to receive dividend Right to inspect registers, contracts etc. Right to vote at meetings Right to appoint proxy Right to apply to Court/Company Law Board/Central Govt. for prevention of oppression and mismanagement

Liabilities of a member a) Present member The liability of present members is restricted to amount unpaid on their shares. b) Past member Past members are also liable as contributories in certain circumstances. The liability of a past member is subject to the following qualifications as laid down in Section 426 :1. A past member is not liable to contribute if he has ceased to be a member for one year or upwards before the commencement of the winding up. 2. A past member is not liable to contribute in respect of any debt or liability of the company contracted after he ceased to be a member. In other words, his liability is only for the liabilities incurred upto the date of his membership. 3. No past member is liable to contribute unless it appears to the court that the present members are unable to satisfy the contribution. The primary liability is that of the present share-holders to pay the unpaid balance. They should be required to pay in the first place and on their default, the past members become liable to pay.

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SHARES CLASSIFICATION OF SHARES According to Companies Act, 1913 shares can be classified into three types 1. Ordinary Shares 2. Preference Shares 3. Deferred Shares According to Companies Act, 1956, shares are classified into two types 1. Preference Shares 2. Equity Shares PREFERENCE SHARES Preference Share Capital is the sum total of the preference shares. These shares carry the following preferential rights over equity shares1. As regards dividend, to be paid a fixed amount or an amount calculated at a fixed rate 2. On winding up of the company, to return of capital paid up Note: - Since preference shares carry a preference over equity shares, a company cannot have only preference share capital. However, a company can have only equity share capital. It is not compulsory to have preference share capital. Types of preference shares 1. Cumulative preference shares These shares are entitled to fixed dividends. If profits are not sufficient to pay dividends in a particular year, then the dividends are accumulated and paid in a succeeding year out of the profits along with the fixed dividends for that year. As the dividends can be, accumulated, they are called cumulative preference shares 2. Non-cumulative preference shares These types of shares are also entitled to fixed dividends, but if the profits are not sufficient or there are losses in a particular year and the dividends are not declared, these shares are not entitled to arrears of dividends in succeeding year. In other words dividends do not accumulate but they lapse 3. Redeemable Preference Shares Shares which can be purchased back by the company are called Redeemable preference shares. The articles must authorize the redemption of the preference shares at the option of the company. The shares can be redeemed by the company subject to the following conditions only: (1) The shares shall be redeemed only (a) Out of the profits of the company or (b) Out of the proceeds of a fresh issue of shares made for the purposes of redemption
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(2) Only fully paid-up shares can be redeemed. (3) Premium if any payable on redemption shall be provided for (a) Out of profits of the company; or (b) Out of the companys Security Premium Account (4) A sum equal to nominal amount of shares redeemed out of profits shall be transferred to a Reserve Fund. Such reserve fund shall be called Capital Redemption Reserve Account. NOTE: - The amendment of 1988 abolished the category of irredeemable preference shares. Subsection (5A) inserted by the amendment, says that no company limited by shares shall issue any preference share which is irredeemable or is redeemable after the expiry of 20 years from the date of issue. 4. Participating preference sharesThese shares have a right to a share in the surplus profits of the company besides fixed dividends. 5. Convertible Preference Shares Convertible preference shares are shares which may be converted into equity shares. EQUITY SHARES Equity shares have been defined as any shares other than preference shares.

DIFFERENCE BETWEEN EQUITY SHARE CAPITAL AND PREFERENCE SHARE CAPITAL EQUITY SHARES Equity shares are those shares which bear risks, enjoy rewards and provide permanent finance to the company. All equity shares are of one type i.e. irredeemable PREFERENCE SHARES Preference shares are those shares which enjoy preference regarding dividend and repayment over equity shares. The various types of preference shares are- Cumulative, noncumulative, redeemable, participating and convertible. They get a regular fixed dividend and their claim stands before equity shareholders. The rate of dividend is fixed at the time of issue and no changes are made in due course. Preference shareholders do not enjoy normal voting rights, except in case of matters which affect their interests.
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Meaning

Types

Dividend

Rate dividend Voting rights

They normally get higher dividend but after making payment to preference shareholders. of The rate of dividend is not fixed but changes as per the net profits of the company. Equity shareholders enjoy normal voting rights

Equity share capital is not repayable Preference share capital is during the lifetime of the company. repayable during the lifetime of the company. Nature of Those investors who are prepared to Cautious investors prefer to buy take risks buy equity shares preference shares. investors Capital appreciation is possible due No capital appreciation is possible. Capital Appreciation to prospects of rising dividends. Repayment

FURTHER ISSUE OF CAPITAL [Sec. 81] A limited company having a share capital may if so authorized by its articles increase its share capital by issuing new shares. Where at any time, - After the expiry of two years from the formation of a company or - After the expiry of one year from the allotment of shares in that company made for the first time after its formation Whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares then such further shares shall be offered to the existing equity shareholders. This right is called Right of preemption. The shareholders also have a right to renounce the right of preemption in favour of any other person. This is called Right of renunciation. Exception- Section 81 is not applicable to a. A Private company b. Exercise of option attached to debentures issued or loans raised to convert debentures or loans into shares. c. Conversion by Govt. of debentures or loans into shares whether there is an option to convert the same or not. The power is to be exercised only if such conversion appears to be necessary in public interest. d. A public company if a special resolution is passed by the company authorizing the directors to allot new shares to any persons other than existing shareholders. BUY BACK OF SHARES Traditionally, subject only to a few exceptions specified in Section 77, companies were not permitted to purchase their own shares. Section 77A brought in by Amendment Act of 1999 has caused this structural change in the theme and philosophy of Company Law that, subject to certain conditions, a company may buy back its own shares. Conditions 1. The sources allowed are the companys free reserves, securities premium account, proceeds of an earlier issue. No buy back of any kind of shares or other securities can be made out of earlier proceeds of the same kind of shares or securities.
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2. Buy back should be authorized by articles of the company or by a special resolution. 3. The amount involved in buy back should be less than 25% of the companys paid up capital and free reserves. 4. After buy back the ratio between the debts owed by the company should not be more than twice the capital and free reserves. 5. The shares to be bought back should be fully paid up. 6. In case of listed companies, buy back should be in accordance with SEBI guidelines. 7. A declaration of solvency should be filed with SEBI and Registrar of Companies.

MEETINGS Different types of General Meetings STATUTORY MEETING Only public companies are required to hold this meeting. As the name suggests, it is mandatory. The meeting must be called within a period not less than one month and not more than six months from the date on which the company is entitled to commence business. Thus the meeting is held once in the lifetime of the company. The business transacted at the meeting includes matters relating to- Incorporation - Issue of shares - Preliminary contracts The members can discuss any other meeting if sufficient notice is given to the company. The meeting is to be called by giving a notice of 21 days to the members. The notice must be accompanied by a report called Statutory Report. ANNUAL GENERAL MEETING (AGM)

All companies are required to hold this meeting every year (Calendar year). The time lag between two meetings cannot be more than 15 months. The first AGM can be called within 18 months of incorporation of the company. An extension of 3 moths can be granted by Registrar of Companies. However in case of first AGM, no extension can be granted. The business transacted at the meeting includes matters relating toAdoption of accounts Declaration of dividend Appointment of directors in place of those retiring Appointment of auditors
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The members can discuss any other meeting if sufficient notice is given to the company. The company can also discuss any matter which requires approval of the members. The meeting is to be called by giving a notice of 21 days to the members. The notice must be accompanied by a copy of Annual Report which includes Financial Statements, Auditors Report and Directors Report. The meeting can be called by giving a shorter notice if consent is accorded by all the members entitled to vote at the meeting. AGM is required to be held at the registered office of the company or in the same city, town or village where the registered office of the company is situated. EXTRA ORDINARY GENERAL MEETING Any general meeting which is held by any company (private or public) between two Annual General Meetings is called an Extra Ordinary General Meeting (EOGM). This meeting is called by the company to discuss any matter which requires approval of shareholders. Items which can be discussed at AGM (as mentioned above) cannot be transacted at EOGM. The meeting is to be called by giving a notice of 21 days to the members. The notice must be accompanied by the copy of resolution proposed to be passed at the meeting. The resolution shall include an explanatory statement of all material facts. The meeting can be called by giving a shorter notice if consent is accorded by the members holding 95% of the voting power. The members can also send a requisition to the company if they want to discuss any matter relating to the company. The Board of directors must call the meeting within 45 days of the date of deposit of requisition. If the Board fails to call the meeting, the members may, themselves call the meeting within 90 days of the date of deposit of requisition. Hence this meeting is also called Requisitionists Meeting. QUORUM FOR GENERAL MEETINGS OF A COMPANY Quorum is the minimum number of members required to be present at the meeting. Quorum in case of a private company- Two members personally present Quorum in case of a public company- Five members personally present Thus proxies are not to be counted. If the quorum is not present within half an hour of the appointed time, the meeting shall stand dissolved if called upon by the requisitionists. In any case, the meeting shall stand adjourned till the same day in the next week and at the same time and place. If at the adjourned meeting also, the quorum is not present, the members present (not less than two) shall be deemed to be a valid quorum.

ORDINARY AND SPECIAL RESOLUTIONS

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A resolution shall be deemed to be an ordinary resolution when votes cast in favour of resolution exceed the votes cast against the resolution. A resolution shall be deemed to be a special resolution when votes cast in favour of resolution are three times the votes cast against the resolution. PROXY 1. 2. 3. 4. A proxy need not be a member of the company A proxy is not allowed to speak at the meeting A proxy shall not be entitled to vote except on a poll A proxy is revocable at any time before the commencement of the meeting

DIVIDEND S. 205 A company may declare or pay dividend for any financial year, out of a) Profits of the company for that year arrived at after providing for depreciation; or b) Profits for any previous financial year/s arrived at after providing for depreciation; or c) Out of both (a) and (b); or d) Out of moneys provided by the Central Govt. or a State Govt. for the payment of dividend in pursuance of guarantee given by that Govt. Thus dividend for the year 2008-09 can be paid out of profits for 2008-09 or from any previous years profits. Non provision of depreciation If the company has not provided for depreciation for any previous financial year/s, it shall before declaring dividend for any financial year provide for such depreciation. Thus if the company wants to declare dividend for the year 2008-09 but has not provided for depreciation during the years 2006-07 and 2007-08, it should not only provide for depreciation for 2008-09 but also for 2006-07 and 2007-08. Past Losses If the company has incurred any loss in previous financial year/s, then the amount of loss or amount equal to the amount provided for depreciation for that/those years, whichever is less shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid. Rules relating to transfer of profits to reserves Before declaring dividend for any financial year a company shall transfer to reserves the following percentage of profits for that year 1) If the rate of proposed dividend > 10% but =<12.5% -at least 2.5% of the current years profit
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2) If the rate of proposed dividend > 12.5% but =<15% - at least 5% of the current years profit 3) If the rate of proposed dividend > 15% but =<20% -at least 7.5% of the current years profit 4) If the rate of proposed dividend > 20% -10% of the current years profit Notes:a) If the rate of proposed dividend is less than or equal to 10%, the company need not transfer any profits to reserves. b) A company may voluntarily transfer more than 10% of current years profits to reserves if the shareholders are assured a minimum rate equal to average rate of dividend declared for preceding 5 years. If the current years profits are less than preceding two years average profits by more than 20%, the company can transfer more than 10% of profits to reserves without any assurance of minimum dividend as aforesaid. Dividend out of past reserves If the company has incurred losses in any financial year, it may declare dividend out of past reserves. Rules 1. Rate of dividend- average of the rates declared in preceding 5 years or 10% whichever is less 2. Maximum withdrawal from reserves- 10% of paid up capital and free reserves. 3. Balance in reserves after withdrawal shall not fall below 15% of paid up capital Note- Amount withdrawn shall be first utilised to set off the losses incurred in the year. Unpaid dividend 1. Any dividend remaining unpaid for 30 days from the date of declaration to be transferred to a separate bank account within 7 days. 2. Failure of above shall attract interest @ 12% which shall enure to the benefit of shareholders whose dividend remains unpaid. 3. Any shareholder can claim from the company within 7 years. 4. After 7 years amount to be transferred to Investor education & Protection Fund Payment of interest out of capital S. 208 Shareholders are entitled to dividends only if the company has profits. However, as per Section 2081. Where any shares are issued for raising money to defray the expenses of construction of any work or building or plant which cannot be made profitable for a lengthy period, the company may a. Pay interest on such share capital, and b. Charge such interest to capital as part of cost of construction
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Conditions 1. 2. 3. 4. Payment of interest should be authorised by articles or by a special resolution Previous sanction of Central Govt. should be obtained. Rate of interest maximum 4% Period for which interest can be paid- Upto close of the half year next after the half year during which the work is completed.

If the work is completed any time during the half year - January to June (say January 10), then interest can be paid upto December 31.

LAW OF PARTNERSHIP

Sl. No. 1.

Partnership Minimum number is 2 and maximum number is 10 in banking business and 20 in any other business. It arises out of an agreement. It is not a legal entity. Partners are personally liable for the losses of the firm. Registration is not mandatory except in the state of Maharashtra. Partners are jointly the owners of the property of the firm. It may be dissolved by agreement between the partners. All the partners are entitled to take part in the management of the firm. Every partner is an agent of the other partners and of the firm. A share in a partnership cannot be transferred without the consent of all the partners.

Joint Stock Company Minimum 2 in private company and 7 in public company but maximum number is 50 in private company but no limit in public company. It is created by procedure of law. Company is a legal entity. Share-holders are not liable for the losses in a company. Registration is compulsory. Property of the company is not the property of the shareholders. It is wound up through legal procedure. Share-holders do not take part in the management. A member is not an agent of the other members or of the company. His actions do not bind either. A shareholder may transfer his shares subject to the provisions contained in the Articles. In the case of Public Limited Companies the shares of which are quoted in the stock exchange, the transfer is usually restricted.

2. 3. 4. 5. 6. 7. 8. 9.

10.

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11.

The profits of the firm must be distributed among the partners according to the terms of the partnership deed.

No such compulsion to distribute its profits among its members. Some portion of the profits become distributable among the shareholders only when dividends are declared.

Definition :Section 4 of the Partnership Act,1932, defines partnership :Partnership is the relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all. Though partnership may be implied from the conduct or course of dealing of the parties, it is advisable to form a partnership by an agreement in writing. This agreement is called a partnership deed which should be adequately stamped as required by the Indian Stamp Act, 1889. The partnership deed contains names and addresses of the partners, name and address of the firm, duration of the firm, profit sharing, management, accounts, etc. Who may be partners? As stated above parties to the partnership must be competent to contract as provided by Section 11 of the Indian Contract Act. Therefore, every person who is of age of majority according to the law to which he is subject to and who is of sound mind and is not disqualified from contracting by any law to which he is subject, is competent to contract and therefore may be a partner. Some specific cases are as follows :1. Minor : A minor cannot become a partner. He may be with the consent of the other partners entered into the benefits of partnership. 2. Lunatic : A person of unsound mind is not competent to contract and therefore cannot become a partner. 3. Alien enemy : An alien enemy cannot enter into a contract of partnership though an alien friend can do so. 4. Corporation : A corporation being an artificial person can neither become a partner nor can it enter into a partnership agreement. 5. A Firm : A firm cannot be a partner of another firm though its partners can be in their individual capacity (Mahabir Cold Storage v. C.I.T. Patna 1991 (Sup(1) SCC-402) Who are not partners? 1. The members of a Hindu Undivided Family carrying on a family business. However, partnership contract inter se between undivided members of family is permissible. Undivided member of HUF can enter into partnership with the Karta (Chandrakant Manilal Shah v. Commissioner of Income Tax, Bombay-AIR 1992 SC 66) 2. A Burmese Buddhist husband and wife carrying on business. 3. Lender of money to persons engaged or about to be engaged in any business, receiving a rate of interest. 4. Servant or agent engaged in a business and receiving remuneration. 5. Widow or child of a deceased partner, receiving a portion of the profits as annuity.
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6. A previous owner (or part-owner) of the business selling his business along with the goodwill and receiving a portion of the profits in consideration of sale. 7. Joint or co-owners of property sharing profits arising from the property. Characteristics or elements of partnership :1. Association of two or more persons : At least two persons should join together to constitute a partnership. Persons who have entered into partnership with one another are individually partners. Collectively, they are called firm. A firm is distinct from its members but is not an entity under the Indian Partnership Act, though under the Income Tax Act it has an independent separate tax legal entity. The name under which their business is carried on is called the firm name. Persons ay carry on business under any name and style they may choose to adopt provided that it is not misleading. 2. Agreement :The second important characteristic to determine the existence of partnership is there must be an agreement entered into by all the persons who come together to form a partnership. The agreement may be express or implied. 3. Business :Business is another essential feature of the partnership. Where a few persons join together for some charitable purpose, the association cannot be termed as partnership. The term business includes every trade, occupation and profession. For example, a polyclinic can be started by two or more doctors on the basis of partnership. 4. Share profits of the business :An agreement may not mention anything regarding sharing of losses as an agreement to share the losses is not essential. Every man who has a share in profits of a trade, ought also to bear his share of losses. Though sharing of profits impliedly involves sharing of losses, the partners between themselves may agree that one or more of them shall not be liable for losses. Further, partners may agree to share the profits in different proportions. 5. The business must be carried on by all or any of them acting for all-Mutual agency : The last and most important fundamental characteristic of the partnership is that the business which the partners agree to carry on must be carried on by all or any of them acting for all. Persons who carry on the business, do so as agents for all the persons in the partnership. They are agents for each other and principals for themselves. Their relationship is governed by the law of agency. The business is conducted by the active partners under an implied authority; to bind the other partners.

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Test of partnership Mutual Agency :The true test of partnership is mutual agency rather than sharing of profits. If this element of mutual agency is absent, then there will be no partnership. The prima facie evidence of partnership is mutual agency. Every partner carrying on the business is the principal as well as the agent of the other partners. So, the act of one partner done on behalf of the firm, binds all partners. Section 4 of the Indian Partnership Act, 1932 says is the relation between persons who have agreed to share profits of the business carried on by all or any of them acting for all. Thus an implied agency flows from their relationship as partners with the result that every person who conducts the business of the firm is, in doing so, deemed in law to be the agent of all the partners. (Section 18)

Types of Partners :1. Active Partner : The active partner or managing partner takes active part in the working of the partnership firm. Although all partners have the right to do so, only a few partners take interest in the working of the firm. These active partners get additional benefits such as salary, etc. for their services. 2. Dormant Partner : Sleeping or Dormant partner provides capital but does not participate in the management of the firm. Hence, he is generally given less share in the profit. He is liable for the debts of the firm. 3. Nominal Partner : Nominal partner has only nominal existence in the firm and contributes neither capital nor services. He only allows his name to be used by the firm on account of his status, goodwill or reputation. However, he is liable to outsiders to pay the debts and liabilities of the firm. 4. Partner in Profits Only : Such a partner contributes to the capital of the firm and shares only the profits, not the losses. However, he is liable to outsiders to pay the debts and liabilities of the firm. 5. Partner by Estoppel (Holding out) : Such a partner neither contributes capital nor services but talks and behaves with outsiders so that they believe that he is a partner of the firm. Though he is not given share in profit, he will be responsible and estopped (stopped) from denying the character he represented. However, he is liable only if any one has given credit to the firm on the basis of such representation. 6. Secret Partner : A secret partner does not disclose his name as a partner to outsiders. However, he shares profits and losses and has unlimited liability. 7. Sub-partner : This partner acts as partner of one of the partners of the firm and gets a share in the profit of that particular partner. However, he is not liable to debts and liabilities of the firm.
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8. Quasi Partner : This partner is the one who has retired from the active participation in the firms business but has left his capital at home. Hence he gets a share in the profit and is liable to the debts and liabilities of the firm. 9. Minor as Partner : A minor cannot become a partner, as he is not competent to contract. But if all the partners agree, he can be admitted to the benefits of partnership. Such minor has a right to his agreed share of profits; he cannot take part in management, and he can have access to inspect and copy the accounts of a firm but not to the books of the firm. On attaining majority, he has to elect whether he has to continue as a partner or not within 6 months of his attaining majority. If he fails to give such a notice, he shall become a partner of the firm on the expiry of the said 6 months. If a minor becomes a partner of his own willingness, his position is as follows :(a) his rights and liabilities as a minor will continue upto the date on which he becomes a partner. (b) he becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership. (c) his share in the property and profits of the firm remains the same as to which he was entitled as a minor. REGISTRATION OF PARTNERSHIP FIRMS The registration of a firm is not compulsory except in the State of Maharashtra. But an unregistered firm suffers from certain disabilities and so registration is necessary. The effects of non-registration as provided in Section 69 of the Indian Partnership Act, 1932 are :(a) In an unregistered firm, a partner cannot file a suit against the firm or any other partner for enforcing his right conferred in the Act or arising from a contract. (b) No suit can be filed on behalf of an unregistered firm against any third party for the purpose of enforcing a right arising from a contract. Note:- An unregistered firm can file a suit for a right arising otherwise than from a contract. Thus if patent rights of a firm are infringed by any person, an unregistered firm can file a suit against the wrongdoer. (c) An unregistered firm or any other partner thereof cannot claim set off in a suit instituted against the firm by a third party to enforce a right arising out of a contract. Thus if an unregistered firm is to pay Rs. 1 lakh to a party from whom Rs. 20000 is recoverable, it cannot set off Rs. 20000 and pay balance of Rs. 80000 only. But the non-registration of a firm does not affect the following :(i) The right of a third party to sue the firm or any other partner. (ii) The right of a partner to sue for dissolution of firm or for accounts of a dissolved firm or any right or power to realize the property of a dissolved firm. (iii) The power of official assignee or receiver to realize the property of an insolvent partner. (iv) The rights of firms having no place of business in India.
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(v)

A suit for set off not exceeding Rs.100 /- in amount which is of a nature cognizable by Small Causes Court.

DIFFERENT TYPES OF PARTNERSHIPS 1. Partnership for a fixed term :The partners are free to fix the duration of the partnership or be silent about it. Where partners have agreed to carry on the business for a definite period of time, the partnership is said to be for a fixed period. It shall come to an end only after the expiry of the stipulated period. However, where the partners continue the business even after the expiry of the stated period, the partnership ipso facto gets converted into partnership at will. The rights and duties of the partners continue to be the same unless they have been changed by an agreement or are inconsistent with a partnership at will. 2. Particular Partnership :A person may become a partner with another person in particular adventures or undertakings (Sec.8). Where two or more persons agree to do business in particular adventure or undertaking, such a partnership is called a Particular Partnership. Illustration A and B enter into partnership for producing a particular film. Since the object is to produce a particular film, it is formed for a particular adventure, and immediately on completion of the film, the partnership may be dissolved. Sometimes persons enter into partnership for carrying out a particular adventure or undertaking within a certain period of time. In such a case, the partnership is to exist, either till the particular adventure is determined or till the expiry of the fixed period of time as intended to by the parties. Partnership at will :The definition pf partnership at will is given under Section 7 of the Partnership Act, 1932. It lays down that where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is Partnership at Will. Accordingly, a partnership is deemed to be a partnership at will when :(i) No fixed period has been agreed upon for the duration of partnership; and (ii) There is no provision made as to the determination of partnership in any other way. Such partnership has no fixed date of termination therefore, death or retirement of a partner does not affect the existence of such partnership. Section 43 (1) provides that where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the partners of his intention to dissolve the firm. The firm is dissolved from the date of notice or date of communication of the notice. However, if the freedom to dissolve the firm at will is curtailed by agreement say, if the agreement provides that the partnership can be dissolved by mutual consent of all the partners only, it will not constitute a partnership at will. Sub-partnership :-

49

This is a partnership within the main partnership. Where one of the members of the firm agrees to hare the profits received by him with a stranger, there arises what is called as sub-partnership between such third person and the partner. Such a third party is in no sense a partner in the original firm and has no right of recourse against it. Also, such partners are not counted for the limits of partners in a firm. His rights and liabilities are only referable to the contract with the main partner. A sub-partner is a transferee within the meaning of Section 29 of the Partnership Act. (Venkatraman (v) Venkataram (1944)

NEGOTIABLE INSTRUMENTS: TYPES & PARTIES

Negotiable Instruments The Negotiable Instruments Act, 1881 Amended in 2002 What is a Negotiable Instrument? In Scope Promissory Note, Bills of Exchange, Cheques Local Usage: If not contrary to the Act Out of Scope Bills of Lading, Dividend Warrants, Drafts

Characteristics of a Negotiable Instrument Holder in due course gets the instrument free from all defects Payable to order Payable to bearer Can be made payable to two or more persons jointly Consideration is presumed All prior parties are liable to holder who has the complete Right to Ownership Promissory Notes Definition: It is an instrument in writing 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. Parties: Maker: promises to pay Payee: is promised the payment

Essential Elements: 1. Writing: In ink/pencil/printed/cyclostyled 2. Undertaking to pay: Not necessary to use word promise. Intentions must be clearly shown 3. Signed: Sign with free consent 4. Specific Sum: Sum should be certain. Interest rate may not be specific. Can be made in installments 5. Unconditional: No conditions should be attached. Following are not conditions:
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i) Particular place or specific time ii) Event which is certain to happen 6. Promise to pay money only: Anything else, in full or part, is not a note 7. Certain Persons: Maker and payee must be certain and definite. 8. Stamping: Chargeable with stamp duty. Examples I owe you Rs.1000 I promise to pay B Rs.1,000 7 days after Cs marriage I promise to pay B Rs.300 in cash and Rs.100 worth of cosmetics. (None of the above is a valid promissory note) BILL OF EXCHANGE Definition: An instrument in writing containing an unconditional order, signed by the marker, 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. Parties: Drawer/ Maker: draws the bill Drawee/Acceptor: on whom the bill is drawn Payee: to whom the money is paid Drawee/ Payee & Drawer/ Payee

Essential Elements: 1. Writing: in any language, any form 2. Order to pay: imperative, no request; its an ORDER 3. Unconditional: conditional bill is invalid 4. Signed: must be signed by the drawer 5. Person directed: the drawee must be certain 6. Money: payment of money only 7. Payee must be certain: payee must be definite 8. Certain sum: sum payable must be certain 9. Stamping: is chargeable with stamp duty Specimen of Bill of Exchange Mumbai Date: 2nd Dec, 2006

Rs.5,000.00

Sixty days after date pay to ABC or Order, the sum of five thousand rupees only for value received. To PQR, Mumbai Here, XYZ Drawer PQR Drawee Signed XYZ ABC Payee
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Classification of Negotiable Instruments 1. 2. 3. 4. 5. 6. 7. 8. 9. Accommodation Bill Fictitious Bill Escrow Instruments payable on demand Bearer and order instruments Inchoate stamped instruments Ambiguous instruments Inland and foreign instrument Forged instrument

Accommodation Bill Illustration: A is in need of Rs.5000, approaches friend B to borrow money. B suggests A to draw bill on him which he would accept A gets the bill discounted with the banker Meets his requirement On due date, A pays Rs.5000 to B B would honor the bill Thus, B has accommodated A Cheques Definition: A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. It includes the electronic image of a truncated cheque and a cheque in the electronic form. 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 biometric signatures) and asymmetric crypto systems. 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 movements of the cheque in writing.

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Aspects Drawee Acceptance Payment Crossing Stamp Noting and protesting Payable to bearer on demand

Cheques Only banker Not required No grace May be crossed Not required Not required for dishonor Can be drawn so

Other Bills of Exchange Anyone including banker Drawee liable only after acceptance 3 days grace after maturity Can never be crossed Must be properly stamped A bill may be noted or protested for dishonor It cannot be drawn so

Types of Crossing Cheques: 1. Bearer Cheques 2. Crossed Cheques: i) Crossed generally ii) Crossed Specifically iii) Crossed A/C Payee Parties and crossing rules Parties: Drawer, drawee, payee Crossing after issue: When a cheque is: (i) Uncrossed, holder may cross generally or specially (ii) Generally, holder may cross specially (iii) Generally or specially, holder may add not negotiable (iv) Specially, banker may re-cross to another banker or agent for collection Parties to a Negotiable Instrument Four parties: 1. Drawer: maker of an instrument 2. Drawee: person directed to pay 3. Payee: person to whom or to whose order the money is to be paid. 4. Endorser: person who endorses an instrument UNPAID SELLER An unpaid seller is one who has not been paid or tendered the whole of the price or one who receives a bill of exchange or other negotiable instrument as conditional payment and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise. RIGHTS OF AN UNPAID SELLER 1. RIGHT OF LIEN ( Sec. 47)
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Meaning of lien: Right of lien means right to retain the possession of the goods or property until the claim is paid or satisfied Right of lien as applicable to unpaid seller : the unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price in the following cases: (i) where the goods have been sold without any stipulation as to credit (ii) where the goods have been sold on credit and the term of credit has expired. Therefore, during the currency of the credit, right cannot be exercised. (iii) where the buyer becomes insolvent and the seller is in possession of the goods Part delivery of the goods: (Sec. 48) When an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an agreement to waive the lien. Termination of lien: (Sec.49) The unpaid sellers lien is lost under following circumstances: (i) when he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods (ii) when the buyer or his agent lawfully obtains possession of goods (iii) when the seller waives his right of lien.( Waiver may be done expressly or by implication. It is an implied waiver when the seller assents to a sub-sale by the buyer. 2. RIGHT OF STOPPAGE IN TRANSIT ( Sec. 50) 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 i.e. he 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 Meaning of transit: Transit of goods commences when the goods are delivered to the carrier or other bailee by the seller and comes to an end when the buyer acquires possession thereof. Essentials: To exercise the right of stoppage in transit following essentials must be present: i) The seller must be unpaid wholly or partly ii) The buyer must have become insolvent iii) The goods must be in transit i.e., the seller must have parted with the possession of the goods and the buyer must not have received the goods. End of transit of goods: The transit of goods comes to an end when the buyer acquires possession. The buyer acquires possession or is deemed acquire possession of the goods under following circumstances: i) when the buyer takes delivery of the goods from the carrier or other bailee. ii) when the buyer or his agent in that behalf obtains delivery of the goods before their arrival at the appointed destination. iii) when the carrier or other bailee on arrival of the goods at the appointed destination, acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent iv) when the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent.
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v)

When part delivery of the goods has been given in such circumstances as to show an agreement to give up the possession of the whole of the goods

Loss of right of stoppage in transit: The right of stoppage in transit is lost under following circumstances: i) If the buyer or his agent obtains delivery of the goods from carrier or other bailee or ii) If after arrival of the goods at the appointed destination the carrier or other bailee acknowledges to the buyer that he holds the goods on his behalf iii) If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent iv) Where a part delivery of the goods has been made to the buyer or his agent in that behalf, in such circumstances as to show an agreement to give up possession of the whole of the goods 3. RIGHT OF RE-SALE (Sec. 54) When the unpaid seller has exercised his right of lien or the right of stoppage in transit, he can re-sell the goods under the following circumstances: i) where the goods are of perishable nature- without any notice to the buyer. ii) where the seller gives notice to the buyer of his intention to re-sell the goods ( no notice is necessary in case of perishable goods) and the buyer does not pay or tender the price within a reasonable time after the notice iii) where the seller has expressly reserved his right of re-sale in case the buyer makes default 4. RIGHT OF WITHHOLDING DELIVERY Where the property in the goods has not passed to the buyer the seller has a right to withhold delivery of goods. 5. RESERVATION OF RIGHT OF DISPOSAL (Sec. 25) Under the following instances the seller reserves the right of disposal over the goods i) Where the seller imposes certain conditions and until the conditions are fulfilled ii) Where goods are shipped or delivered to a railway administration for carriage by railway and by the bill of lading or railway receipt, as the case may be, the goods are deliverable to the order of the seller or his agent iii) Where the seller transmits to the buyer bill of exchange for the price with bill of lading or railway receipt and the buyer fails to honour the bill of exchange and wrongfully retains the bill of lading or railway receipt. Where goods are sent by value payable parcel until actual delivery and payment is made the goods remain the property of the sender 6. OTHER RIGHTS ( Secs. 55 & 56) Besides the above rights, the seller has the following rights against the buyer personally: i) sue the buyer for the price of the goods ( Sec. 55) ii) the seller may sue the buyer for damages for wrongfully neglecting or refusing to accept the goods. iii) recover interest from the buyer if there is specific agreement to that effect. If there is no specific agreement the seller may charge interest on the price when it becomes due

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BUSINESS LAW END TERM TEST Time : 30 Minutes

Roll No.

Max Marks 50 5 marks

Q. 1. a) Match the following columns. Please answer in the table provided. Column A Column B (a) Proxy 1. Commercial impossibility (b) Shares 2. Ownership security (c) Debentures 3. Letter of offer (d) Minor 4. Creditorship security (e) Document containing 5. Inter-corporate loan invitation to purchase 6. Vote only in case of a poll shares 7. Unlimited liability 8. Prospectus 9. Benefits of partnership Column B Column A Proxy Shares Debentures Minor Document containing invitation to purchase shares Vote only in case of a poll Ownership security Creditorship security Benefits of partnership Prospectus

Q. 2. Fill in the blanks with the words / phrases provided in the following list: ( fully paid up, two, three, fifteen, twelve, member, Maharashtra, Six, ten, twenty, security giver, tangible, depreciation, managerial remuneration, 100%, held jointly with parents, security holder, shareholder, 60%, holding out, executory, Delhi, Particular partnership, one, four, partnership at will,) 10 marks a. Time lag between two Annual General Meetings cannot be more than fifteen months. b. The bearer of a share warrant is shareholder of the company but not a_member of the company. c. Registration of partnership firm is compulsory in Maharashtra d. Within six months of attaining majority, a minor has to elect as to whether he wishes to continue as a partner. e. Depreciation has to be provided before dividend is declared. f. A partnership carrying on a banking business can have maximum ten partners. g. In case of partnership at will a firm can be dissolved by a notice to other partners. h. The limit for inter corporate loans and investments is 60% of aggregate of paid up capital and free reserves or 100% of free reserves whichever is higher.

Q. 3. Name the following 10 marks a. A dividend declared at a Board of Directors meeting - Interim dividend
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b. Shares not carrying a fixed rate of dividend. Equity shares c. Shares compulsorily taken by a director. Qualification shares d. Meeting compulsorily required to be held by all companies every year Annual General Meeting (AGM) e. A person who lends his name as a partner. Nominal partner f. An extra ordinary general meeting called by shareholders is also called Requisitionists Meeting g. A prospectus issued by a Financial Institution Shelf prospectus h. Shares offered to the existing shareholders free of cost Bonus shares i. A partner by holding out - Estoppel j. The true test of partnership Mutual Agency 4. State whether the following statements are True or False. Please write the full word True or False. No marks shall be allotted for writing T or F or any other word. 10 marks a. A managing director may appoint his son as his successor. False b. A company must issue a part of its share capital by way of preference shares. False c. A foreign company is included while counting the no. of directorships held for the purpose of ceiling under the Companies Act. -False d. Any member of ABC Ltd. With a total membership of 11 members can make a valid petition with respect to oppression and mismanagement. - False e. The court must order dissolution of a partnership firm where a petition is made-False f. A foreign national can be appointed as a director of a company. - True g. A manager who gets his remuneration as some percentage of profits of a firm is deemed to be a partner in that firm. - False h. A board of directors meeting need not be held at the registered office of the company.- True i. A company can become a member of another company. - True j. In the absence of any clause in partnership deed, the partners share the profits and losses equally. True 15 Marks Q. 5. In the following questions choose the most appropriate answer. . 1. To form a partnership, minimum capital contribution should be a) Rs.one lakh b) Rs. Five lakh c) Rs. Ten lakh d) None of the above

2. The sharing of profits arising from property by persons holding joint interest in property automatically makes those persons, partners a) True b) False c) Partly true d) none of the above 3. Last meeting of directors was held on July 4, 2007. Hence the next meeting can be held latest by a) September 30, 2007 b) October 4, 2007 c) December 31, 2007
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d) August 4, 2007 4. Which of these is not necessary for constituting partnershipa) Carrying of business b) Sharing of profits c) Two or more persons d) Written contract 5. A & B enter into partnership for Project A. On completion of Project A a) b) c) d) The partnership is dissolved The firm is dissolved Partnership continues Firm continues

6. Abhishek, Vivek and Salman are in partnership. Vivek and Salman are adjudicated insolvent, while Abhishek wants to continue the firm a) Firm is also declared insolvent b) Abhishek has to repay the debts of the firm c) Firm is automatically dissolved and hence Abhishek cannot continue d) The court has to give order for dissolution 7. If a partner has become permanently become incapable of performing his duties as a partner, a suit for dissolution can be brought by a) Any other partner b) The partner who has become so incapable c) A creditor of the firm d) Any two of the above 8. The total number of directors of listed public company is 12. Three directors are interested in an item considered by the Board. The quorum of the Board shall be a) Two directors b) Nine directors c) Four directors d) Three directors 9. Kapil is a director in 14 public companies. On December 1, 2007 he is appointed director in ICC Ltd., IPL Pvt. Ltd., BCCI Ltd. Within 15 days, Kapil has to choose 15 companies in which he wants to continue. If he does not make choice within 15 days a) All new appointments become void b) Appointments in ICC Limited and BCCI Ltd. are void c) Appointments in ICC Ltd. And IPL Pvt. Ltd. are void d) Appointment in ICC Ltd and BCCI Ltd. are void but appointment in IPL Pvt. Ltd. Is valid 10. The paid up share capital of accompany is Rs. 50 lakhs and its free reserves are Rs. 2o lakhs. It wants to invest Rs. 30 lakhs in shares of a listed public company. This is the first inter corporate loan/investment and it has no loan taken from any public financial institution. Whose authorization is requireda) Central Govt. b) Special resolution of members c) Unanimous Boards resolution d) Company Law Board
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11. A public Ltd. Company has 9 directors. Hence the no. of directors liable to retire and those actually to retire at the AGM are respectively a) 6 and 3 b) 9 and 6 c) 6 and 2 d) 9 and 3 12. ABC Pvt. Ltd. was incorporated on April 1, 2007. It is converted into a public company on December 1, 2007. Hence it is compulsory for the company to hold the statutory meetinga) True b) False c) Partly true d) Partly false 13. A general meeting of Sholay Ltd.was attended by Mr. Amitabh, Mrs. Jaya and Mr. Dharmendra who were holding 1 equity share each and Mr. Amitabh and Mr. Dharmendra were authorized to represent Angarey Ltd. And Bhadke Ltd. respectively a) The meeting is void since quorum is not present b) The meeting is valid since quorum is present c) Meeting will be valid only if Angarey Ltd. And Bhadke Ltd. Authorize somebody else. d) Meeting will be valid if Amitabh and Dharmendra appoint proxies for them 14. The power to borrow can be delegated by the Board to any director or a committee of directors a) True b) False c) Partly true d) Partly false 15. The following cannot be admitted as a member of a company a) A registered partnership firm b) An unregistered partnership firm c) HUF d) All the above

BUSINESS LAW END TERM TEST Time : 30 Minutes

Roll No.

Max Marks 50 5 marks

Q. 1. a) Match the following columns. Please answer in the table provided. Column A Column B (a) Debentures 1. Commercial impossibility (b) Shares 2. Ownership security (c) Minor 3. Letter of offer (d) Proxy 4. Creditorship security (e) Document containing 5. Inter-corporate loan invitation to purchase 6. Vote only in case of a poll

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shares

7. Unlimited liability 8. Prospectus 9. Benefits of partnership Column B

Column A Debentures Shares Minor Proxy Document containing invitation to purchase shares

Creditorship security Ownership security Benefits of partnership Vote only in case of a poll Prospectus

Q. 2. Fill in the blanks with the words / phrases provided in the following list: ( fully paid up, two, three, fifteen, twelve, member, Maharashtra, Six, ten, twenty, security giver, tangible, depreciation, managerial remuneration, 100%, held jointly with parents, security holder, shareholder, 60%, holding out, executory, Delhi, Particular partnership, one, four, partnership at will,) 10 marks a. Time lag between two Annual General Meetings cannot be more than fifteen months. b. The bearer of a share warrant is shareholder of the company but not a member of the company. c. Registration of partnership firm is compulsory in Maharashtra d. Within six months of attaining majority, a minor has to elect as to whether he wishes to continue as a partner. e. Depreciation has to be provided before dividend is declared. f. A partnership carrying on a banking business can have maximum ten partners. g. In case of partnership at will a firm can be dissolved by a notice to other partners. h. The limit for inter corporate loans and investments is 60% of aggregate of paid up capital and free reserves or 100% of free reserves whichever is higher. Q. 3. Name the following 10 marks a. A dividend declared at a Board of Directors meeting Interim dividend. b. Shares carrying a fixed rate of dividend. - Preference shares c. Shares compulsorily taken by a director. Qualification shares d. Meeting compulsorily required to be held by all companies every year Annual General Meeting (AGM) e. A partner who does not take part in the business -Dormant or sleeping partner f. An extra ordinary general meeting called by shareholders is also called Requisitionists Meeting g. A prospectus issued by a Financial Institution -Shelf prospectus h. Shares offered to the existing shareholders free of cost Bonus shares i. A partner by estoppel Holding out j. The true test of partnership Mutual agency 4. State whether the following statements are True or False. Please write the full word True or False. No marks shall be allotted for writing T or F or any other word. 10 marks a. A managing director cannot appoint his son as his successor. True b. A company can issue the whole of its share capital by way of equity shares. True
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c. A foreign company is not included while counting the no. of directorships held for the purpose of ceiling under the Companies Act. True d. Any member of ABC Ltd. with a total membership of 10 members can make a valid petition with respect to oppression and mismanagement. True e. The court may order dissolution of a partnership firm where a petition is made True f. A foreign national cannot be appointed as a director of a company. False g. A manager who gets his remuneration as some percentage of profits of a firm is not a partner in that firm. True h. A board of directors meeting must be held at the registered office of the company. False i. A company cannot become a member of another company. False j. In the absence of any clause in partnership deed, the partners share the profits and losses equally. True Q. 5. In the following questions choose the most appropriate answer. 15 Marks . 1. To form a partnership, minimum capital contribution should be a. None of the following b. Rs.one lakh c. Rs. Five lakh d. Rs. Ten lakh 2. The sharing of profits arising from property by persons holding joint interest in property does not automatically make those persons, partners a. True b. False c. Partly true d. none of the above

3. Last meeting of directors was held on January 4, 2007. Hence the next meeting can be held latest by a. June 30, 2007 b. April 4, 2007 c. February 28, 2007 d. August 4, 2007 4. Which of these is not necessary for constituting partnershipa. Written contract b. Carrying of business c. Sharing of profits d. Two or more persons 5. A & B enter into partnership for Project A. On completion of Project A a. b. c. d. The firm is dissolved The partnership is dissolved Partnership continues Firm continues

6. Abhishek, Vivek and Salman are in partnership. Vivek and Salman are adjudicated insolvent, while Abhishek wants to continue the firm a. Firm is also declared insolvent
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b. Abhishek has to repay the debts of the firm c. Firm is automatically dissolved and hence Abhishek cannot continue d. The court has to give order for dissolution 7. If a partner is guilty of misconduct, a suit for dissolution can be brought by a. The guilty partner himself b. Any other partner c. A creditor of the firm d. Any two of the above 8. The total number of directors of listed public company is 12. Three directors are interested in an item considered by the Board. The quorum of the Board shall be a. Two directors b. Three directors c. Four directors d. Nine directors 9. Kapil is a director in 14 public companies. On December 1, 2007 he is appointed director in ICC Ltd., IPL Pvt. Ltd., BCCI Ltd. Within 15 days, Kapil has to choose 15 companies in which he wants to continue. If he does not make choice within 15 days a. All new appointments become void b. Appointments in ICC Limited and BCCI Ltd. are void c. Appointments in ICC Ltd. And IPL Pvt. Ltd. are void d. Appointment in ICC Ltd and BCCI Ltd. are void but appointment in IPL Pvt. Ltd. Is valid 10. The paid up share capital of accompany is Rs. 50 lakhs and its free reserves are Rs. 2o lakhs. It wants to invest Rs. 30 lakhs in shares of a listed public company. This is the first inter corporate loan/investment and it has no loan taken from any public financial institution. Whose authorization is requireda. Unanimous Boards resolution. b. Special resolution of members c. Central Govt. d. Company Law Board 11. A public Ltd. Company has 12 directors. Hence the no. of directors liable to retire and those actually to retire at the AGM are respectively a. 6 and 9 b. 8 and 3 c. 9 and 6 d. 12 and 4 12. ABC Pvt. Ltd. was incorporated on April 1, 2007. It is converted into a public company on May 1, 2007. Hence it is compulsory for the company to hold the statutory meetinga. True b. False c. Partly true d. Partly false 13. A general meeting of Sholay Ltd.was attended by Mr. Amitabh, Mrs. Jaya and Mr. Dharmendra who were holding 1 equity share each and Mr. Amitabh and Mr. Dharmendra were authorized to represent Angarey Ltd. And Bhadke Ltd. respectively
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a. The meeting is void since quorum is not present b. The meeting is valid since quorum is present c. Meeting will be valid only if Angarey Ltd. And Bhadke Ltd. Authorize somebody else. d. Meeting will be valid if Amitabh and Dharmendra appoint proxies for them 14. The power to borrow can be delegated by the Board to any director or a committee of directors a. False b. True c. Partly true d. Partly false 15. The following cannot be admitted as a member of a company a. A registered partnership firm b. An unregistered partnership firm c. HUF d. All the above

ccc BUSINESS LAW END TERM TEST Time : 30 Minutes Roll No.

Max Marks 50 5 marks

Q. 1. a) Match the following columns. Please answer in the table provided. Column A Column B (a) Proxy 1. Commercial impossibility (b) Minor 2. Ownership security (c) Debentures 3. Letter of offer (d) Shares 4. Creditorship security (e) Document containing 5. Inter-corporate loan invitation to purchase 6. Vote only in case of a poll shares 7. Unlimited liability 8. Prospectus 9. Benefits of partnership Column B Column A Proxy Vote only in case of a poll Shares Ownership security Debentures Creditorship security Minor Benefits of partnership Document containing Prospectus invitation to purchase shares Q. 2. Fill in the blanks with the words / phrases provided in the following list:

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( fully paid up, two, three, fifteen, twelve, member, Maharashtra, Six, ten, twenty, security giver, tangible, depreciation, managerial remuneration, 100%, held jointly with parents, security holder, shareholder, 60%, holding out, executory, Delhi, Particular partnership, one, four, partnership at will,) 10 marks a. Time lag between two Annual General Meetings cannot be more than fifteen months. b. The bearer of a share warrant is a shareholder of the company but not a member of the company. c. Registration of partnership firm is compulsory in Maharashtra. d. Within six months of attaining majority, a minor has to elect as to whether he wishes to continue as a partner. e. Depreciation has to be provided before dividend is declared. f. A partnership carrying on a non-banking business can have maximum twenty partners. g. In case of partnership at will a firm can be dissolved by a notice to other partners. h. The limit for inter corporate loans and investments is 60% of aggregate of paid up capital and free reserves or 100% of free reserves whichever is higher. Q. 3. Name the following a. b. c. d. e. f. g. h. i. j. 10 marks A dividend declared at a Board of Directors meeting - Interim dividend Shares not carrying a fixed rate of dividend. Equity shares Shares compulsorily taken by a director. Qualification shares Meeting compulsorily required to be held by all companies every year Annual general Meeting (AGM) A partner who takes part in business. Active partner An extra ordinary general meeting called by shareholders is also called Requisitionists Meeting A prospectus issued by a Financial Institution Shelf prospectus Shares offered to the existing shareholders for price Right shares A partner by holding out - Estoppel The true test of partnership Mutual Agency

4. State whether the following statements are True or False. Please write the full word True or False. No marks shall be allotted for writing T or F or any other word. 10 marks a. A managing director may appoint his son as his successor. False b. A company must issue a part of its share capital by way of preference shares. False c. A foreign company is included while counting the no. of directorships held for the purpose of ceiling under the Companies Act. False d. Any member of ABC Ltd. with a total membership of 11 members can make a valid petition with respect to oppression and mismanagement. False e. The court must order dissolution of a partnership firm where a petition is made False f. A foreign national can be appointed as a director of a company. True g. A manager who gets his remuneration as some percentage of profits of a firm is deemed to be a partner in that firm. False h. A board of directors meeting can be held at any place other than the registered office of the company. True i. A company can become a member of another company. True j. The partners can decide the manner in which profits/losses can be shared amongst themselves. True

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Q. 5. In the following questions choose the most appropriate answer. 15 Marks . 1. To form a partnership, minimum capital contribution is not required a. False b. True c. Partly true d. Partly false 2. .The sharing of profits arising from property by persons holding joint interest in property automatically makes those persons, partners a. True b. False c. Partly true d. none of the above 3. Last meeting of directors was held on June 30, 2007. Hence the next meeting can be held latest by a) September 30, 2007 b) July 30, 2007 c) December 31, 2007 d) August 30, 2007 4. Which of these is necessary for constituting partnershipa. Carrying of business b. Sharing of profits c. Two or more persons d. All the above 5. A & B enter into partnership for Project A. On completion of Project A a. b. c. d. The partnership is dissolved The firm is dissolved Partnership continues Firm continues

6. Abhishek, Vivek and Salman are in partnership. Vivek and Salman are adjudicated insolvent, while Abhishek wants to continue the firm a. Firm is also declared insolvent b. Abhishek has to repay the debts of the firm c. Firm is automatically dissolved and hence Abhishek cannot continue d. The court has to give order for dissolution 7. If the firm is incurring continuous losses, a suit for dissolution can be brought by a. Any partner b. A debtor of the firm c. A creditor of the firm d. All partners 8. The total number of directors of listed public company is 12. Three directors are interested in an item considered by the Board. The quorum of the Board shall be a. Two directors b. Nine directors
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c. Four directors d. Three directors 9. Kapil is a director in 14 public companies. On December 1, 2007 he is appointed director in ICC Ltd., IPL Pvt. Ltd., BCCI Ltd. Within 15 days, Kapil has to choose 15 companies in which he wants to continue. If he does not make choice within 15 days a. All new appointments become void b. Appointments in ICC Limited and BCCI Ltd. are void c. Appointments in ICC Ltd. And IPL Pvt. Ltd. are void d. Appointment in ICC Ltd and BCCI Ltd. are void but appointment in IPL Pvt. Ltd. Is valid 10. The paid up share capital of accompany is Rs. 50 lakhs and its free reserves are Rs. 2o lakhs. It wants to invest Rs. 30 lakhs in shares of a listed public company. This is the first inter corporate loan/investment and it has no loan taken from any public financial institution. Whose authorization is requireda. Central Govt. b. Special resolution of members c. Company Law Board d. Unanimous Boards resolution 11. A public Ltd. Company has 6 directors. Hence the no. of directors liable to retire and those actually to retire at the AGM are respectively a. 4 and 2 b. 6 and 2 c. 4 and 1 d. 3 and 2 12. ABC Pvt. Ltd. was incorporated on April 1, 2007. It is converted into a public company on December 1, 2007. Hence it is compulsory for the company to hold the statutory meetinga. True b. False c. Partly true d. Partly false 13. A general meeting of Sholay Ltd.was attended by Mr. Amitabh, Mrs. Jaya and Mr. Dharmendra who were holding 1 equity share each and Mr. Amitabh and Mr. Dharmendra were authorized to represent Angarey Ltd. And Bhadke Ltd. respectively a. The meeting is void since quorum is not present b. The meeting is valid since quorum is present c. Meeting will be valid only if Angarey Ltd. And Bhadke Ltd. Authorize somebody else. d. Meeting will be valid if Amitabh and Dharmendra appoint proxies for them 14 The power to borrow can be delegated by the Board to any director or a committee of directors e. True f. False g. Partly true h. Partly false

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15 The following can be admitted as a member of a company a. A registered partnership firm b. An unregistered partnership firm c. HUF d. None of the above

COMPANIES ACT Definition of Company- Section 3(1)(i) Company means a company formed and registered under the Companies Act. Definition as per General Law A company is an incorporated association which is an artificial person created by law having a common seal and perpetual succession NATURE OF CORPORATE FORM AND ADVANTAGES 1. Independent corporate existence The company is a distinct legal persona existing independent of its members. By incorporation under the act, the Company is vested with a corporate personality which is distinct from the members who compose it. Solomon v/s. Solomon & Co. Mr. Solomon was a shoe manufacturer. His business was in sound condition and there was a substantial surplus of assets over liabilities. He incorporated a company called Solomon & Co. Ltd. which took over the proprietory business of Mr. Solomon. Solomon and his two sons constituted board of directors. The business was transferred to the company for a consideration of 40000 pounds. In payment Solomon was allotted debentures of 20000 pounds which were secured by a charge on the assets of the company. One share each was given to 6 family members of Solomon family and all the remaining shares were taken by Mr. Solomon. The company went into liquidation within a year. The assets were not sufficient to pay off the liabilities. Thus after paying off the debentures (secured creditor), nothing would be left for unsecured creditors. The unsecured creditors, therefore, contended that, though incorporated under the Act, the company never had an independent existence; it was in fact Solomon under another name; he was the managing director, the other directors being his sons and under his control. His vast preponderance of shares made him absolute master. The business was solely his, conducted solely for and by him and the company was a mere sham and fraud, in effect entirely contrary to the intent and meaning of the Companies Act. But it was held that Solomon and Co. Ltd. was a real company fulfilling all the legal requirements. Kondoli Tea Co. Ltd. Re. Certain persons transferred a tea estate to a company and claimed exemptions from ad valorem duty on the ground that they themselves were the shareholders in the company and, therefore, is was nothing but a transfer from them in one to themselves under another name. Rejecting this, the Court observed: The company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons. 2. Limited Liability One of the primary and accepted motivations behind incorporating a company is to limit personal risks by obtaining the benefit of limited liability. The liability of a member is limited or restricted to the nominal value of the shares taken by 67

them or the amount guaranteed by them. No member is bound to contribute anything more than the nominal value of the shares held by him. 3. Perpetual Succession An incorporated company never dies. It is an entity with perpetual succession. Perpetual Succession means that the membership of a company may keep changing from time to time but that does not affect the companys continuity. The death or insolvency of individual members does not in any way affect the corporate existence of the company. A,B and C are the only members of a company holding all its shares. Their shares may be transferred to or inherited by X,Y and Z, who may, therefore, become the new members and managers of the company. But the company will remain the same entity in spite of the total change in membership. 4. Separate property A company, being a legal person is capable of owning, enjoying and disposing of property in its own name. The company becomes the owner of its capital and assets. The Shareholders are not the several or joint owners of the companys property. A member does not even have an insurable interest in the property of the company. In Macaura v. Northern Assurance Co. Ltd., a person was the holder of nearly all the shares, except one, of a timber company and was also a substantial creditor. He insured the companys timber in his own name. The timber having been destroyed by fire the insurance company was held not liable to him. 5. Transferable Shares According to section 82 of the Companies Act, 1956 the shares or debentures or other interest of any member in a company shall be moveable property transferable in the manner provided by the articles of the company. Thus incorporation enables a member to sell his shares in the open market and to get back his investment without having to withdraw the money from the company. This provides liquidity to the investor and stability to the company. 6. Capacity to sue and be sued A company being a body corporate can sue and be sued in its own name. 7. Professional Management The corporate sector is capable of attracting the growing cadre of professional managers. Independent Functioning of these managers is assured because of the fact that there is no human employer and the shareholders exercise only a formative control. Also, with the financial backing that companies are able to provide, these managers are able to develop the business to a considerable extent. 8. Finances The company is the only medium of organizing business which is given the privilege of raising capital by public subscriptions either by way of shares or debentures. Further, public financial institutions lend their resources more willingly to companies than to other forms of business organization.

DISADVANTAGES 1. Lifting of corporate veil The theory of separate legal entity cannot be pushed to unnatural limits. Circumstances must occur which compel the courts to identify a company with its members. The corporate veil is said to be lifted when the court ignores the company and concerns itself directly with the members or managers. The following grounds have been well established. a) Determination of character

Occasionally it becomes necessary to determine the character of the company, for example, to see whether it is enemy. Daimler and Co. v/s Continental Tyre and Rubber Co. A company was incorporated in England for the purpose of selling tyres manufactured in Germany by a German company. The German company held bulk of the shares in English Company. All the directors were also Germans. During the First World 68

War, the English company commenced an action against its customer to recover the debts. The question was whether the company had become an enemy company and therefore, should be barred from maintaining the action. It was held hat a company incorporated in England is definitely a legal entity but it may assume an enemy character when persons in de facto control of its affairs are residents in enemy country. Accordingly the company was not allowed to proceed with the action. b) For the benefit of revenue (Govt.) Dinshaw Manekjee Petit Re. Bacha F.Gazdar v/s C.I.T. The assessee was a wealthy person having huge investments income by way of dividends and interest. He formed four limited companies and transferred all investments to these companies. Income from investments was credited in the accounts of companies and the companies handed back the amount to him as a pretended loan. This way he divided his income into 4 parts and reduced his tax liability. It was held that the companies were formed purely to avoid tax liability and the company was nothing but the assessee himself.

c) Fraud or improper conduct Gilford Motor Co. v/s Horne Horne was appointed as a managing director of the plaintiff company in the condition that, he shall not at any time while he shall hold the office of a managing director or afterwards, solicit or entice away the customers of the company. His employment was determined under an agreement. Shortly afterwards he opened a business in the name of a company which solicited the plaintiffs customers. It was held that the company was a mere cloak or sham for the purpose of enabling the defendant to commit a breach of his covenant against solicitation. 2. Formality and expense Incorporation is a very expensive affair and requires a number of formalities to be complied with. 3. Company is not citizen A company, though a legal person, is not a citizen either under the Constitution of India or under the Citizenship Act. Hence it cannot enjoy the fundamental rights guaranteed to citizens.

PRIVATE COMPANY- S.3(1)(iii) A private company means a company which has a minimum paid-up share of one lakh rupees and which by its Articlesa) restricts the right to transfer shares b) limits the no. of its members to 50 not including i) present employee-members ii) past employee-members c) prohibits invitation to public to subscribe for shares or debentures d)prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives

PUBLIC COMPANY- S.3(1)(iv) Public company means a company whichi) is not a private company 69

ii) has a minimum paid-up share capital of five lakh rupees iii) is a private company which is a subsidiary of a public company. HOLDING & SUBSIDIARY COMPANIES- S. 4 A company shall be deemed to be a subsidiary of another if d) that another controls the composition of its Board of Directors; If H Ltd. has the power to appoint or remove the majority of directors of S Ltd, then S Ltd. is subsidiary of H Ltd. It is not necessary that majority of the directors of one company are also the majority of the directors of another company. e) that another holds more than half in nominal value of its equity share capital; or If H Ltd. holds shares of the nominal value of Rs. 5001 of the total nominal share capital of Rs. 10,000 of S Ltd., then S Ltd. is subsidiary of H Ltd. f) it is a subsidiary of that another's subsidiary If S Ltd. is a subsidiary of H Ltd. and SS Ltd. is subsidiary of S Ltd. then SS Ltd. is a subsidiary of H Ltd. also.

INCORPORATION OF A COMPANY 1. SELECTION OF A NAME Guidelines to be followedh) Identical or resembling name- The proposed name cannot be identical or too nearly resembling the name of an existing company. i) j) k) l) m) n) Justifying the business of the company- The name shall justify the business of the company The name shall have a proper prefix Use of certain words not allowed- king, emperor Certain words are allowed only if conditions prescribed are complied-International Phonetic resemblance not allowed Translation of existing company's name not allowed

The name must contain the word/s Limited/ Private Limited depending upon the type of company. Section 25 Company Features: 3) Established for promotion of art, science, religion, charity, sports etc.- useful objects 4) Income applied in promoting the objects and payment of dividend to members is prohibited. 70

Such companies need not have the word Limited or Private Limited as part of their name. e.g. Cricket Club of India, NGOs 2. SUBMISSION OF CERTAIN DOCUMENTS The following documents are to be submitted to the Registrar of Companies of the state in which registered office of the company is to be situated. i) Memorandum of Association -M/A- It is the constitution of the company CLAUSES OF M/A 6. Name 7. Registered Office 8. Objects 9. Liability 10. Capital

ii) Articles of Association- A/A It contains rules and regulations for internal management of the company iii) Form No. 18 giving the address of the registered office of the company iv) Form No. 32 in duplicate giving the particulars of board of directors. v) Form No. 1 certifying that all the provisions of the Companies Act relating to incorporation are complied with. 3. PAYMENT OF PRESCRIBED FEES AND STAMP DUTY The promoters are also required to pay the prescribed fees to the Registrar of Companies and the Govt. stamp duty which are fixed on the basis of authorized share capital of the company. On completion of the above formalities, the Registrar of Companies issues Certificate of Incorporation of the company.

DIRECTORS 1. Meaning- S. 2(13) A director includes any person occupying the position of a director by whatever name called. Functions and duties discharged determine whether he is a director or not e.g. designation as governors or members of executive committee 2. Deemed director/shadow director S. 7 A director may include any person in accordance with whose instructions the board of directors of a company is accustomed to act. Such a director does not have the power or rights in connection with management of the company. He is reckoned as a director for the liabilities and obligations of the company. Professionals like lawyer, Chartered Accountant will not be deemed as directors Who may be appointed as a director ?
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Only individuals can be appointed as a director of the company. A body corporate, association or a firm cannot be appointed as a director of the company. This provision does not apply to deemed director/shadow director. Thus a holding company may be deemed to be a director if the subsidiary is accustomed to act according to the directions of holding company. Qualifications No educational qualifications are prescribed by law QUALIFICATION SHARES To obtain shares only if required by Articlesa. To be obtained within 2 months b. Any provision in Articles which requires a person to obtain shares within a period less than 2 months is void. c. Nominal value not to exceed Rs. 5000 Joint holding- one can be appointed Consequences if shares not obtained- Vacate the office and also punishable. Private company can have its own rules. DISQUALIFICATIONS Unsound mind Undischarged insolvent Applied to be adjudged as an insolvent Offence involving moral turpitude Failure to pay call money for more than 6 months Disqualified by order of court A director of a public company which is in default a) if annual accounts and annual returns for continuous 3 financial years, or b) failure to repay deposit or interest thereon on due date or redeem debentures on due date and such failure continues for one year Disqualified to be appointed as a director of a public company for 5 years Appointment of first directors 1. Usually named in Articles 2. Subscribers to memorandum till duly appointed in general meeting Subsequent directors Only in general meeting
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1. 2. 3. 4. 5. 6. 7.

Retirement by rotation in case of public company or its subsidiary private company Unless the articles provide for retirement of all directors at every AGM At least 2/3 rd of total liable to retire by rotation Of 2/3 rd rotational directors, 1/3 rd or no. nearest to 1/3 rd shall actually retire at AGM. Those who have been longest in office shall retire first. Persons appointed on same day, retirement to be determined by mutual consent and in case of default, by draw of lots. Minimum and maximum no. of directors Minimum Every public company 3 directors Every private company- 2 directors Maximum No limit provided in the Act. Articles may provide for maximum no. The maximum no. may be increased/reduced by altering articles. Maximum no. of directorships A person cannot hold office as a director in more than 15 companies

Exclusions Private companies Unlimited companies Section 25 companies Alternate directorships A person holding directorship in 15 companies, is appointed director, then - new appointment will not be effective if within 15 days the choice not made - New appointment void after 15 days if choice not made. A person holding directorship in 14 or less no. of companies, is appointed director taking th total no beyond 15, then - new appointment will not be effective if within 15 days the choice not made - all new appointments void after 15 days if choice not made.

Vacation of office of a director 1. Where he incurs any disqualification of S. 274 2. Failure to obtain qualification shares 3. Absence from 3 consecutive board meetings or all meetings for a period of 3 months whichever is longer 4. Obtains loan/guarantee/security without Central Govt. approval 5. Fails to disclose his interest 6. He is removed

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Removal of a director 1. 2. 3. 4. A director may be removed by passing an ordinary resolution Special notice of such a resolution shall be given to all the members Notice shall also be given to the concerned director who shall be entitled to make a representation If the representation is made in writing, he may request the company to notify the same to the members. 5. If the representation could not be sent, it shall be read at the meeting 6. The director is also given an opportunity of being heard at the meeting A director appointed by Central Govt., Company Law Board, SICA, nominee director of financial institutions cannot be removed.

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