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Chavan
Maharashtra
kmZJJmKamoKar Open University
Business Law
Unit 1 Introduction to Business Law 1
Unit 2 Indian Contract Act, 1872: Nature and Kind of Contracts 5
Unit 3 Indian Contract Act, 1872: Offer and Acceptance 15
Unit 4 Indian Contract Act, 1872: Capacity of Parties and Consideration 27
Unit 5 Indian Contract Act, 1872: Other Essential Elements of a Contract 37
Unit 6 Indian Contract Act, 1872: Performance and Discharge of Contract 55
Unit 7 Indian Contract Act, 1872: Remedies for Breach of Contract and
Quasi- Contract 73
Unit 8 Indian Contract Act, 1872: Indemnity and Guarantee 83
Unit 9 Indian Contract Act, 1872: Agency 95
Unit 10 Sales of Goods Act, 1930 109
Unit 11 The Negotiable Instruments Act, 1881 139
Unit 12 Companies Act, 2013: Types of Companies and their Characteristics 167
Unit 13 Companies Act, 2013: Memorandum, Articles of Association and
Prospectus 181
Unit 14 Companies Act, 2013: Share Capital And Transfer of Shares 203
Unit 15 Companies Act, 2013: Meeting and Power of Board 227
Unit 16 Companies Act, 2013: Management of Company 255
Unit 17 Consumer Protection Act, 2015 279
Unit 18 Limited Liability Partnership Act, 2008 295
Yashawantrao Chavan Maharashtra Open University (MBA-401)
Vice-Chancellor: Prof. E. Vayunandan
Director, School of Commerce & Management: Dr. Pandit Palande
NATIONAL ADVISORY BOARD___________________________________________________________
Prof. Sudhir .K.Jain Prof. Karuna Jain, Dr. Latika Ajitkumar Ajbani
Former Vice Chancellor, Director, Assistant Professor,
Professor and Former Head N I T I E, Vihar Lake, School of Commerce & Management,
Indian Institute of Technology Delhi, Mumbai 400087 Yashwantrao Chavan Maharashtra
Department of management Studies Open University, Nashik
SYLLABUS
UNIT 12: COMPANIES ACT, 2013: TYPES OF COMPANIES AND THEIR CHARACTERISTICS
Characteristics of company
Body corporate
Lifting of corporate veil
Types of company
Control of compensation of board
Promoter and duties of promoter
Effects of pre- incorporation contracts
Steps to obtain certificate of incorporation and certificate of commencement of business
UNIT 13: COMPANIES ACT, 2013: MEMORANDUM, ARTICLES OF ASSOCIATION AND PROSPECTUS
Memorandum of Association and its purpose
Contents of the Memorandum of Association
Doctrine of ultra vires
Articles of Association and its contents
Procedure for alteration of Association
Doctrine of constructive notice and Doctrine of indoor management
Prospectus and its contents
Shelf Prospectus and Information Memorandum Section 31
UNIT 14: COMPANIES ACT, 2013: SHARE CAPITAL AND TRANSFER OF SHARES
Share Capital and types of shares
Allotment of shares and general provisions for allotment of shares
Brokerage
Reduction of share capital
Issue of shares at premium and discount
Forfeiture of shares and legal requirements for Forfeiture of shares
Surrender and transfer of shares
Termination of partnership
Rights of member of a company and rights to the members as group
Nomination
Debentures and types of debentures
Debenture Trustees and their functions
1.0 Introduction
Business law encompasses all of the laws that dictate how to form and run a business.
This includes all of the laws that govern how to start, buy, manage and close or sell
any type of business. Business laws establish the rules that all businesses should
follow. A savvy businessperson will be generally familiar with business laws and
know when to seek the advice of a licensed attorney. Business law includes state
and federal laws, as well as administrative regulations.
According to a Dictionary of Basic Legal Terms, law is [1] the regime that
orders human activities and relations through systematic application of the force of
politically organized society, or through social pressure, backed by force, in such a
society.
[2] This definition of the law, while true, is too abstract and long for our
needs. We should therefore think of the law in more basic terms as rules that govern
and guide actions and relations among and between persons, organizations, and
governments.
The English Mercantile Law constitutes the foundation on which the super-struc-
ture of the Indian Business Law has been built. Even now, despite the enactment of
various statutes relating to matters falling within the purview of the Business Law,
our courts generally take recourse to the English Law where some principles are
not expressly dealt within an Act, or where there is ambiguity.
1.5 Summary
Business law encompasses all of the laws that dictate how to form and run a
business. This includes all of the laws that govern how to start, buy, manage and
close or sell any type of business.
The word Law has been derived from the Teutonic word Lag, which means
definite. On this basis Law can be defined as a definite rule of conduct and
human relations. It also means a uniform rule of conduct which is applicable
equally to all the people of the State.
There are various branches of law like International law, constitutional law,
criminal law, civil law, business law or mercantile law.
The main sources of business law in India are English law, Judicial decisions,
Customs and Usages and Indian statutes.
Business Law : 4
Indian Contract Act, 1872:
Unit 2: Indian Contract Act, 1872: Nature and Nature and Kind of Contracts
Kind of Contracts
Structure
NOTES
2.0 Introduction
2.1 Unit Objectives
2.2 Meaning of Contract
2.3 Essential Elements of A Valid Contract
2.4 Types of Contract
2.5 Distinguish Between Void and Voidable Contract
2.6 Key Terms
2.7 Summary
2.8 Questions and Exercise
2.9 Further Readings and References
2.0 Introduction
The Law of Contract constitutes the most important branch of Mercantile or
Commercial Law. It is the foundation upon which the superstructure of modern
business is built. It affects everybody, more so, trade, commerce and industry. It may
be said that the contract is the foundation of the civilized world.
The Indian Contract Act mostly deals with the general principles and rules
governing contracts. The Act is divisible into two parts. The first part (Section 1-75)
deals with the general principles of the law of contract, and therefore applies to all
contracts irrespective of their nature. The second part (Sections 124-238) deals with
certain special kinds of contracts, namely contracts of Indemnity and Guarantee,
Bailment, Pledge, and Agency.
2.2 Contract
According to section 2 (h) of the Indian Contract Act, 1872 An agreement enforceable
by law is a contract. This definition indicates that a contract essentially consists of
two distinct parts. First, there must be an agreement. Secondly, such an agreement
must be enforceable by law. To be enforceable, an agreement must be coupled with
Business Law : 5
Indian Contract Act, 1872: an obligation. A contract therefore, is a combination of the two elements: (1) an
Nature and Kind of Contracts
agreement and (2) an obligation.
2.2.1 Agreement
NOTES As per Section 2(e): Every promise and every set of promises, forming the
consideration for each other, is an agreement. Thus it is clear from this definition
that a promise is an agreement.
2.2.2 Promise
According to Section 2(b) of the Indian Contract Act when the person to whom the
proposal is made signifies his assent thereto, the proposal is said to be accepted. A
proposal, when accepted, becomes a promise. An agreement, therefore, comes into
existence when one party makes a proposal or offer to the other party and that other
party signifies his assent thereto. In nutshell, an agreement is the sum total of offer
and acceptance.
An analysis of the definition given above reveals the following characteristics of an
agreement:
(a) Plurality of persons: There must be two or more persons to make an agreement
because one person cannot enter into an agreement with himself.
(b) Consensus ad idem: The meeting of the minds is called consensus-ad-idem.
It means both the parties to an agreement must agree about the subject matter of
the agreement in the same sense and at the same time.
2.3.2 Consent
Consent means knowledge and approval of the parties concerned. A contract is
made when one person makes an offer while another person accepts the offer. This
acceptance of the offer should be made without any force or threat. It means that a
consent given should be free and genuine.
Example: A has two cars- one black and the other white. He offers to sell one of
his cars to B. A intends to sell the black one while B accepts the offer believing that
it is for the white car. Here, A and B are not thinking in the same sense of a particular
thing. In this situation, there is a mistake, so it cannot be said to be a free consent.
2.3.4 Consideration
Consideration is one of the essential elements of a valid contract. Section 2(d) of the
Indian Contract Act, 1872 defines consideration thus: when at the desire of the
promisor, the promisee or any other person has done or abstained from doing, or
Business Law : 7
Indian Contract Act, 1872: does or abstains from doing, or promises to do or to abstain from doing something,
Nature and Kind of Contracts
such act or abstinence or promise is called a consideration for the promise.
In simple words Consideration would generally mean compensation for doing or
omitting to do an act or deed. It is also referred to as quid pro quo viz something in
NOTES
return for another thing. Such a consideration should be a lawful consideration.
Check your progress Example: A agrees to sell his books to B for Rs. 100, Bs promise to pay Rs. 100 is
What is contract? the consideration for As promise to sell his books and As promise to sell the books
. Define agreement. is the consideration for Bs promise to pay Rs. 100.
. What do you understand
by consideration?
2.3.5 Not expressly declared to be void
The last element to clinch a contract is that the agreement entered into for this
purpose must not be which the law declares to be either illegal or void. An illegal
agreement is an agreement expressly or impliedly prohibited by law. A void agreement
is one without any legal effects.
Example: Threat to commit murder or making/publishing defamatory statements or
entering into agreements which are opposed to public policy is illegal in nature.
Similarly, any agreement in restraint of trade, marriage and legal proceedings etc.
are classic examples of void agreements.
Types of Contract
Unenforceable
Bilateral Contract
Contract
Certain Contract in
writing
2.7 Summary
The Indian Contract Act mostly deals with the general principles and rules
governing contracts. The Act is divisible into two parts. The first part (Section 1-
75) deals with the general principles of the law of contract, and therefore applies
to all contracts irrespective of their nature. The second part (Sections 124-238)
deals with certain special kinds of contracts, namely contracts of Indemnity and
Guarantee, Bailment, Pledge, and Agency.
According to Section 2 (h) of the Indian Contract Act, 1872 An agreement
enforceable by law is a contract. A contract therefore, is a combination of the
two elements: (1) an agreement and (2) an obligation.
As per Section 2(e): Every promise and every set of promises, forming the
consideration for each other, is an agreement. Thus it is clear from this definition
that a promise is an agreement.
According to Section 2(b) of the Indian Contract Act when the person to whom
the proposal is made signifies his assent thereto, the proposal is said to be accepted.
A proposal, when accepted, becomes a promise. An agreement, therefore, comes
into existence when one party makes a proposal or offer to the other party and
that other party signifies his assent thereto. In nutshell, an agreement is the sum
total of offer and acceptance.
As stated above, an agreement to become a contract must give rise to a legal
obligation i.e. a duty enforceable by law.
Business Law : 12 A valid contract there must be (i) an agreement, (ii) based on the genuine consent
of the parties, (iii) supported by a lawful consideration, (iv) made for a lawful Indian Contract Act, 1872:
Nature and Kind of Contracts
object, and (v) between the competent parties.
Contract can be of different types namely, express contract, implied contract,
quasi- contract, e-contract, executed contract, executory contract, unilateral NOTES
contract, bilateral contract, valid contract, void contract, voidable contract and
illegal contract.
Business Law : 13
Indian Contract Act, 1872: Offer
Unit 3: Indian Contract Act, 1872: Offer and and Acceptance
Acceptance
Structure
NOTES
3.0 Introduction
3.1 Unit Objectives
3.2 Essential Elements of an Offer
3.3 Legal Rules Regarding a Valid Offer
3.4 Classification of Offers
3.5 Lapse and Revocation of Offer
3.6 Acceptance and Legal Rules for the Acceptance
3.7 Communication of Offer, Acceptance and Revocation
3.8 Key Terms
3.9 Summary
3.10 Questions and Exercise
3.11 Further Readings and References
3.0 Introduction
It has been explained in the previous chapter that a proposal or a promise backed by
legal consideration is an agreement and such an agreement, if legally enforceable,
becomes a contract. An offer is the first step in the formation of a contract. An offer
is a proposal by one personal to another to enter into a contract. The term offer is
defined under Section 2 (a) as under:
When one person signifies to another, his willingness to do or abstain from
doing anything with a view to obtaining the assent of the offer, to such an act or
abstinence, he is said to make a proposal.
Business Law : 15
Indian Contract Act, 1872: Offer 3.2.1 Two Parties
and Acceptance
For the valid offer, there must be two parties. A person cannot make an offer to
himself.
NOTES An offer which is made to public at large and if it is kept open for public acceptance
for a certain period of time, it is known as continuing or open offer.
Check your progress
Example:Tenders that are invited for supply of materials and goods
What do you mean by an
offer? 7. Counter offer
. Write the essentials of an
offer. Upon receipt of an offer from an offeror, if the offeree instead of accepting it
. Differentiate between ex- straightway, imposes conditions which have the effect of modifying or varying the
press and implied offer. offer, he is said to have made a counter offer. Counter offers amounts to rejection of
original offer.
Example: A offered to sell his book to B for Rs 2,000. B replied, I am ready to pay
Rs 1,900. On As refusal to sell at this price, B agreed to pay Rs. 2,000. Held, there
was not contract, as the acceptance to buy it for Rs. 1900 was a counter offer, i.e.
rejection of the offer of A. The subsequent acceptance to pay Rs 2,000 is a fresh
offer from B to which A was not bound to give his acceptance.
Business Law : 20
Indian Contract Act, 1872: Offer
3.6.4 Mental acceptance ineffectual and Acceptance
Mental acceptance or quiet assent not evidenced by words or conduct does not amount
to a valid acceptance, and this is so even where the offeror has said that such a mode
of acceptance will suffice. Acceptance must be communicated to the offeror, otherwise NOTES
it has no effect. If an oral acceptance is spoken into a telephone after the telephone has
gone dead, there is in effect no acceptance. This rule is based on the theory of consensus
ad idem or of identity of minds. Unless the acceptance of the offer comes to the
knowledge of the offeror, there is no identity of mind and therefore no contract.
Example: A person received an offer by letter. In reply he wrote a letter of acceptance.
Put the letter in his drawer and forgot all about it. Held, this uncommunicated acceptance
did not amount to acceptance and so did not complete the contract. (Brogden vs.
Metropolitan Rly co)
Let us now come to the issue of when communication of acceptance is Check your progress
complete. In terms of Section 4 of the Act, it is complete, What do you mean
revocation or lapse of an
(a) As against the proposer, when it is put in course of transmission to him so as to offer?
be out of the power of the acceptor to withdraw the same; . Write down the legal rules
as to proposal.
(b) As against the acceptor, when it comes to the knowledge of the proposer. . Explain the communication
of acceptance.
3.7.3 Communication of a Revocation
The communication of a revocation is complete,
(a) As against the person who makes it, when it is put into a course of transmission
to the person to whom it is made, so as to be out of the power of the person
revoking, i.e., when the letter of revocation is posted; and
(b) As against the person to whom it is made, when it comes to his knowledge, i.e.,
when the letter.
Business Law : 24
Indian Contract Act, 1872: Offer
3.10 Questions and Exercise and Acceptance
Business Law : 25
Indian Contract Act, 1872: Offer
and Acceptance
NOTES
Business Law : 26
Indian Contract Act, 1872:
Unit 4: Indian Contract Act, 1872: Capacity of Capacity of Parties and
Parties and Consideration Consideration
Structure
NOTES
4.0 Introduction
4.1 Unit Objectives
4.2 Capacity of Parties
4.3 Minor and Minors Agreements
4.4 Different Position of a Minor
4.5 Person of Unsound Mind
4.6 Person Disqualified by Law
4.7 Consideration
4.8 Essentials of Valid Consideration
4.9 Key Terms
4.10 Summary
4.11 Questions and Exercise
4.12 Further Readings and References
4.0 Introduction
In the previous unit we have discussed important elements of contract are capacity
of parties and consideration. The capacity of parties to the contract means the
legal ability of the parties to enter into a contract. While the consideration means
something in return. It is the benefit received by a party to the contract in return of
the promise made by him. Therefore, in this unit along with the capacity of parties;
the concept of consideration and the legal requirements for consideration are
discussed.
4.3.3 No ratification
Ratification by the minor is not valid. The ratification means the acceptance of a
transaction already done. However, on attaining majority, he can enter into a fresh
contract having the same terms and conditions. Again, it is worth noting that where
a minor had not completed a transaction during his minority and continues to complete
the same on majority, he will be liable for the whole transaction. Therefore, the
services are rendered at the desire of the minor during his minority (to the minor)
Business Law : 28 and are continued to be rendered at his request after his majority. If he makes a
promise to pay for the whole, the promise is enforceable.
4.3.4 No specific performance Indian Contract Act, 1872:
Capacity of Parties and
No specific performance order can be granted against a minor. A specific performance Consideration
order is the order granted by the court against the defaulting party to contract to
perform, the promise as per the terms and conditions of the contract. As a minor NOTES
cannot be a promisor, a minor cannot be forced to perform a promise.
4.7 Consideration
Presence of consideration is one of the requisites of Valid Contract. Consideration
must be of two directional nature. That means both parties should get benefited
mutually. Then only the Contract becomes capable of creating legal relations.
Consideration may be in the form of cash, goods, act or Abstinence. According to
Sec. 2 (d), When at the desire of the promisor, the promisee or any other person has Business Law : 31
Indian Contract Act, 1872: done or abstained from doing or does or abstains from doing or promise to do or abstain
Capacity of Parties and from doing something, such act or abstinence or promise is called consideration for the
Consideration
promise.
NOTES Example: A, a coolie, lifts Bs luggage and B pays him remuneration. Lifting luggage
is causing detriment to the coolie but a benefit to the passenger, i.e. promisor.
4.10 Summary
An essential ingredient of a valid contract is that the contracting parties must be
competent to contract (Sec. 10). Section 11 lays down that Every person is
competent to contract who is of the age of the majority according to the law to
which he is subject and who is of sound mind, and is not disqualified from contracting
by any law to which he is subject.
According to Section 3 of the Majority Act 1875, a person, domiciled in India, who
is under the age of 18 years is a minor. Accordingly every person who has completed
the age of 18 years becomes a major.
The agreement by a minor is void ab initio. It is nullity in the eye of law. An
agreement with a minor can never be enforced by the other party. The law protests Business Law : 33
Indian Contract Act, 1872: the minors as they are not capable to understand the terms of contracts, and
Capacity of Parties and
Consideration the rights and liabilities under the contract.
Section 12 of the Contract Act defines the term sound mind as follows: A
NOTES person is said to be of sound mind for the purpose for the purpose of making a
contract, if, at the time when he makes it, he is capable of understanding it and
of forming a rational judgement as to its effects upon his interests.
Apart from minors and persons of unsound mind, these are the others who are
not capable of entering into contract either wholly or partially. Contract by such
persons are void. E.g. Body Corporate or Company or Corporation, Alien
Enemy, Convict, Insolvent.
Presence of consideration is one of the requisites of valid contract. Consideration
must be of two directional nature. That means both parties should get benefited
mutually. Then only the contract becomes capable of creating legal relations.
Consideration may be in the form of cash, goods, act or abstinence.
Business Law : 34
Indian Contract Act, 1872:
4.12 Further Readings and References Capacity of Parties and
Consideration
Books
1. Sheth, T., Business Law, 2nd ed. Pearson India Education Services Pvt. NOTES
Limited.
2. Kuchhal. M.C. & Prakash, D., 3rd ed. Business Legislation for Management,
Vikas Publishing House Pvt. Limited.
Web resources
1. Essentials of consideration are available at http://www.lawsofbusiness.com/
2013/08/essentials-of-consideration.html
Business Law : 35
Indian Contract Act, 1872:
Capacity of Parties and
Consideration
NOTES
Business Law : 36
Indian Contract Act, 1872:
Unit 5: Indian Contract Act, 1872: Other Other Essential Elements of a
Essential Elements of a Contract Contract
Structure
NOTES
5.0 Introduction
5.1 Unit Objectives
5.2 Meaning of Consent
5.3 Free Consent
5.4 Coercion
5.5 Undue Influence
5.6 Fraud
5.7 Misrepresentation
5.8 Mistake
5.9 Unlawful Object
5.10 Unlawful Consideration
5.11 Agreement Expressly Declared As Void
5.12 Contingent Contract
5.13 Key Terms
5.14 Summary
5.15 Questions and Exercise
5.16 Further Readings and References
5.0 Introduction
In the previous units we discussed all aspects of offer, acceptance, revocation, and
consideration. In this unit we will discuss other elements, which would constitute a
contract. In terms of section 10 of the Indian Contract Act, 1872 a legally enforceable
agreement should be made with the free consent of the parties who are competent
to contract for a lawful consideration with a lawful object. Further the agreement
should not have been expressly declared as void by law. These elements would be
examined here under. First we will understand consent and thereafter free consent.
5.4 Coercion
According to Section 15 of the Act, Coercion is the committing, or threatening to
commit any act forbidden by the Indian Penal Code 1860, or the unlawful detaining,
or threatening to detain any property, to the prejudice of any person whatever, with
the intention of causing any person to enter into an agreement.
Example 1: X says to Y I shall not return the documents of title relating to your
wifes property, unless you agree to sell your house to me for Rs 5000. Y says, All
right, I shall sell my house to you for Rs. 5000; do not detain my wifes documents of
title, X has employed coercion; he cannot therefore enforce the contract. But Y can
enforce the contract if he finds the contract to his benefit. An agreement induced by
coercion is voidable and not void. That means it can be enforced by the party coerced,
but not by the party using coercion. It is immaterial whether the Indian Penal Code,1860
is or is not in force at the place where the coercion is employed. Where husband
obtained a release deed from his wife and son under a threat of committing suicide, the
transaction was set aside on the ground of coercion, suicide being forbidden by the
Indian Penal Code. (Amiraju Vs. Seshamma (1974) 41 Mad, 33)
5.6 Fraud
According to Section 17 of the Act, fraud means and includes any of the following
acts committed by a party to a contract or with his connivance or by his agent with
intent to deceive another party thereto or his agent or to induce him to enter into the
contract.
(i) The representation that a fact is true when it is not true by one who does not
believe it be true;
(ii) The active concealment of a fact by one, having knowledge or belief of the fact;
(iii) A promise made without any intention of performing it;
(iv) Any other act fitted to deceive; and
Business Law : 40 (v) Any such act or omission as to law specially declared to be fraudulent
It is important to note that fraud that results in a contract alone is covered by Indian Contract Act, 1872:
Other Essential Elements of a
section17 of the Act. If there is a fraud but it does not result in a contract, it would Contract
not fall within the purview of the Act. The following can be taken as illustration of
fraud:
NOTES
A director of a company issues prospectus containing misstatement knowing
Check your progress
fully well about such misstatement. It was held by any person who had
What is free consent?
purchased shares on the faith of such misstatement can repudiate the contract
Differentiate between coer-
on the ground of fraud. cion and undue influence.
B discovered an ore mine in the Estate of A He conceals the mine and the . What do you understand
information about the mine. A in ignorance agrees to sell the estate to B at by fraud in Indian Contract
Act?
a price that is grossly undervalued. The contract would be voidable of the
option of A on the ground of fraud.
Buying goods with the intention of not paying the price is an act of fraud.
It will be interesting to know that not only Contract Act, but also other Acts
have specifically declared certain acts and omission as fraud. A seller of a
property should disclose any material defect in the property. Concealing the
information would be an act of fraud. Any other act committed to deceive is
fraud.
Mere silence would amount to fraud under certain circumstances.
Although a mere silence as to facts which is likely to affect the willingness of a
person to enter into a contract is no fraud, where there is a duty to speak or where
his silence is equivalent to speech, then such silence amounts to fraud. This would
be clearly seen from the explanation to Section 17 of the Indian Contract Act,1872.
This situation often arises in Insurance contracts.
In the case of fire insurance contract between people standing in fiduciary
relationship, nondisclosure of certain information would amount to fraud as there
is a duty to make special disclosure. These are also known as UberrimaeFidei
contract.
In the case of marine insurance policy contract, where a charterer is shipping
goods of high value but fails to disclose such high value of the goods to the underwriter,
there is fraud. Similarly the insurer is not bound by the policy issued by him where
he is misinformed about insurance policy previously taken by the insured.
5.7 Misrepresentation
Misrepresentation does not involve deception but is only an assertion of something
by a person which is not true, though he believes it to be true. Misrepresentation
could arise because of innocence of the person making it or because he lacks sufficient
or reasonable ground to make it. A contract which is hit by misrepresentation can be
avoided by the person who has been misled.
Example: A makes the statement on information derived, not directly from C but
from M. B applies for shares on the faith of the statement which turns out to be
false. The statement amounts to misrepresentation, because the information received
second-hand did not warrant A to make the positive statement to B [Section 18 (1)]. Business Law : 41
Indian Contract Act, 1872: 5.7.1 Essential elements of misrepresentation
Other Essential Elements of a
Contract All elements of fraud are equally applicable to misrepresentation except the knowledge
of false facts. Following are the essential elements of misrepresentation:
NOTES 1. The party makes a representation of facts which are false.
2. The misrepresentation should be related to the material facts of contract.
3. The misrepresentation should be with an intention that the other party should act
upon it.
4. The misrepresentation should have been acted upon.
5. The misrepresentation was made innocently.
6. Other party actually acted believing misrepresentation to be true.
5.8 Mistake
It means an erroneous belief about some facts. A mistake can either be (a) mistake of
law and (b) mistake of fact.
5.8.1 Mistake of law
A mistake of law does not mean mistake in provisions of any law but it means there is
mistake in understanding the provision of any law by the party to contract.
A mistake of law can be further classified either as mistake of Indian law and mistake
of foreign law.
5.8.1.1 Mistake of Indian law
Everyone is supposed to know the law of land. In the Latin maxim it is said that
Ignoranlia juris non exusa. Ignorance of law is no excuse. Therefore, if there is a
mistake of Indian law, the contract is not void or voidable.
Example: A, a widow, was entitled to certain occupancy rights on the land of B. she
remarried and believing that she has lost her occupancy rights by reason of her second
marriage, agreed to take the land on lease from B, on an increased rent. Both A and B
honestly believed that A had lost her occupancy rights. The contract for hire rent is
valid and not voidable although they made the contract in ignorance of law.
5.8.1.2 Mistake of Foreign law
Everyone can be supposed to know the law of the foreign country. A mistake of the
foreign law is treated, as if it were a mistake of facts, because person cannot be
expected to know the law of other country.
5.8.2 Mistake of fact
A mistake of fact can be classified either as a bilateral mistake or a unilateral mistake.
5.8.2.1 Bilateral mistake
A bilateral mistake of fact occurs when both parties to the contract are operating under a
mistaken reality. Bilateral mistakes are also known as mutual mistakes or common mistakes.
A bilateral mistake would result in a contract that could be voided by both individuals.
Example: A buys a painting from B at a price of Rs. 20,000. Both A and B believed it
to be the work of a known artist by B did not make any representation or warranty
about it. Later A comes to now that it was a new one and worth only Rs 1000. A is
Business Law : 42
bound by the contract.
The bilateral mistake can be further classified as: Indian Contract Act, 1872:
Other Essential Elements of a
1. Mistake of quantity: If both the parties are under a mistake as to the quantity of Contract
the subject matter of the agreement, the agreement is void. Such a mistake may
even be caused by the negligence of a third party but the agreement would be void. NOTES
Example: A agreed to buy 100 sewing thread reels from B. Both believe that each
reel contains 500 meters of thread but, in fact, the length of thread was only 300
meters. Held, the agreement was void as there was a bilateral mistake
2. Mistake as to price: If both the parties are working under a mistake as to the
price, the agreement is void.
Example:A agreed with B to let out his house for a monthly rent of Rs 520. However,
in the lease deed it was written as Rs. 350. Held, the agreement was void.
3. Mistake as to possibility of performance
Example: A agrees to sell 100 units of a particular product. Later, it is discovered
that there was a ban on the sale of a product even at the time of the making the
contract. The contract is void.
5.8.2.2 Unilateral mistake
A mistake of fact is unilateral when only one party is mistaken. A mistake of fact that
is unilateral in nature is not normally a reason to set aside a contract or a reason that
will allow a plaintiff in a civil trial to seek damages. A unilateral mistake of fact will
result in an enforceable voidable contract.
Example: A submitted a tender to B for construction of a number of houses. A made
a mistake in calculating the cost therefore his offer was lower than other tenders. As
tender was accepted. Held, it was a binding contract although it was an erroneous
estimate based on unilateral mistake.
5.10.3 Consideration that would defeat any rule for the time
being in force
This is a situation not very different from point (2) discussed above. The issue covered
by this point can be explained by following two examples:
a) A will must be proved in order to be probated by a court. A mere consent of parties
by way of agreement to except this requirement of proof of genuineness or proper
execution of will is not lawful and therefore cannot be enforced under C.P.C.
b) A receiver is a court officer. Therefore his remuneration has to be fixed by the court.
Parties to certain litigations cannot add or deviate of the power of the receiver.
Similarly they cannot fix salary of a receiver without the leave of the court however
unconditional it may be. Such an act would be in contravention of law.
NOTES
5.15 Questions and Exercise
1 When is consent said to be given under coercion? How coercion differs from
undue influence?
2 A contract caused by unilateral mistake may be valid, voidable or void. Explain.
3 Mere silence would amount to fraud under certain circumstances.Discuss this
statement.
4 Define mistake. Differentiate between bilateral and unilateral mistake by giving
suitable examples.
5 What do you understand by the contingent contract ? Discuss the rules regarding
enforcement of contingent contracts.
6 Explain briefly:
(a) Agreement in restraint of marriage
(b) Invitation to treat does not amount to an offer
(c) Consideration must be sufficient but need not be adequate.
7 Explain the concept of misrepresentation in the matters of contract.
8 Consideration is required for every kind of contract. Comment.
9 Insufficiency of consideration is immaterial but an agreement without consideration
is void. Comment.
10 All agreements against public policy are void. Comment.
Business Law : 53
Indian Contract Act, 1872:
Other Essential Elements of a
Contract
NOTES
Business Law : 54
Indian Contract Act, 1872:
Unit 6: Indian Contract Act, 1872: Performance Performance and Discharge of
Contract
and Discharge of Contract
Structure
NOTES
6.0 Introduction
6.1 Unit Objectives
6.2 Performance of Contract
6.3 Essentials of a Valid Tender
6.4 Types of Tenders
6.5 By whom Contracts must be Performed?
6.6 Performance of Joint Promise
6.7 Time and Place for Performance of Promise
6.8 Kinds of Reciprocal Promise
6.9 Rules regarding Performance of Reciprocal Promises
6.10 Appropriation of Payments
6.11 Assignment of Contracts
6.12 Discharge of a Contract
6.13 Key Terms
6.14 Summary
6.15 Questions and Exercise
6.16 Further Readings and References
6.0 Introduction
A contract being an agreement enforceable by law, creates a legal obligation, which
subsists until discharged. Performance of the promise or promises remaining to be
performed is the principal and most usual mode of discharge. In a contract where
there are two parties, each one has to perform his part and demands the other to
perform. This obligation is the primary tenet. The parties would be treated as
having been absolved only under the provisions of any law or by the conduct of the
other party. Until such time, the performance is neither excused nor dispensed with.
Not only the promisor has a primary duty to perform, even the representative in the
event of death of a promisor, is bound by the promise to perform, unless a contrary
intention appears from the contract [Section 37]. This unit explains, who must perform
his obligation; what are the rules regarding performance of reciprocal promises etc.
Effect: If promisee does not accept a valid tender of goods and services, it has the
following effects:
The promisor is discharged from his obligation under the contract
The promisor need not offer the goods or services again.
The promisor may sue promisee for non-performance.
Business Law : 67
Indian Contract Act, 1872: (a) Unauthorized material alteration of a written document
Performance and Discharge of
Contract A party can treat a contract discharged (i.e., from his side) if the other party alters
a term (such as quantity or price) of the contract without seeking the consent of the
NOTES former.
Example: One of the parties without the consent of the other party changes the
date of payments or the place of delivery.
(b) Death
The contract that requires personal skill is discharged on the death of the promisors.
However, any benefit received before the performance shall be returned by the
legal representative of the deceased party.
(c) Merger
The conversion of the inferior right into superior right is called as merger. It is also
called as vesting of rights and liabilities in the same person.
(d) Insolvency
The insolvent is discharged from all the liabilities on all the contracts, entered into, up
to the date of insolvency.
6.14 Summary
Performance of contract means fulfilling of their respective legal obligations
created under the contract by both the promisor and the promise.
An attempt to perform a promise by a promisor is regarded as a valid tender,
when it fulfils all of the following conditions. Such as, must be unconditional,
must be made at a proper time and place, must be for the entire obligation, must
be in legal tender money, must be given reasonable opportunity to inspect the
goods and must be made to the promise or his authorised agent.
There are two types of tenders (a) tender of goods and services and (b) tender
of money. When a promisor offers to deliver the goods or service to the promisee
and the promisee refuses to take the delivery, it is said to be tender of goods or
services. When the promisor offers to pay the amount and the promisee refuses
to accept the same it is called valid tender of money.
There may be contracts have joint promisors and joint promisees. When two or
more persons enter into a joint agreement with one or more persons, in such a
case, the promise is known as a joint promise.
When the Contract specifies or mentions that a promisor is to perform his promise
without an application by the promisee and no time for performance is specified,
then the obligation must be performed within a reasonable time.
According Sec 2(f) Promises which form the consideration or a part of the
consideration for each other are called reciprocal promises. In other words, it is
a promise in exchange for a promise. In case of reciprocal promises, each party
to the contract is a promisor as well as a promise.
Appropriation of payment means an adjustment and application of the money to
a given transaction. When there are several debts outstanding from one person
to another and certain payment is made by the debtor, and such payment is
insufficient to satisfy the whole debt, the order in which the debts are satisfied is
known as appropriation of payment.
The term assignment means transfer. Assignment of contracts would mean
the transfer of rights and liabilities under a contract by a party to another person.
Thus, in the case of an assignment, the original party or parties to the contract
drop out and the others take his / their place.Assignment takes place either, by
the act of parties or by operation of Law.
Discharge of a contract suggests termination of contractual obligations. This is
because when the parties originally entered into the contract, the rights and
duties in terms of contractual obligations were set up. Consequently when those
Business Law : 70 rights and duties are put out then the contract is said to have been discharged.
Indian Contract Act, 1872:
6.15 Questions and Exercise Performance and Discharge of
Contract
1 Write a short note on the performance of the contract.
2 What are the requisites of the valid tender of performance?
NOTES
3 Is there any difference between the tender of services and tender of money?
4 Who can perform the promise under a contract?
5 Who can demand the performance of promise?
6 Explain rules with regard to demand of promise by the joint promisors.
7 State the provisions relating to the performance of reciprocal promises.
8 Discuss the various methods of termination of contract.
9 How is the contract discharged on the performance of a promise?
10 Explain the meaning of the term remission. Write the short note on the novation
of contract.
11 Write a short note on the anticipatory breach of contract.
Practical Problems
1. A promises to paint a picture for B. A dies before painting the picture. Can B
ask legal representative of A to paint picture as per the contract? What is the
current legal position here?
2. A owes Rs. 80,000 to B. Before clearing his liability, A dies leaving behind an
estate worth Rs. 40,000. In this case, As legal representatives are liable for
what amount? Explain the rule in this regard.
3. A hires Bs ship to take in and convey from Calcutta to Mauritius, a cargo to be
provided by A, B received a certain freight for its conveyance. A does not
provide any cargo for the ship. Advise on parties right to claim damages.
4. A bill of exchange which was accepted by B, reaches Bs hands after being
negotiated and endorsed through several other parties. Is it a valid contract? Is
B required to make payment on bill?
5. A contracts with B to deliver goods to B on 10 July. A fails to deliver goods on
10 July. Is it anticipatory breach of contract? Why?
Business Law : 71
Indian Contract Act, 1872:
Performance and Discharge of
Contract
NOTES
Business Law : 72
Indian Contract Act, 1872:
Unit 7: Indian Contract Act, 1872: Remedies for Remedies for Breach of Contract
Breach of Contract and Quasi- Contract and Quasi-Contract
Structure
NOTES
7.0 Introduction
7.1 Unit Objectives
7.2 Rescission of a Contract
7.3 Suit for Damages
7.4 Suit upon Quantum Meruit
7.5 Suit for a Specific Performance
7.6 Suit for an Injunction
7.7 Quasi-Contract
7.8 Key Terms
7.9 Summary
7.10 Questions and Exercise
7.11 Further Readings and References
7.0 Introduction
A contract is an agreement or promise made between two or more parties that the
courts will enforce. In some cases, the agreements and promises made in a con-
tract are not kept by a party or more parties. Therefore, this situation called breach
of contract which means failure to keep the promises or agreements of a contract.
Breach of contract is a legal cause of action in which a binding agreement is not
honoured by one or another more of the parties. When one party to contract breaches
the control, the other party who is not at fault has certain remedy available to him.
But all the remedies are not available at the proper time. The aggrieved party has
one or more remedies available, depending upon the facts and circumstances of
each such case. These remedies are as follows:
Business Law : 73
Indian Contract Act, 1872:
Remedies for Breach of Contract
7.2 Rescission of a Contract
and Quasi-Contract
The rescission of a contract means the right to the party to cancel the contract. In
case of breach of contract, the other party may rescind the contract.
NOTES
Example: A promises B to supply 100 bags of rice on a certain date and B promises
to pay the price on receipt of the goods. A does not deliver the goods on the ap-
pointed day, B need not pay the price.
Party rightfully rescinding contract entitled to compensation (Section 75): A
person who rightfully rescinds the contract is entitled to compensation for any dam-
age which he has sustained through the non-fulfilment of the contract.
Example: A, a singer, contracts with B, the manager of a theatre, to sing at his
theatre for two nights in every week during the next two months, and B engages to
pay her Rs. 100 for each nights performance. On the sixth night, A wilfully absents
herself from the theatre, and B inconsequence, rescinds the contract. B is entitled to
claim compensation for the damage which he has sustained through the non-fulfilment
of the contract.
Practical Problems
1. A contracts to deliver 1000 bags of rice at Rs 150 per bag on a future date. On
the due date he refuses to deliver. Market price on that day is Rs 180 per bag.
What amount of damage can be recovered from A?
2. A, a singer, agreed with B to perform at his theatre for two months, on a
condition that during that period, he would not perform anywhere else. When A
performs somewhere else, what remedy would have available to him?
3. P supplies, the wife and children of Q, a lunatic with necessaries suitable to
their condition in life. Is A entitled to reimburse the expenses? Is so, from
whom?
Business Law : 81
Indian Contract Act, 1872:
Remedies for Breach of Contract
and Quasi-Contract
NOTES
Business Law : 82
Indian Contract Act, 1872:
Unit 8: Indian Contract Act, 1872: Indemnity Indemnity and Gurantee
and Guarantee
Structure
NOTES
8.0 Introduction
8.1 Unit Objectives
8.2 Indemnity Contract
8.3 Essential Elements of an Indemnity Contract
8.4 Rights of an Indemnity Holder
8.5 Guarantee
8.6 Essential Elements of Contract of Guarantee
8.7 Kinds of Guarantee
8.8 Revocation of a Continuing Guarantee
8.9 Suretys Liability
8.10 Rights of Surety
8.11 Discharge of a Surety
8.12 Key Terms
8.13 Summary
8.14 Questions and Exercise
8.15 Further Readings and References
8.0 Introduction
Contract of Indemnity and Guarantee are the special types of contracts given under
sections 124 to 147 of the Indian Contract Act,1872.The term Indemnity literally
means Security against loss. In a contract of indemnity one party i.e. the indemnifier
promise to compensate the other party i.e. the indemnified against the loss suffered
by the other. A contract of guarantee is a contract to perform the promise, or
discharge the liability, of a third person in case of his default. The person who gives
the guarantee is called the surety;the person in respect of whose default the
guarantee is given is called the principal debtor, and the person to whom the
guarantee is given is called the creditor. A guarantee may be either oral or written.In
this unit, the law relating to indemnity and guarantee are discussed.
Business Law : 84
8.4.2 Right to recover costs Indian Contract Act, 1872:
Indemnity and Gurantee
The indemnity holder is entitled to recover all costs incidental to the institution and
defending of the suit.
The indemnity holder is entitled to recover all amounts which he had paid under the
terms of the compromise of such suit. However, the compensation must not be
against the directions of the indemnifier. It must be prudent and authorized by the
indemnifier.
8.5 Guarantee
A contract of guarantee is a contract to perform the promise made or discharge
liability incurred by a third person in case of his default (Section 126). There are
three parties in a contract of guarantee. Surety- person who gives the guarantee,
Principal debtor- person in respect of whose default the guarantee is given, Creditor-
person to whom the guarantee is given.
Any guarantee given may be oral or written. The contract of guarantee
may be express, or implied, and may even be inferred from the course of conduct of
the parties concerned.
Example:
(1) Where A obtains housing loan from LIC Housing and if B promises to pay
LIC Housing in the event of A failing to repay, it is a contract of guarantee.
(2) X and Y go into a car showroom where X says to the dealer to supply latest
model of Wagner to Y. In case of his failure to pay, he will be paying for it. This
is a contract of guarantee because X promises to discharge the liability of Y in
case of his defaults.
(3) Sagar requests Chetan to lend Rs 500 to Paresh and guarantees that if Paresh
fails to pay the amount, he will pay. This is a contract of guarantee. Sagar, in this
case, is the surety, Chetan, the creditor and Paresh, the principal debtor. Business Law : 85
Indian Contract Act, 1872:
Indemnity and Gurantee 8.6 Essential Elements of Contract of Guarantee
A contract of guarantee can be performed only when certain essential elements of
the contract are fulfilled. The following are the essential requirements of a contract
NOTES
of guarantee.
8.6.3 Consent
Since the contract of guarantee involves the creditor, principal debtor and the surety,
it is necessary that all the three parties agree to the contract.
Business Law : 86
8.6.6 There should be a principal debt Indian Contract Act, 1872:
Indemnity and Gurantee
There has to be a primary liability of a person who is other than the surety to the
contract of guarantee. The surety becomes liable only if the principal debtor is
unable to discharge his obligation. If there is no principal debtor, there cannot be a
NOTES
contract of guarantee. In situations where there is a promise by one of the parties
for compensating another without involving a third party, the contract becomes a
contract of indemnity.
8.11.3 Novation
Novation, i.e., entering into a fresh contract, either between the same parties or
between other parties, constitutes another mode of discharging a surety from the
liability. If the parties to a contract (of guarantee) agree to substitute it with a new
contract, the original contract need not be performed and so the surety stands
discharged with regard to the old contract. For the surety, too, a fresh contract
would have to be drafted.
8.13 Summary
Contract of Indemnity and Guarantee are the special types of contracts given
under sections 124 to 147 of the Indian Contract Act, 1872.
In terms of Section 124 of the Act, a contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself or
the conduct of any person is called a contract of indemnity. This is also a
known as typical form of contingent contract.
There are two parties in this form of contract. The party who promises to
indemnify/ save the other party from loss is known as indemnifier (promisor),
whereas the party who is promised to be saved against the loss is known as
indemnified (promisee).
An indemnity holder (i.e. indemnified) acting within the scope of his authority is
entitled to the following rights Right to recover damages, Right to recover
costs, Right to recover sums paid under compromise, Right to sue for specific
performance.
A contract of guarantee is a contract to perform the promise made or discharge
liability incurred by a third person in case of his default (Section 126).
There are three parties in a contract of guarantee. Surety- person who gives the
guarantee, Principal debtor- person in respect of whose default the guarantee is
given, Creditor- person to whom the guarantee is given.
When the guarantee is given for an existing obligation or debt, it is called
retrospective guarantee.
When the guarantee is given for a future obligation or debt it is called prospective
guarantee.
A continuing guarantee is cancelled on the death of the surety. In such case, no
Business Law : 93
Indian Contract Act, 1872: notice is required to be given to the creditor.
Indemnity and Gurantee
Rights of Surety can be classified into three groups, as follows; Rights against
Principal debtor, Rights against Creditor, Rights against Co-Sureties.
NOTES According to section 141 of the Act, the surety has the right of subrogation after
performing his duty or making a payment to the creditor. All the rights of the
creditor are passed on to the surety.
Business Law : 94
Indian Contract Act, 1872:
Unit 9: Indian Contract Act, 1872: Agency Agency
Structure
9.0 Introduction
NOTES
9.1 Unit Objectives
9.2 Agency
9.3 Essentials for a Valid Agency
9.4 Test of an Agency
9.5 Difference between an Agent and an Independent Contractor
9.6 Kinds of Agents
9.7 Creation of Agency
9.8 Essentials of a Valid Ratification
9.9 Extent of Agents Authority
9.10 Delegation of Authority
9.11 Sub-Agent
9.12 Substituted Agent
9.13 Duties of an Agent
9.14 Rights of an Agent
9.15 Termination of an Agency
9.16 Irrevocable Agency
9.17 Key Terms
9.18 Summary
9.19 Questions and Exercise
9.20 Further Readings and References
9.0 Introduction
In the modern world conduct of business is not possible without the help of agents.
Therefore it is necessary to know the law relating to agency. In India, as in most
other jurisdictions agency signifies a relationship, which exists where one person
has an authority to act on behalf of another (the principal) to create legal relation-
ships between the principal and third parties. The Indian Contract Act, 1872 (the
Act) contains statutory provisions that govern the rights and obligations of both the
principal and the agent. Under the statute an agent is a person employed to do
any act for another or to represent another in dealings with third persons. The
person for whom such act is done or who is so represented is called the principal.
The law of agency is contained in sections 182 to 238 of the Indian Contract Act,1872.
Business Law : 95
Indian Contract Act, 1872:
Agency
9.1 Unit Objectives
After completing this unit, students will be able to:
Understand contract of agency and essential elements for a valid agency
NOTES
Know difference between agent and independent contractor
Explain types of agents
Familiarise with the rights and duties of an agent and principal
Learn mode of creation of an agency
Describe termination of an agency
9.2 Agency
The Indian Contract Act,1872 does not define the word Agency. However the
word Agent is defined as a person employed to do any act for another or to
represent another in dealings with third persons. The third person for whom the act
is done or is so represented is called Principal (Section 182).
Thus Agency is a comprehensive word used to describe the relationship
between one person and another, where the first mentioned person brings the sec-
ond mentioned person into legal relation with others. The Rule of Agency is based
on the maxim Quit facit per alium, facit per se: i.e., he who acts through an agent
is himself acting.
Example: Mahesh appoints Sohan to buy liquor on his behlf. Mahesh is the princi-
pal and Sohan is the agent. The relationship between Mahesh and Sohan is called
an agency.
There are two important rules on which the agency is based-
1. Whatever a person can do personally, he can do through the agent.
2. He, who does an act through another, does by himself. Consequently, all the acts
of the agent are the acts of the principal.
The function of the agent is thus to bring his principal into contractual relation with
the third parties. In simple words, the agent is merely a connecting link between the
principal and the third parties.
9.6.5 Factor
A factor is an agent to whom goods are entrusted for sale.
9.6.7 Banker
The relationship between banker and his customer is that of debtor and creditor.
9.6.8 Auctioneer
An auctioneer is an agent who is authorized to sell goods to the highest bidder at a
public sale for commission.
9.6.9 Sub-agent
A sub-agent is a person employed by and acting under the control of the original
agent in the business of agency.
9.6.10 Broker
A broker is an agent employed for buying or selling the goods or other property. He
simply acts between the two parties.
9.6.11 Indenter
He is an agent who, buys or sells on behalf of his principal.
9.6.12 Advocate
An advocate also acts an agent. He appears on behalf of principal in the court.
Business Law : 98
Indian Contract Act, 1872:
9.7 Creation of an Agency Agency
The relationship of the principal and the agent may be created in anyone of the
following ways:
NOTES
9.7.1 Agency by express agreement- Section 186 and 187
Number of agency contract come into force under this method. It may be Oral or
documentary or through power of attorney. No particular form or words are re-
quired for the appointment of the agent.
Example: Contract of agency created by power of attorney
Business Law : 102 Agent should follow the instructions given by the principal.
If agent comes across any complicated situation, he has to communicate that Indian Contract Act, 1872:
situation to principal and his advice is to be obtained. Agency
Agent should behave in his capacity as agent, he should not run the transaction
in his own name.
NOTES
Agent should not make secret profits by utilizing reputation of the principal.
Agent should safe guard property of principal particularly upon happening of
events like death of principal, insolvency of principal, etc.
Agent should maintain proper accounting records to enrol the transactions run
by him. Agent has to remit amounts to principal properly.
Agent has to remit amounts to principal properly.
Agent should not carry on delegation.
NOTES 3. Death or lunacy of either party: Whenever principal or agent come across
death or lunacy, agency contract gets terminated.
Check your progress 4. Insolvency of Principal: Principal should have capacity to contract. When
Differentiate between sub principal becomes insolvent, He foregoes capacity to contract and termination of
agent and substituted
agent. agency takes place. But the act is silent with regard to insolvency of agent. As
What do you understand
minor also can act as agent, it can be conformed that insolvent person may act as
by delegation of authority agent.
by an agent?
5.Destruction of subject matter: When subject matter of contract gets destructed,
. Explain the duties of an
agent. agency contract comes to an end.
6.Principal Alien Enemy: When principal is alien and war breaks out between
the countries, then principal becomes alien enemy and agency contract gets termi-
nated.
7. Liquidation of company: On account of legal entity company may act either as
principal or agent. Whatever the status may be, if company enters into liquidation,
termination of agency takes place.
8. Termination of Sub-agency: When ever man agency gets terminated on ac-
count of any reason, sub-agency also goes off.
9.15.2 Termination of agency by the act of Parties
The following are the situations where the agency is terminated by the act of par-
ties.
1. Termination of agency by the Principal: Principal can terminate the contract
of agency by giving notice to agent. By doing so if agent comes across any suffer-
ing. Principal has to compensate the agent.
2. Termination of agency by the Agent: Agent also can terminate the agency
contract by giving notice to principal but by doing so if principal comes across any
suffering, agent has to compensate.
3. Termination of agency by both the parties to the contract: By means of
mutual understanding between principal and agent, the contract of agency may
come to an end.
9.18 Summary
Agent is defined as a person employed to do any act for another or to repre-
sent another in dealings with third persons. The third person for whom the act
is done or is so represented is called Principal (Section 182).
According to section 185 of the Indian Contract Act, no consideration is neces-
sary to create an agency.
An independent contractor is to exercise his own discretion, as to the mode and
time of doing work, for which he is engaged. The agent, on the other hand, is
one who acts according to the instructions of the principal.
The general agent possesses the authority to carry out a broad range of trans-
actions in the name and on behalf of the principal.
The special agent is one who has authority to act only in a specifically desig-
nated instance or in a specifically designated set of transactions.
A del-credere agent is an agent, who guarantees to his principal that person to
whom he sells will pay for that, if he will not pay, he will be liable.
Ratification means subsequent adoption of an activity. Soon after ratification
principal agent relations will come into operation. The person who has done
Business Law : 105
Indian Contract Act, 1872: the activity will become agent and the person who has given ratification will
Agency become principal.
An actual authority means that authority which has been really delegated to the
NOTES agent. The authority of the agent may be express or implied.
Sub agent refers to case where an agent appoints another agent. The appoint-
ment of sub agent is not lawful, because the agent is a delegatee and a delegatee
cannot further delegate.
Substituted agents are not sub agents. They are agents of the principal. Where
the principal appoints an agent and if that agent identifies another person to carry
out the acts ordered by principal, than the second person is not to be treated as a
sub agent but only as an agent of the original principal.
Termination of agency may take place in two ways either by the operation of
law or by the act of parties.
Where the agency cannot be terminated, it is called irrevocable agency. (a)
Where agency is coupled with interest then it is a case where the agent has
interest in the subject matter of agency.
Practical Problems
1. Q is the wife of K. She purchased some sarees on credit from P. P demanded
the amount from K. K refused. P filed a suit against K for the said amount.
Decide in the light of provisions of Indian Contract Act, 1872, whether P would
succeed?
2. Mr. Vipin of Delhi engaged Mr. Abhishek as his agent to buy a house in west
extension area. Mr. Abhishek bought a house for Rs. 20 lakhs in the name of a
nominee and then purchased it himself for Rs 35 lakhs. He then sold the same
house to Mr. Vipin for Rs 40 lakhs. Mr. Vipin later comes to know the mischief
Business Law : 106
of Mr. Abhishek and tries to recover the excess amount paid to Mr. Abhishek. Indian Contract Act, 1872:
Agency
Is he entitled to recover any amount from Mr. Abhishek? If so, how much can
he recover? Explain.
NOTES
9.20 Further Readings and References
Books
1. Sheth, T., Business Law, 2nd ed. Pearson India Education Services Pvt. Limited.
2. Kuchhal. M.C. & Prakash, D., 3rd ed. Business Legislation for Manage-
ment, Vikas Publishing House Pvt. Limited.
NOTES
Structure
10.0 Introduction
NOTES
10.1 Unit Objectives
10.2 Definitions
10.3 Essentials of Valid Sales
10.4 Difference between Sale and an Agreement to Sell
10.5 Difference between Sale and a Hire-Purchase
10.6 Difference between Sale and a Bailment
10.7 Kinds of Goods
10.8 Prices of Goods
10.9 Conditions and Warranties
10.10 Implied Conditions
10.11 Implied Warranties
10.12 Distinguish between a Condition and a Warranty
10.13 Doctrine of Caveat Emptor
10.14 Transfer of Ownership
10.15 Delivery of Goods- Sections 32-39
10.16 Unpaid Seller
10.17 Rights of Unpaid Seller
10.18 Right of Lien
10.19 Right of Stoppage in Transit
10.20 Right of Resale
10.21 Right to withhold Delivery of Goods
10.22 Delivery to Carrier
10.23 Buyers Right against the Seller or Remedies against Seller- Sections 55-61
10.24 Sale by Non-Owners or Transfer of Title by Non-owners- Sections 27-30
10.25 Auction Sale- Section 64
10.26 Key Terms
10.27 Summary
10.28 Questions and Exercise
10.29 Further Readings and References
10.0 Introduction
In trade and commerce, sales and purchase of goods are very common transactions. Business Law 109
Originally, the transactions related to sale and purchase of goods was regulated by
Sales of Goods Act, 1930 Chapter VII (Sections 76 to 123) of Indian Contract Act, 1872 which was broadly
based on English common law. A need was felt to overhaul the law due to rapid
growth of mercantile transactions and various progressive English judgments being
passed to meet the needs of the community. Thus, the provisions of Chapter VII
NOTES
were repealed, suitably amended keeping in mind the English Sales of Goods, 1893
and recent judicial decisions of the time. A separate act, the Sale of Goods Act came
into force on 1st July 1930. It extends to the whole of India except the State of
Jammu and Kashmir. It does not affect rights, interests, obligations and titles acquired
before the commencement of the Act. The Act deals with sale but not with mortgage
or pledge of the goods.
10.2 Definitions
10.2.1 Buyer Section 2(1)
Buyer means a person who buys or agrees to buy goods.
All the essentials of a valid contract must be present. viz., competent parties, free
consent, legal object and so on. The transfer of possession and ownership under the
Act has to be voluntary and not be tainted with fraud or duress. NOTES
NOTES
10.9 Conditions and Warranties
The Sale of Goods Act, identifies the terms, Conditions and Warranties as being
of a prime significance in a contract of sale. Both the terms imply a promise that is
made by the seller. However, the difference between Conditions and Warranties
arises due to the nature of the promise that is made in each case. In the case of
Condition the impact is on the very essence of the contract; whereas, in the case
of Warranty, the promise is in the nature of collateral to the main purpose of the
contract. The conditions and warranties may be expressed or implied.
The expressed conditions and warranties are those which the parties agree expressly,
i.e., orally or in writing. The implied conditions are those which are implied by the
law in the absence of any agreement to the contrary. The conditions and warranties
in the contract of sale constitute stipulation with the reference to goods. In the case
of a conflict between the express conditions and the implied conditions, express
conditions shall prevail.
The breach of condition in a contract of sale of goods gives right to cancel the
contract. If the party has suffered from any loss, he can also claim compensation
for the breach of condition. But the breach of warranty in a contract of sale of
goods gives the right to claim the damages only. However, the liability for the implied
conditions and warranties may be excluded by the parties in the following situations:
1. If an express agreement between the parties provides so.
2. If the course of dealings between the parties suggests so.
3. If there is a custom or usages of a particular trade.
According to the Section 13 of Sales of Goods Act, 1930, a breach of condition may
be treated as a breach of warranty in the following circumstances:
1. Where a contract of sale is subject to any condition to be fulfilled by the seller,
the buyer may waive the condition.
2. Where the buyer elects to treat the breach of condition as the breach of a warranty.
3. Where the contract of sale is non-severable and the buyer has accepted the
whole goods or any part thereof.
4. Where the fulfilment of any condition or warranty is excused by law by the
reason of impossibility or otherwise.
NOTES Case law: Rowland bought a second hand car from Divall, a car dealer. After a
few months, the police took the car away as it was a stolen one. The Court observed
that it was a breach of condition as to title as Divall had no right to sell the car. It was
held that Rowland could recover full price of the car from Divall. (Rowland v.
Divall)
If there is breach of a Condition by a seller, the buyer can opt to reject and return the
goods to the seller. In the case, there is a breach of Warranty by the seller, the buyer
can claim damages. When a breach of condition is treated as breach of warranty, NOTES
then the main implication is the availability of the kind remedies that the buyer can
resort to. In the following situations, breach of condition is treated as a breach of
warranty:
a) Option of the buyer: This happens when the buyer instead of putting an end
to the contract, accepts the goods in return for damages from the seller.
b) When the circumstances are such that the goods sold cannot be returned:
This takes please when the buyer has already accepted the goods. According to
Section 42 of the Act, the buyer is deemed to have accepted the goods when he
informs the seller of his acceptance, or the buyer continues to retain them for a
long time without any such indication to the seller.
Condition Warranty
A condition is a stipulation which is essential A warranty is a stipulation which is collateral
to the main purpose of the contract. to the main purpose of the contract.
For the breach of condition, the affected For the breach of warranty, the affected party
party can abandon the contract of sale. can claim damages only.
A breach of condition may be treated as a A breach of warranty cannot be in any way
breach of warranty. This happens if the treated as breach of condition.
affected party decides to claim damages only.
NOTES
10.14.3 Transfer of ownership in the case of goods sale on approval
or on sale or return basis - Section 24
Check your progress The term sale on approval basis may be defined as the sale in which the buyer may
Distinguish between return the goods within a reasonable time. This is also known as sale on return
condition and warranty. basis. It means the buyer has the option either to return or retain the goods. Here,
Define the doctrine of the property in goods does not pass from the seller to the buyer:
caveat emptor.
Discuss the transfer of
ownership of specific
goods.
Example: A certain jewellery was delivered to a buyer on sale or return basis. The
buyer pledged the jewellery. Held, the buyer had adopted the transaction and as
wh
such the property has passed and the seller could not recover the jewellery from the
acc
Pawnee.
Wh
tran
10.15 Delivery of Goods Wh
a) i
Apart from the transfer of property in the goods from the seller to the buyer, a
contract of sale of goods envisages two other important events, the delivery of the
goods to the buyer and the payment of the price to the seller. The delivery of the b) i
goods and payment of the price must be done in accordance with the terms of the
contract. If there are no terms in the contract, then the delivery of goods and payment
of price are concurrent conditions, i.e. both must take place at the same time, for
instance, goods purchased for cash over a shop counter.
Delivery means voluntary transfer of possession of goods from one person to another
[sec. 2(2)]. The rules regarding the delivery of goods are contained in Sec. 33 to
Sec. 39 of the Sale of Goods Act, which may be grouped as under:
10.15.1 Modes of delivery (Section 33)
Delivery of goods may be made in any of the following three ways:
10.15.1.1 Actual delivery
The term actual delivery may be defined as the delivery where the goods are
Business Law 124 handed over by the seller to the buyer or his authorised agent. In other words, when
the goods are physically put in possession of the buyer, the delivery is said to be Sales of Goods Act, 1930
actual.
Example: Amar sold 10 tins of oil to Akbar and delivered the same to him. In this
case, there is an actual delivery of oil from Amar to Akbar.
NOTES
10.15.1.2 Constructive delivery or delivery by attornment
Where a third person (e.g., a bailee) who is in possession of the goods of the seller
at the time of the sale acknowledges to the buyer that he holds the goods on his
behalf, there takes place a delivery by attornment or constructive delivery [sec.36(3)].
This may happen in the following cases:
a) Where the seller in possession of the goods agrees to hold them on behalf of the
buyer.
b) Where the buyer is in possession of the goods and the seller agrees to the
buyers holding the goods as owner.
c) Where a third person in possession of the goods acknowledges to the buyer that
he holds them on his behalf.
Example: A sells to B 10 bags of wheat lying in Cs godown. A gives an order to C,
asking him to transfer the goods to B. C assents to such order and transfer the
goods in his books to B. this is a delivery by attornment.
10.15.1.3 Symbolic delivery
Where the goods are ponderous or bulky and incapable of actual delivery, e.g.,
haystack in a meadow, the delivery may be symbolic. Handing over of the key of a
warehouse to the buyer is symbolic delivery of the goods to the buyer and is as
effective as actual delivery, even though there is no change in the possession of the
goods.
10.15.2 Part delivery of goods - Section 34
The analysis of Sec. 34 reveals that in case of part delivery of the goods, the following
rules shall apply:
Where the part delivery is made in progress of the whole delivery, then it is
treated as a delivery of the whole. The ownership of the whole quantity is
transferred to the buyer
Where the part delivery is made with the intention of separating it from the
whole, it is not treated as a delivery of the whole. The ownership of the whole
quantity is not transferred to the buyer.
10.17.1.2 Rights of unpaid seller against the goods when ownership is not
transferred
Where the ownership is not transferred to the buyer, the seller has the right to
withhold the delivery of goods. In case where the ownership is not transferred to the
buyer, the seller has no other right available to him.
When the seller wrongfully neglects or refuses to deliver the goods to the buyer, the
buyer may sue the seller for damages for non-delivery. This is in addition to the
buyers right to recover the price, if already paid, in case of non-delivery. NOTES
When the goods are sold by one of the several joint owners, the buyer shall get a
better title, if the following conditions are satisfied:
1. The joint owner, who makes the sale, must be in the possession of the goods NOTES
with permission of the other joint owners
2. The buyer should have acted in good faith and without the notice that the seller
had no authority to sell
Example: Ashok and Kumar jointly purchased a car. The car was in the possession
of Ashok with the consent of Kumar. Later on Ashok sold the car to an innocent
purchaser. The purchaser will get a good title.
10.27 Summary
A sale has to be bilateral because the goods have to pass from one person to
another. There must be a buyer and a seller. The seller and the buyer must be
different persons.
The price is the consideration for the contract of sale of goods. If goods are
offered as the consideration for goods, it will not amount to sale.
A Hire purchase agreement is an agreement for hire of goods where the person
who hires the goods has an option to purchase the goods at the end.
When the goods are in possession of the seller at the time the contract is entered
into, they are called existing goods.
Section 2(6) has defined future goods as Future Goods means goods to be
manufactured or produced or acquired by the seller after the making of the
Business Law 135
contract of the sale.
Sales of Goods Act, 1930 The Sale of Goods Act, identifies the terms, Conditions and Warranties as
being of a prime significance in a contract of sale. Both the terms imply a promise
that is made by the seller. However, the difference between Conditions and
Warranties arises due to the nature of the promise that is made in each case.
NOTES
Whenever a product is sold, it is assumed that there are certain Warranties that are
given by the seller. It is a warranty which the law implies into the contract of sale.
The maxim Caveat Emptor means let the buyer beware. In other words, the
buyer must take care of his own interest while purchasing the goods.
The transfer of ownership (or property in legal terminology) is important as it
determines who owns the goods at a particular point during the contract. The sole
purpose of a sale is the transfer of ownership of the goods from seller to buyer.
Apart from the transfer of property in the goods from the seller to the buyer, a
contract of sale of goods envisages two other important events, the delivery of
the goods to the buyer and the payment of the price to the seller.
The seller to whom the full price of the goods sold has not been paid the price is
known as an unpaid seller.
When the ownership of goods is transferred to the buyer, there are three rights
of an unpaid seller. These are: Right of Lien- Sections 47-49, Right of stoppage
in transit- Sections 50-52 and Right of Re-sale.
Section 54 indicates that the unpaid seller has the right of resale. When the
seller uses his right of lien or stoppage in transit, the contract continues to remain
in force and the buyer can claim delivery of goods by paying for the goods.
The right to withhold the delivery of goods means the seller refuses to deliver
the goods to the buyer.
A carrier means a transporter or a bailee to whom the goods are delivered by
the seller for transportation to the buyer.
Auction sale means public sale. The seller invites the interested parties by
advertisement to offer the price (i.e. bid).
9 What are the rules relating to the delivery of the goods in a contract of sale of
goods?
10 Write a short note on an unpaid sellers lien. NOTES
11 What type of remedies are available to the buyer against the seller?
Practical Problems
1. A, a farmer, agrees to sell B, coconuts, provided there is good rain during sea-
son. Is it sale or agreement to sell?
2. A agrees to sell his 100 bags of rice to B at a price to be fixed by C. But C failed
to fix the price. Is it valid contract now?
3. Rajesh bough a second hand car from Mahesh for Rs 1,05,000 and paid for it.
After Rajesh has used the car for six months, he was deprived of it because
Mahesh had no title to it. Can Rajesh recover the price of the car from Mahesh?
Advice Rajesh.
4. A goes to Bs shop and purchases a silk saree, thinking that it is made of Banarsi
Silk. The shopkeeper knows that As thinking is wrong. He, however, does not
correct As impression. Later on, when A discovers that the saree is not made of
Banarsi- silk he wants to avoid the contract. Would A succeed? Give reasons.
5. Ashish sells to Amit a specific horse which is to be delivered to Amit the next
week. Amit is to pay the price on delivery. In the next week, Amit was ready to
pay the price for the horse but Ashish was not in a position to deliver the horse
to Amit. Ashish asks Amit to take delivery of the horse after another week and
pay the price then. During the second week, the horse dies before it is delivered
and paid for. Who shall bear the loss? Explain.
NOTES
Structure
11.0 Introduction NOTES
11.1 Unit Objectives
11.2 Characteristics of a Negotiable Instrument
11.3 Presumptions as to Negotiable Instrument
11.4 Promissory Note- Section 4
11.5 Bill of Exchange- Section 5
11.6 Cheque- Section 6
11.7 Distinction between a Bill of Exchange and a Cheque
11.8 Capacity of a Person to be a Party to a Negotiable Instrument
11.9 Classification of Negotiable Instruments
11.10 Incomplete Instrument or Inchoate Instrument- Section 20
11.11 Maturity of a Negotiable Instrument- Sections 22-25
11.12 Negotiation- Section 14
11.13 Endorsement- Sections 15 and 16
11.14 kinds of Endorsements- Sections 16, 50, 52 and 60
11.15 Negotiation Back
11.16 Distinction between Negotiation and Assignment
11.17 Crossing of Cheque
11.18 Bouncing or Dishonour of Cheques- Section 31 and 138
11.19 Holder- Section 8
11.20 Privileges of a Holder in Due Course
11.21 Payment in Due Course- Section 10
11.22 Protection to Paying Banker- Section 85
11.23 Liability of the Paying Banker and Collecting Banker- Section 129
11.24 When Banker must Refuse to Honour a Customers Cheque
11.25 Banker may Refuse to Honour a Customers Cheque
11.26 Material Alteration
11.27 Acceptance of Bill
11.28 Acceptance for Honour
11.29 Payment for Honour
11.30 Dishonour by Non-Payment
11.31 Discharge of a Negotiable Instrument
11.32 Discharge of a Party
Business Law 139
The Negotiable Instruments Act, 11.33 Key Terms
1881
11.34 Summary
11.35 Questions and Exercise
NOTES 11.36 Further Readings and References
11.0 Introduction
The act was originally drafted in 1866 by the Indian Law Commission and intro-
duced in December 1867 in the Council and it was referred to a Select Committee.
The draft then modified several times and was introduced in the Council and was
passed into law in 1881being the Negotiable Instruments Act, 1881. Subsequent
amendments were then implemented from time to time.The Negotiable Instruments
Act was enacted, in India, in 1881.The Act operates subject to the provisions of
Sections 31 and 32 of the Reserve Bank of India Act, 1934. Section 31 of the
Reserve Bank of India Act provides that no person in India other than the Bank or
as expressly authorised by this Act, the Central Government shall draw, accept,
make or issue any bill of exchange, hundi, promissory note or engagement for the
payment of money payable to bearer on demand. Negotiable instrument means a
promissory note or bill of exchange or cheque payable either to order or to the
bearer. An instrument, the property in which is acquired by anyone, who takes it
bonafide and for value notwithstanding any defect in the title of any prior party is
known as a negotiable instrument.
NOTES Example: Mr. B.I.O.U Rs. 10,000. There is no promise to pay and therefore
this is not a valid promissory note.
3. Must be unconditional: A conditional undertaking destroys the negotiable
character of an otherwise negotiable instrument. Therefore, the promise to pay
must not depend upon the happening of some outside contingency or event. It
must be payable absolutely.
4. Signed by the maker: The person who promises to pay must sign the instru-
ment even though it might have not been written by the promisor himself. There
are no restrictions regarding the form or place of signatures in the instrument. It
may be in any part of the instrument. It may be in pencil or ink, a thumb mark or
initials.
5. Must be certain: The note self must show clearly who the person is agreeing
to undertake the liability to pay the amount. In case a person signs in an as-
sumed name, he is liable as a maker because a maker is taken as certain if from
his description sufficient indication follows about his identity. In case two or
more persons promise to pay, they may bind themselves jointly or jointly and
severally, but their liability cannot be in the alternative.
6. The payee must be certain: The instrument must point out with certainty the
person to whom the promise has been made. The payee may be ascertained by
name or by designation.
7. The promise should be to pay money and money only: Money means legal
tender money and not old and rare coins. A promise to deliver paddy either in
the alternative or in addition to money does not constitute a promissory note.
8. The amount should be certain: One of the important characteristics of a
promissory note is certainty- not only regarding the person to whom or by whom
payment is to be made but also regarding the amount.
Meaning A written document that shows the A document used to make easy
indebtedness of the debtor towards the payments on demand and can
creditor. be transferred through hand
delivery is known as cheque.
Defined in Section 5 of The Negotiable Section 6 of The Negotiable
Instrument Act, 1881 Instrument Act, 1881
Validity Period Not Applicable 3 months
Payable to bearer on Cannot be made payable on demand Always
demand as per RBI Act, 1934
Grace Days 3 days of grace are allowed. Not Applicable, as it is always
payable at the time of
presentment.
Acceptance Bill of exchange needs to be accepted. A cheque does not require
acceptance.
Stamping Must be stamped. No such requirement.
Crossing No Yes
Drawee Person or Bank Bank
Noting or Protesting If a bill of exchange is dishonoured it If the cheque is dishonoured it
can be noted or protested. cannot be noted or protested
Negotiable instrument payable on stated Date on which such event happens+ stated
number of days after happening of a certain number of days + third day
event.
NOTES
C h e q u e s c ro s se d P a y m e n t is m a d e in d u e c o u rs e .
g e n e ra lly
11.24 WhenP a Banker y m e n t is m a d e to a n y b a n k e r.
must Refuse to Honour a
C h e q u e s c ro s se d P a y m e n t is m a d e in d u e c o u rs e .
s p e c iCustomers
a lly Cheque
P a y m e n t is m a d e to th e b a n k e r to w h o m th e c h e q u e
The authority ofi sthe
c ro s se d
banker to honour the customers cheque comes to an end he
must refuse to honour issued by the customer is in the following cases:
1. When customer countermands payment i.e. stop payment.
2. When an order garnishee of court prohibits payment.
3. When the banker receives notice of death of the customer.
4. When the customer has been adjudged as insolvent.
5. When bank receives notice of customers insanity.
6. When the customer has given notice of assignment of funds.
Business Law 155
The Negotiable Instruments Act, 7. When the holders title is defective and the banker comes to know about it.
1881
8. When the customer has given a notice for closing of account.
9. When there is a loss of cheque and the customer has informed the bank.
NOTES 10. Materially altered cheque, cheque of doubtful validity and incomplete cheque.
11. When there is signatures mismatch.
12. When the banker has received an application for closure of account.
13. When there is irregular endorsement.
11.34 Summary
The Negotiable Instruments Act was enacted, in India, in 1881. The Act oper-
ates subject to the provisions of Sections 31 and 32 of the Reserve Bank of
India Act, 1934.
Section 4 of the Act defines, A promissory note is an instrument in writing
(note being a bank-note or a currency note) containing an unconditional under-
taking, signed by the maker, to pay a certain sum of money to or to the order of
a certain person, or to the bearer of the instruments.
According to the Negotiable Instruments Act 1881, a bill of exchange is defined
as an instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay a certain sum of money only to, or to the order
of a certain person or to the bearer of the instrument.
A cheque is a bill of exchange, drawn on a specified banker and it includes the
electronic image of truncated cheque and a cheque in electronic form. The
cheque is always payable on demand.
Every person capable of contracting, according to the law to which he is sub-
ject, may bind himself and be bound by the making, drawing, acceptance, en-
dorsement, delivery and negotiation of a promissory note, bill of exchange or
cheque.
The negotiable instrument, on which time for payment is not specified, is an
instrument payable on demand. The negotiable instrument which is expressed
to be payable on demand is also demand instrument.
Cheques are always payable on demand but other instruments like bills and
notes, may be made payable on specified date or after specified time.
Negotiation of an instrument is the process by which the ownership of an instru-
ment is transferred from one person to another.
The word endorsement in its literal sense means, writing on the back of an
instrument. But under the Negotiable Instruments Act it means, the writing of
ones name on the back of the instrument or any paper attached to it with the
intention of transferring the rights therein.
Negotiation back is a process under which an endorsee comes again into
possession of the instrument in his own right.
A cheque is said to be bounced or dishonoured by non-payment when the drawee
of cheque makes a default in payment in when cheque is presented to him for
payment.
According to Section 8 of Negotiable Instruments Act, holder of a promissory
note, bill of exchange or cheque means any person entitled in his own name to Business Law 163
The Negotiable Instruments Act, the possession thereof and to receive or recover the amount due thereon from
1881
the parties thereto.
The term material alteration indicates alteration or change in the material parts
of the instrument. It may be defined as any change, which alters the very nature
NOTES
of the instrument.
The acceptance of a bill is the indication of courtesy extended by the drawee or
his/her agent towards the order of the drawer.
Discharging of a negotiable instrument means that all the rights of action under
it are completely extinguished and it ceases to be negotiated anymore.
NOTES
Structure
NOTES
12.0 Introduction
12.1 Unit Objectives
12.2 Main Activities of Business
12.3 Characteristics of Company
12.4 Body Corporate
12.5 Lifting of Corporate Veil
12.6 Corporate Veil under Judicial Interpretations
12.7 Illegal Association
12.8 Advantage of Incorporation
12.9 Public Company
12.10 Private Company
12.11 Difference between Public and Private Company
12.12 Limited Liability Company
12.13 Unlimited Liability Company
12.14 Conversion of Private Company into Public Company
12.15 Government Companies
12.16 Foreign Company
12.17 Holding and Subsidiary Company
12.12 Control of Compensation of Board
12.19 Promoter
12.20 Legal Position of Promoter
12.21 Duties of Promoter
12.22 Effects of Pre- Incorporation Contracts
12.23 Steps to Obtain Certificate of Incorporation
12.24 Certificate of Commencement of Business
12.25 One Person Company
12.26 Features of One Person Company
12.27 Key Terms
12.28 Summary
12.29 Questions and Exercise
12.30 Further Readings and References
12.19 Promoter
A person who conceives the idea of forming a company, and actually put it into
existence, can be termed as promoter. As per Section 2(69) of the companies Act,
2013, promoter means the person:
1. Who has been named as such in a prospectus or is identified by the company in
the annual return referred to in Section 92; or
2. Who has control over the affairs of the company, directly or indirectly whether
as a shareholder, director or otherwise; or
3. In accordance with whose advice, directions or instructions the Board of Directors
of the company is accustomed to act.
12.28 Summary
Companies Act 2013 explains about the whole procedure of the how to form a
company, its fees procedure, name, constitution, its members, and the motive
behind the company, its share capital, about its general board meetings,
management and administration of the company including an important part
which is the directors as they are the decision makers and they take all the
important decisions for the company their main responsibility and liabilities about
the company matter the most. The Act explains about the winding of the business
as well and what happens in detail during liquidation period.The basic objectives
underlying the law are:
A minimum standard of good behaviour and business honesty in company
promotion and management.
Due recognition of the legitimate interest of shareholders and creditors and of
the duty of managements not to prejudice to jeopardize those interests.
Provision for greater and effective control over and voice in the management
for shareholders.
A fair and true disclosure of the affairs of companies in their annual published
balance sheet and profit and loss accounts.
Proper standard of accounting and auditing.
Recognition of the rights of shareholders to receive reasonable information and
facilities for exercising an intelligent judgment with reference to the management.
A ceiling on the share of profits payable to managements as remuneration for
services rendered. Business Law: 179
Companies Act, 2013: Types of A check on their transactions where there was a possibility of conflict of duty
Companies and their
Characteristics and interest.
A provision for investigation into the affairs of any company managed in a
manner oppressive to minority of the shareholders or prejudicial to the interest
NOTES
of the company as a whole.
Practical Problems
1. Shiva is a director who has 20 years of professional experience. On the basis, A
Ltd has employed him as a director. Can A Ltd say that the director As experience
is companys experience?
2. English Company was formed for selling tyres in England produced by French
Company. The majority of English companys shares were held by the French
company. The overwhelming majority of shareholders and all directors were
French nationals residing in France. The English company filed suit during world-
War 1 to recover trade debts. Could the company be allowed to proceed with
the action.
3. Mr. Ramesh and his 50 friends carry on business under the name of Ramesh
Ltd., but it was not registered under the companies act, 2013. Is Mr Ramesh
liable under the Act.
4. Q Pvt Co. is s subsidiary of P Co., which is a public company? What is type of
company Y Pvt Co. is?
5. 50% of the paid-up share capital of company A is held by the Central Government
and 11% by Public institutions like the life insurance corporation of India and
the Unit trust of India. Is A Ltd a government Company.
Structure
NOTES
13.0 Introduction
13.1 Unit Objectives
13.2 Defining Memorandum of Association
13.3 Purpose of Memorandum of Association
13.4 Provision related to Printing and Signature of Memorandum
13.5 Contents of the Memorandum of Association
13.6 Provisions for Change in Name Clause of Memorandum
13.7 Procedure to Change Registered Office With in City
13.8 Procedure to Change Registered Office From One City to Another
13.9 Procedure to Change Registered Office From One ROC to Another ROC
Jurisdiction
13.10 Procedure to Change Office From One State to Another
13.11 Procedure for Changing Object Clause of Memorandum
13.12 Alteration of Liability Clause
13.13 Doctrine of Ultra Vires
13.14 Effect of Ultra Vires Transaction
13.15 Articles of Association
13.16 Distinguish Between Memorandum and Articles of Association
13.17 Provisions Related to Printing and Signature of Articles
13.18 Contents of Articles of Association
13.19 Procedure for Alteration of Association
13.20 Limitation to Alteration of Articles
13.21 Binding effect of Memorandum of Articles
13.22 Doctrine of Constructive Notice
13.23 Doctrine of indoor Management
13.24 Exception to Doctrine of Indoor Management
13.25 Prospectus
13.26 Circumstances when the Prospectus is Not Required
13.27 Abridged Prospectus
13.28 Contents of Prospectus
13.29 The reports with Prospectus
13.30 Refusal to Register Prospectus by Registrar
Business Law : 181
Companies Act, 2013: 13.31 Shelf Prospectusand Information Memorandum Section 31
Memorandum, Articles of
Association and Prospectus 13.32 Key Terms
13.33 Summary
NOTES 13.34 Questions and Exercise
13.35 Readings and References
13.0 Introduction
Memorandum is a document in relation to the proposed company containing all the
fundamentals on which the company will be incorporated. It is the charter of the
company. Memorandum of Association and Article of Association serve as the con-
stitution of the company. Memorandum, Articles and Prospectus are the documents
prepared while formation and registration of the company and for raising funds from
the public. These are publicly accessible documents.
If, for any reason a company has been registered with a name which is identical
with or too closely resembles with the name of an existing company. Company shall NOTES
change its name within three months from the receipt of direction from the Central
Government by passing an ordinary resolution. Change of name shall not affect any
rights or obligations of the company or render defective any legal proceedings by or
against it.
NOTES
13.10 Procedure to Change the Registered Office
from One State to Another
If the registered office is to be shifted from one state to another, it can be done by
exercising the following procedures
1. A special resolution should be passed and a copy thereof filed with the registrar
within 15 days in form MGT 14.
2. Application is made to the central government with a copy of the resolution and
the other documents after passing a resolution. The list of creditors is also at-
tached to the application.
3. After making an application to central government, advertise the application in
Form INC 26 in a English newspaper and another advertisement in a regional
daily newspaper should be published at least 14 days prior to the hearing.
4. Send notice to creditors and deposit holders who have the right to raise objec-
tion. If no objection is raised by any person, the central government may order
confirming change in the registered office without a hearing.
5. Confirmation order of the Central Government shall be filed with the Registrar
of companies within 30 days in Form INC 28.
13.24.3 Forgery
The protection under this doctrine shall not be available where the outsiders have
relied upon a forged document, because nothing can validate. A company is not
liable for forgeries committed by its officer. But a company may be held liable for
fraudulent acts of its officers acting under their ostensible authority on its behalf.
13.25 Prospectus
As per Section 2(70), means any document described or issued as prospectus and
includes a red herring prospectus or any notice, circular, advertisement or other
document inviting offers from the public for the subscription or purchase of any
securities of a body corporate.
A document shall be called a Prospectus if it satisfies two conditions:
1. It invites subscription to securities
2. The aforesaid invitation is made to the public.
As per the Companies Act, 2013 prospectus is required to be issued by a public
company when it makes an offer to public to subscribe for securities while public
company do not make public offer, it is not required to prepare prospectus.
6. Where the issue relates to shares or debentures, which are, or to be, uniform in
all respects with shares or debentures previously issued and dealt in or quoted on NOTES
a recognized stock exchange.
13.33 Summary
Prospectus, memorandum and articles are the legal documents required by a
company. Prospectus provides details about the investment offering for sale to
the public. It is filed with the stock exchange and Securities and Exchange
Board of India (SEBI).
Articles along with Memorandum form the companys constitution which de-
fines the responsibilities of the directors, the kind of business to be undertaken,
and means by which shareholders can exert control over the Board of Direc-
tors.
The memorandum confirms that the subscribers wish to form a company under
the Companies Act and agree to become members of the company. In the case
of a company that is to have a share capital, they undertake to receive at least
one share each.
The articles of association set out how the company is run, governed and owned.
The articles can put restrictions on the companys powers which may be use-
ful if shareholders want comfort that the directors will not pursue certain courses
of action, at least without shareholder approval. There are exceptions to the
unlimited powers given to companies.
Charitable companies must state the charitable objects that the company is re-
stricted to and community interest companies must restrict the company to objects
that benefit the community. The articles can be amended. If a company changes
its articles other than to the model articles a copy of the articles should be sent to
Companies House within 15 days of the change for review. A copy of the amend-
ing resolution must also be send within 15 days of being passed. You do not need to
tell Companies House why you are changing the articles of association. Its also
sensible for the board to review the articles on a regular basis.
As the company and its circumstances change, some existing clauses may no
longer be useful or new provisions may be desirable. By reviewing and, where
appropriate, updating the articles of association the company can achieve the
most appropriate balance between the needs of the directors and shareholders,
giving the former the right powers to run the company while protecting the
interests of its members.
Business Law : 199
Companies Act, 2013:
Memorandum, Articles of 13.34 Questions and Exercise
Association and Prospectus
1 Write a short note on the form of the memorandum of association.
2 What are the requirements of the association clause?
NOTES
3 Any act which is ultra-vires to the directors is void comment.
4 What are the content of the article of association?
5 Can a Company alter article of association? If so then how?
6 What are the legal requirements as to the Liability Claus? Can liability of a
member be increased?
7 The power to alter article is wide yet it is subject to large number of limitations
Comment.
8 State the procedure to be followed by a company for change in registered office
from one place to another within same state.
9 What are the legal requirements as to the liability clause? Can liability of a
member be increased?
10 Any act which isultra- vires to the directors is void comment.
11 State the procedure to be followed by a company to shift its registered office
from one state to another state.
12 When registrar of company shall refuse to register the prospectus?
Practical Problems
1. An offer was made by Co. Shree to the members of Co. JK and ACC to
acquire all their shares in these companies in exchange of allotment of shares of
Co. Shree. Whether it could be considered as invitation to public?
2. Newspaper advertisement stated some shares are still available for sale ac-
cording to terms of prospectus of a co., which may be obtained on application.
Whether newspaper can be held as prospectus?
3. The secretary of a company issued a share certificate to A under the companys
seal with his own signature and the signature of a director forged by him. A
borrowed money from B on the strength of this certificate. B wanted to realise
the security and requested the company to register him as a holder of the shares.
Explain, whether B will succeed in getting the share registered in his name.
4. RD Company Ltd. Is registered in Telangana within the jurisdiction of the Reg-
istrar of Companies, Hyderabad. The company proposes to shift its registered
office to a place within the jurisdiction of the Registrar of Companies, Chennai.
State the steps to be taken by the company to give effect to the proposed
shifting of its registered office.
5. The Articles of a public company clearly stated that Mr Anil will be the solicitor
of the company. The company in its general meeting of the shareholders, re-
solved unanimously to appoint Sunil in place of Anil as the solicitor of the com-
pany by altering the Articles of Association. Examine whether company can do
Business Law : 200 so? State the reasons clearly.
Companies Act, 2013:
13.35 Further Readings and References Memorandum, Articles of
Association and Prospectus
Books
1. Sheth, T., Business Law, 2nd ed. Pearson India Education Services Pvt. Limited.
NOTES
2. Kuchhal. M.C. & Prakash, D., 3rd ed. Business Legislation for Manage-
ment, Vikas Publishing House Pvt. Limited.
NOTES
14.0 Introduction
Share capital is the most common way of determining the ownership of a company.
In relation to a company limited by share capital, the share capital will be issued to
the shareholders when the company is first set up. However, further share capital
can be issued at a later date if necessary.
Authorized share capital can be defined as the largest amount of share capital that
a company can issue. This amount will be agreed on when the company is being
incorporated.
It should also be noted that the authorized share capital can be divided into different
share classes such as preferable or redeemable, each of which are subject to different
rights.
Shares were developed as a means of allowing a group of people to invest in a
business project by buying shares of it. To be an attractive investment, the shares
had to be transferable, so that the investor could sell the shares to retrieve their
value. So shares are presumed to be capable of transfer, even in a private company,
unless the company has restricted the right to transfer them by a provision in its
articles, or the shareholder has entered into a contract, such as a shareholders
agreement, not to transfer the shares.
14.6.1 Procedure
If the company fulfils the conditions as above, it is required to convey general meeting
and pass an ordinary resolution approving the issue of differential equity. In case of
listed company the resolution must be approved by a postal ballot.
14.14 Brokerage
A commission payable to broker who induce their clients to subscribe for the shares
or debentures is termed as brokerage. A broker does not undertake to subscribe for
shares if the shares are not taken up by the public.
Brokerage payable must be stated in the prospectus. All sums paid on account of
commission or brokerage must be disclosed in the balance sheet.
Business Law: 210
Companies Act, 2013: Share
14.15 Reduction of Share Capital Section 66 Capital and Transfer of Shares
NOTES
14.23 Bonus Shares - Section 63
When large amount of reserves are accumulated with the company and the company
decides to distribute these past undistributed profits among the shareholders, it may
decide to issue shares free of cost to existing shareholders. such issue of shares is
known as bonus share. Bonus shares are issued to the members in proportion to
their existing shareholding.
Bonus shares can be issued only where there is a provision to this effect in the
Articles of the company. If the articles do not contain such provisions, the company
must pass a special resolution in the general meeting of the shareholders and make
such a provision.
14.29.4 Notice
The notice of meeting where special resolution is proposed to be passed shall be
accompanied by a explanatory statement stating and containing the following details:
1. A full and complete disclosure of all material facts.
2. The necessity of the buy -back
3. The class of security intended to be purchased under the buy-back.
4. The time limit for completion of buy-back.
5. The price at which buy back of shares shall be made.
Business Law: 215
Companies Act, 2013: Share
Capital and Transfer of Shares
14.29.5 Time limit
Every buy-back shall be completed within one year of the date of passing the special
resolution as above.
NOTES
14.29.6 Buy-back shall be permissible
The company can buy back shares from the existing shareholders on a proportionate
basis through a tender offer or from open market through book-building process.
The company may buy-back shares from odd-lot holders or securities issued to
employees of the company pursuant to a scheme of stock option or sweat equity.
14.30 Member
Section 2(27) states that a member is the subscriber to the memorandum of the
company who shall be deemed to have agreed to become the member of the
company; and on its registration; shall be entered as member in its register.
When a director agrees to take qualification shares, such director is in the same If shares are issued by
position as if he has signed the memorandum of company for those shares of that the company to its exist-
number of value. Thus, he become a member of the company and will be liable in ing shareholders free of
respect of those qualifications shares. cost is known as?
14.31.3 Government
The Government of India can become a member and shares are held in name of the
President of India. Similarly, a state government can hold in the name of Governor.
14.31.5 Other
A Hindu undivided family (HUF) cannot be a member of a company. A trust is not
a Legal person and therefore cannot be member of a company. A trade union can
be member of a company.
14.40 Debentures
Section 2 (30) of the Companies Act, 2013 define inclusively debenture as
debenture includes debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the assets of the company or
not.
Debenture does not become share capital it is not a stock.
Practical Problems
1. A private limited company issued a certain number of shares as fully paid to a
subscriber to the memorandum on the basis of a promissory note executed by
him as consideration towards the shares. Since no money was paid towards the
allotment, the company after five years from the date of allotment wants to
forfeit those shares and re-issue. Can the company do so?
2. ABC Company goes for public issue of each share of face value Rs. 10. The application
money is Rs. 2, allotment Rs. 3, first call Rs. 4, final call Rs. 1. Is this valid?
3. XYZ Company goes for a public issue application called for on 1st April 2013.
The allotment was made on 1st may 2013, the first call was on 1st June 2013, and
2nd call on 15th June 2013. Can the company do so?
4. ACC Company Ltd. Desirous of buying back of all its equity shares from the
existing shareholders of the Company, seeks your advice. Examining the
provisions of the Companies Act, 2013, advice whether the above buy-back of
equity shares by the company is possible. Also state the sources out of which
buy-back of shares can be financed.
5. Are the following grounds reasonable for refusal to transfer shares in a private
company?
1. Where transferee is a person whose activities are against the interest of
the company.
2. The transferee had applied in the past for winding up of the company.
3. The transferee belongs to a rival concern.
4. Where the transferor is indebted to the company and the article gives
authority to the board to refuse the transfers made by an indebted member
5. The proposed transfer was done without any consideration
NOTES
15.0 Introduction
A meeting may be generally defined as a gathering or assembly or getting together
of a number of persons for transacting any lawful business. There must be at least
two persons to constitute a meeting. Therefore, one shareholder usually cannot
constitute a company meeting even if he holds proxies for other shareholders.
However, in certain exceptional circumstances, even one person may constitute a
meeting.
It is to be noted that every gathering or assembly does not constitute a meeting.
Company meetings must be convened and held in perfect compliance with the various
provisions of the Companies Act, 2013 and the rules framed thereunder. A Company
is composed of members, though it has its own entity distinct from members. The
members of a company are the persons who, for the time being, constitute the
company, as a corporate entity. However, a company, being an artificial person,
cannot act on its own. It, therefore, expresses its will or takes its decisions through
resolutions passed at validly held meetings. The primary purpose of a meeting is to
ensure that a company gives reasonable and fair opportunity to those entitled to
participate in the meeting to take decisions as per the prescribed procedures.
3. Meetings of creditors:
For purpose other than winding up, and
For winding up.
15.3.3 Chairman
The meeting must be legally constituted. There must be a chairperson. It is not
possible to convene a meeting if the chairperson is not present at the time of meeting.
15.3.4 Quorum
Quorum stands for the minimum number of members to be present at the meeting
to discuss the subject matter at the meeting. The rule of quorum must be maintained
and the provisions of the companies act, 2013 and the articles must be complied
with. If the meeting is convened without quorum, the meeting will be invalid.
15.43 Summary
A meeting must be properly convened. The persons calling the meeting must be
authorised to do so. If the meeting is called by the person who does not have
authority, meeting is said to be invalid.
A notice calling a General meeting has to be in writing and to be given at least
21 Clear Days before the meeting date.
Section 96 provides that every company, other than a one person company
isrequired to hold an annual general meeting every year.
In terms of section 121(1) every listed public company required to prepare a
report on each annual general meeting including the confirmation to the effect
that the meeting was convened, held and conducted as per the provisions of the
Act and the rules made thereunder.
Appointment of a proxy is an important right of a member of the company. The
Act contains elaborate provisions regarding exercise of this right by a member.
The proxy can be revoked by the member at any time, and is automatically
revoked by the death or insolvency of the member.
In the Private Company, 2 members personally present, shall be the quorum for
a meeting of the company.
For fair conduct of a meeting, a person is required to chair the meeting. The
chairman of the board of directors generally chairs all the meetings.
The chairman has to ensure that proper and correct minutes are prepared and
signed within the time specified in the Act.
A company issuing debentures may provide for the holding of meetings of the
debenture holders. At such meetings, generally matters pertaining to the variation
in terms of security or to alteration of their rights are discussed.
Adjournment means suspending the proceeding of a meeting for the time being
so that the meeting may be continued at a later date and time fixed in that Business Law : 251
Companies Act, 2013: Meeting meeting itself at the time of such adjournment or decided later on.
and Power of Board
Company being an artificial entity, has to act through natural persons and they
are named as directors and collectively as board of directors.
NOTES The Act requires that not less than seven days notice in writing shall be given to
every director at the registered address as available with the company. The
notice can be given by hand delivery or by post or by electronic means.
Practical Problems
1. ABC co., incorporated on 1st January 2014. The AGM should be held on 1st July
2015. The ROC extended that time to 1st September 2015. Is the AGM valid?
2. ABC is a company conducting an AGM. There are three members personally
present and one member present in his individual capacity and as a representative
of a body corporate. State whether the AGM is valid.
3. In case alteration of AOA to deletion or insertion of provisions defining private
company is passed by resolution through postal ballot, is it as per the provisions
of Companies Act, 2013?
4. The board of directors of ABC Ltd met three times in the year 2015 and the
fourth meeting, though called, could not be held for want of quorum. Examine
reference to the relevant provisions of the Companies Act, 2013, whether any
provisions of the Companies Act, 2013 have been contravened.
Books
1. Sheth, T., Business Law, 2nd ed. Pearson India Education Services Pvt. Limited. NOTES
2. Kuchhal. M.C. & Prakash, D., 3rd ed. Business Legislation for Management,
Vikas Publishing House Pvt. Limited.
NOTES
16.11.3 Tenure
Section 149(10) provides that subject to the provisions of section 152(Appointment
of Directors), an independent director shall hold office for a term up to five consecutive
years on the board of a company, but shall be eligible for reappointment on passing
of a special resolution by the company and disclosure of such appointment in the
boards report. Section 149(11) states that without contravening the section 149(10),
no independent director shall hold office for more than two consecutive terms, but
such independent director shall be eligible for appointment after the expiration of
three years of ceasing to become an independent director. Proviso to Section 149(11)
that an independent director shall not, during the said period of three years, be
appointed in or be associated with the company in any other capacity, either directly
or indirectly.
16.19.1 Exception
In the following cases, however, the general meeting of shareholders is competent
to intervene and act in respect of a matter delegated to the board of directors.
16.22.1 Penalty
The contravention of provisions of Section 185 leads to punishment with fine which
shall not be less than five lakh rupees but which may extend to twenty five lakh
rupees. The director or to whom loan or advance is given or guarantee or security is
given or provided shall be imprisonment which may extend to six months or with fine
mentioned above or with both. Business Law: 271
Companies Act, 2013:
Management of Company 16.23 Managing Director - Section 2 (54)
Section 2(54) of the Companies Act, 2013, defines managing director. It stipulates
that a managing director means a director who, by virtue of the articles of a
NOTES company or an agreement with the company or a resolution passed in its general
meeting, or by its Board of Directors, is entrusted with substantial powers of
management of the affairs of the company and includes a director occupying the
position of managing director, by whatever name called.
The explanation to section 2(54) excludes administrative acts of a routine
nature when so authorised by the Board such as the power to affix the common seal
of the company to any document or to draw and endorse any cheque on the account
of the company in any bank or to draw and endorse any negotiable instrument or to
sign any certificate of share or to direct registration of transfer of any share, from
the substantial powers of management.
NOTES
16.27 Managerial Remuneration
The term managerial remuneration is not defined under Companies Act, 2013. It
means remuneration paid to the person holding managerial position. Managing
directors, whole-time directors, directors and managers hold managerial positions.
Managerial remuneration includes any form of payment made or expenditure incurred
by the company. It may be paid in any of following forms:
1. Monthly payments (salary)
2. Specified percentage of net profits
3. Commission
Remuneration includes any expenditure incurred by company:
1. in providing any rent- free accommodation, or any other benefit in respect of
accommodation free of charge.
2. In providing any other benefit or amenity free of charge or at a concessional
rate.
3. To effect any insurance on the life of, or to provide any pension, annuity and
gratuity.
If sitting fees is paid to the whole-time director or managing director, then it is also
included in the managerial remuneration.
NOTES
16.28 Methods of Determination of Remuneration
The company may determine managerial remuneration payable to its managing
director or whole- time director or manager in any of the following ways:
1. By article of association of company
2. By passing an ordinary resolution
3. By passing special resolution, if the article provides so.
The board has no power to fix the remuneration unless authorised by shareholders
at a general meeting or as per the provisions of the article.
NOTES
16.30 Key Terms
Insolvent: Insolvency is when an organization, or individual, can no longer Check your progress
meet its financial obligations with its lender or lenders as debts become due. What do you mean by
related party transactions?
Shareholders: A shareholder is any person, company or other institution that Define the managing
owns at least one share of a companys stock. Because shareholders are a director.
companys owners, they reap the benefits of the companys successes in the Discuss the methods to
form of increased stock valuation. determine the managerial
remuneration.
Additional directors: The articles of a company may confer on its Board of
Directors the power to appoint any person, other than a person who fails to get
appointed as a director in a general meeting, as an additional director at any time
who shall hold office up to the date of the next annual general meeting or the last
date on which the annual general meeting should have been held, whichever is
earlier.
One Person Company: One Person Company means a company which has
only one member. It shall also be important to note that Section 3 classifies
OPC as a Private Company for all the legal purposes with only one member.
All the provisions related to the private company are applicable to an OPC,
unless otherwise expressly excluded.
Ordinary resolution: In business or commercial law in certain common law
jurisdictions, an ordinary resolution is a resolution passed by the shareholders of
a company by a simple or bare majority (for example more than 50% of the
vote) either at a convened meeting of shareholders or by circulating
a resolution for signature.
Value Added Tax: A tax on the amount by which the value of an article has
been increased at each stage of its production or distribution.
Service tax: Service tax is a tax levied by the government on service providers on
certain service transactions, but is actually borne by the customers. It is categorized
under Indirect Tax and came into existence under the Finance Act, 1994.
Preference shares: A share which entitles the holder to a fixed dividend, whose
payment takes priority over that of ordinary share dividends.
16.31 Summary
To attain the objectives prescribed in Memorandum of Association of the
company, company depends on Board of Directors. Directors of a company are
its eyes, ears, brain, hands and other essential limbs.
Every public company shall have at least 3 directors and every private company
shall have at least 2 directors and every one person company shall have atleast
1 director under section 149. Business Law: 275
Companies Act, 2013:
Directors are trustees for the company i.e. the directors are persons selected to
Management of Company
manage the affairs of the company for the benefit of the shareholders.
Section 164 lays down disqualifications of directors. Also individually only can
NOTES be a director under section 152 of the Act.
Maximum Number of Director is 15, which can be increased by passing a
special Resolution.
Certain prescribed class or classes of companies is required to have at least one
woman director. This is a mandatory provision.
Every company including one person company shall have at least on director who
stays in India for a period of not less than 180 days in the previous calendar year.
Maximum limit on total number of directorship has been fixed at 20 companies
including sub limit of 10 for public companies.
The members of a company may, by special resolution, specify any lesser number
of companies in which a director of the company may act as director.
A director may be removed from the office by giving a special notice.
A director may resign his office in the manner provided by the articles.
Any officer or employee of a company shall be punishable with the fine on the
complaint of the company or any creditor or contributory thereof, if he wrongfully
obtains possession or withholds any property of the company.
The overall limit on managerial remuneration shall not exceed 11% of the net
profits.
The remuneration payable to any one managing director or whole-time director
or manager shall not exceed 5% of the net profits.
If there is more than one such director, remuneration shall not exceed 10% of
the net profits of the company.
Books
1. Sheth, T., Business Law, 2nd ed. Pearson India Education Services Pvt. Limited.
NOTES
2. Kuchhal. M.C. & Prakash, D., 3rd ed. Business Legislation for Management,
Vikas Publishing House Pvt. Limited.
NOTES
17.0 Introduction
In regulatory jurisdictions that provide for this consumer protection is a group of
laws and organizations designed to ensure the rights of consumers, as well as fair
trade, competition, and accurate information in the marketplace. The laws are
designed to prevent the businesses that engage in fraud or specified unfair practices
from gaining an advantage over competitors. They may also provide additional
protection for those most vulnerable in society. Consumer protection laws are a
form of government regulation that aim to protect the rights of consumers. Consumer
protection is linked to the idea of consumer rights, and to the formation of consumer
organizations, which help consumers make better choices in the market place and
get help with consumer complaints. In order to protect the consumers from exploitation
and to save them from adulterated and substandard goods and deficient services the
Consumer Protection Act came into force on 15th April, 1986.
The new Consumer Protection Bill, 2015 (Bill) replaces The Consumer
Protection Act, 1986 (Consumer Protection Act), which was introduced on the
floors of the Lok Sabha in 2015 by the Minister of Consumer Affairs, Food and
Business Law : 279
Public Distribution, Mr. Ram Vilas Paswan.The three decades old Consumer
Consumer Protection Act, 2015
Protection Act (in its present form) is an inefficient piece of legislation not keeping
pace with the new market dynamics, multi-layered delivery chains, innovative (and
many times misleading) advertising and marketing machinery. It was in this backdrop
that the new Bill has been introduced to equip the consumers to protect their rights
NOTES
against unfair trade practices. The new Bill intends to narrow some of the gaps with
regard to protection of consumer rights including the time taken in settling disputes,
an ability to reach to the manufactures for product liability (to cover situations such
as the recent Maggi fiasco), curbing misleading advertisements etc.
17.5 Complaint
Complaint means any allegation in writing made by a complainant that:
1. an unfair trade practice or a restrictive trade practice has been adopted by any
trader or service provider;
2. the goods bought by him or agreed to be bought by him suffer from one or more
defects;
3. the services hired or availed of or agreed to be hired or availed of by him suffer
from deficiency in any respect;
4. a trader or the service provider, as the case may be, has charged for the goods
or for the services mentioned in the complaint, a price in excess of the price-
a. fixed by or under any law for the time being in force;
b. displayed on the goods or any package containing such goods;
Business Law : 282
c. displayed on the price list exhibited by him by or under any law for the time Consumer Protection Act, 2015
being in force;
d. agreed between the parties;
5. goods, which will be hazardous to life and safety when used, are being offered NOTES
for sale to the public-
a. in contravention of any standard relating to safety of such goods as required
to be complied with, by or under any law for the time being in force;
b. if the trader could have known with due diligence that the goods so offered
are unsafe to the public;
6. services which are hazardous or likely to be hazardous to life and safety of the
public when used, are being offered by the service provider which such person
could have known with due diligence to be injurious to life and safety;
7. he has suffered a loss due to an unfair contract entered into by him,with a view
to obtaining any relief provided by or under this Act.
17.8 Defect
Defect means any fault, imperfection or shortcoming in the quality, quantity, potency,
purity or standard which is required to be maintained by or under any law for the
time being in force or under any contract, express or implied or as is claimed by the
trader in any manner whatsoever in relation to any goods and the expression
defective shall be construed accordingly.
17.9 Deficiency
Deficiency means-
1. any fault, imperfection, shortcoming or inadequacy in the quality, nature and
manner of performance which is required to be maintained by or under any law
for the time being in force or has been undertaken to be performed by a person
in pursuance of a contract or otherwise in relation to any service;
2. any act of omission or commission which causes any damage to the consumer
on account of negligence or consciously withholding of relevant information by
any person to the consumer, and the expression deficient shall be construed
accordingly;
Business Law : 284
Consumer Protection Act, 2015
17.10 Manufacturer
Manufacturer means a person who
1. makes or manufactures any goods or parts thereof; or
NOTES
2. does not make or manufacture any goods but assembles parts thereof made or
manufactured by others; or
3. puts or causes to be put his own mark on any goods made or manufactured by
any other manufacturer; or
4. in the course of business conducted for that purpose, sells, distributes, leases,
installs, prepares, packages, labels, markets, repairs, maintains, or otherwise is
involved in placing a product for commercial purposes; but does not include-
a. any person who is engaged in a business to design, produce, make, fabricate,
construct, or re-manufacture any product (or component part of a product); or
b. any product seller holding itself out as a manufacturer to the user of the product;
except that any product seller who acts primarily as a wholesaler, distributor, or
retailer of products may be a manufacturer with respect to a given product to
the extent that such seller designs, produces, makes, fabricates, constructs, or
re-manufactures the product before its sale.
17.11 Trader
Trader, in relation to any goods, means a person who sells or distributes any goods
for sale and includes the manufacturer thereof, and where such goods are sold or
distributed in package form, includes the packer thereof.
17.16 Summary
According to this right to safety the consumers have the right to be protected
against the marketing of goods and services which are hazardous to life and
property, this right is important for safe and secure life.
Business Law : 292
Unfair trade practice means a trade practice which, for the purpose of Consumer Protection Act, 2015
promoting the sale, use or supply of any goods or for the provision of any service,
adopts any unfair method or unfair or deceptive practice.
Restrictive trade practice means a trade practice which tends to bring about
NOTES
manipulation of price or its conditions of delivery or to affect flow of supplies in
the market relating to goods or services in such a manner as to impose on the
consumers unjustified costs or restrictions.
Trader, in relation to any goods, means a person who sells or distributes any
goods for sale and includes the manufacturer thereof, and where such goods
are sold or distributed in package form, includes the packer thereof.
Consumer dispute means a dispute where the person against whom a complaint
has been made, denies or disputes the allegations contained in the complaint.
According to Section 9, there shall be established for the purposes of this Act,
the following agencies, namely:
A District Consumer Grievance Redressal Commission to be known as the
District Commission established by the State Government in each district of
the State by notification: Provided that the State Government may, if it deems
fit, establish more than one District Commission in a district.
A State Consumer Disputes Redressal Commission to be known as the State
Commission established by the State Government in the State by notification;
and
A National Consumer Disputes Redressal Commission to be known as the
National Commission established by the Central Government by notification.
The President and Members of the District Commission shall be appointed by
the State Government on the recommendation of the State Public Service
Commission in such manner as may be prescribed.
18.0 Introduction
Limited Liability Partnership (LLP) is an incorporated partnership formed and
Business Law : 295
registered under the Limited Liability Partnership Act 2008 with limited liability and
Limited Liability Partnership perpetual succession. The Act came into force, for most part, on 31st March 2009
Act, 2008 followed by its Rules on 1st April 2009 and the registration of the first LLP on 2nd
April 2009. LLP is viewed as an alternative corporate business vehicle that provides
the benefits of limited liability but allows its partners the flexibility of organizing their
NOTES internal structure as a partnership based on a mutually arrived agreement. The LLP
form would enable entrepreneurs, professionals and enterprises providing services
of any kind or engaged in scientific and technical disciplines, to form commercially
efficient vehicles suited to their requirements. Owing to flexibility in its structure and
operation, the LLP would also be a suitable vehicle for small and medium enterprises
and for investment by venture capitalists.
Share Certificate There are no provisions for issuing There are no provisions for
of Share Certificate. Rights/ issuing of Share Certificate.
Interest of the Partners in the firm Rights/ Interest of the Partners in
are evidenced by Partnership deed, the LLP are evidenced by
if any. Partnership agreement.
Jurisdiction of CLB has no jurisdiction CLB has jurisdiction over the
Company Law affairs of the LLP
Board (CLB)
Nature Partnership is a relation between A LLP is a body corporate
Business Law : 298
Category Partnership LLP Limited Liability Partnership
Board (CLB) Act, 2008
Nature Partnership is a relation between A LLP is a body corporate
persons who have agreed to share formed and incorporated under
NOTES
the profits of business carried on this act and which has legal
by all or any of them acting for all entity separate from that of its
with unlimited liability. partners, having perpetual
succession and liability of its
partner shall be limited.
Perpetual
It has perpetual succession. It has perpetual succession.
succession
Time line It will take approx. 15 days to It will take approx. 20 days to
incorporate ( inclusive of time incorporate ( inclusive of time
taken to obtain DIN) taken to obtain DPIN)
Filing of Annual Balance Sheet and Profit and loss Statement of accounts and
Accounts account are required to be filed solvency are required to be filed
with the ROC annually in the with registrar of LLP annually
Business Law : 300
prescribed format in the prescribed format.
Limited Liability Partnership
Category Company LLP
Act, 2008
Audit of Accounts As per the provisions of As per the provisions of LLP
companies Act, 2013 accounts act, accounts to be audited NOTES
have to be audited annually annually except for LLPs
having turnover less than Rs. 40
lacs or Rs. 25 lacs contribution
in any financial year.
Section 7 provides that every limited liability partnership shall have at least two
designated partners who are individuals and at least one of them shall be a resident
in India. Provided that in case of a limited liability partnership in which all the partners
are body corporates, at least two partners shall nominate their respective individuals
who are to act as designated partners and one of the nominees shall be a resident
of India.
Every designated partner of a limited liability partnership shall obtain a Designated
Partner Identification Number (DPIN) from the Central Government and the
provisions of Sections 266A to 266G (both inclusive) of the Companies Act, 1956
shall apply mutatis mutandis for the said purpose.
The Central Government, vide Notification No. GSR 506(E) dated 5th July, 2011,
notified Limited Liability Partnership (amendment) Rules, 2011 whereby it has
integrated the Directors Identification Number (DIN) issued under Companies Act,
1956 with Designated Partnership Identification Number (DPIN) issued under
Limited Liability Partnership (LLP) Act, 2008 with effect from 9.7.2011.
Pursuant to aforesaid notification
With effect from 9.7.2011, no fresh DPIN will be issued. Any person, who
desires to become a designated partner in a Limited Liability Partnership, has
to obtain DIN by filing e-form DIN-1.
If a person has been allotted DIN, the said DIN shall also be used as DPIN for
all purposes under Limited Liability Partnership Act, 2008.
If a person has been allotted DPIN, the said DPIN will also be used as DIN for
all the purposes under Companies Act, 1956.
If a person has been allotted both DIN and DPIN, his DPIN will stand cancelled
and his DIN will be used as DIN as well as DPIN for all purposes under
Limited Liability Partnership Act, 2008 and Companies Act, 1956. Every
designated partner, shall intimate his consent to become a designated partner to
the limited liability partnership and DPIN, in Form 9 and the LLP shall intimate
such DPIN to Registrar in Form 4.
Any approval, permit or license issued under any other Act. etc.
In case of firm, every partner of a firm which is converted into an LLP shall continue
to be personally liable (jointly and severally with the LLP), for the liabilities and
obligation of the firm incurred prior to the conversion or which arose from any
contract entered into prior to the conversion. In case any such partner discharges
any such liability or obligation he shall be entitled (subject to any agreement with the
LLP through the contrary) to the fully indemnified by the LLP in respective of such
liability or obligation.
For a period of 12 months commencing on or before 14 days from the date of
registration, the LLP shall insured that every official correspondence of the LLP
bears the following:
A statement that it was, as from the date of registration. converted from a firm
or private limited company or unlisted public company into a LLP; and
the name and registration number. If applicable, of the firm or private limited
company or unlisted public company from which it was converted.
NOTES e- Form 3 (Details of LLP Agreement: This form provides for the necessary
information in respect to the LLP agreement entered into between the partners.
e- Form 4 (Consent of Partners):Consent of each partner to become a partner
of Limited Liability Partnership to be filed with the Registrar of LLP.
Business Law : 318 5 Can a LLP has less than two partners?
6 What are the major duties of a designated partner? Limited Liability Partnership
7 Write short note on whistle blowing. Act, 2008
Practical Problems
1. Five persons who are willing to incorporate excel LLP have prepared its LLP
agreement which suggest that each partner will be designated partner. Is it as
per LLP Act?
2. Oasis water products LLP is an already registered LLP. Can businessmen with
intent to start a distilled water business, register LLP with the name Oasis
water India LLP?
3. Mr. P, Mr. Q, Mr. R and Mr. S are partners of an LLP. Mr. P and Mr. Q are
designated partners. The LLP agreement provides that Mr. P has double the
voting right as compared to Mr. Q and Mr. R while Mr. S has no voting right.
Decide the validity of the agreement.