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UNIT – I
Elements of Law Relating to Contract under Indian Contract Act, 1872
5. Lawful object:
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. For
Example: Threat to commit murder or making/publishing defamatory statements or entering into
agreements which are opposed to public policy are illegal in nature.
Types of Contracts:
The following are the main types of contracts:
1. Void Contract
A void contract is one which cannot be enforced by a court of law. As per Section 2 (j) “A
contract which ceases to be enforceable by law becomes void”. For example, a contract becomes
void when any of the following happens:
a. Where both parties to an agreement are under a mistake of fact [Section 20]
b. When the consideration or object of an agreement is unlawful [Section 23],
c. An agreement without consideration [Section 25],
d. An agreement in restraint of marriage [Section 26], trade [Section 27], legal
proceedings [Section 28] and agreement by way of wager [Section 30] are instances of
void contract.
2. Voidable Contract
A voidable contract is one where one of the parties to the agreement is in a position or is legally
entitled or authorized to avoid performing his part. Such a right might arise from the fact that the
contract may have been brought about by one of the parties by coercion, undue influence, fraud
or misrepresentation and hence the other party has a right to treat it as a voidable contract.
Section 2[i] defines a voidable agreement which is enforceable by law at the option of one or
more parties but not at the option of the other or others.
3. Illegal Contracts
Illegal contracts are those that are forbidden by law. All illegal contracts are hence void also.
Because of the illegality of their nature they cannot be enforced by any court of law. Thus,
contracts which are opposed to public policy or immoral are illegal. Similarly contracts to
commit crime like supari contracts are illegal contracts.
4. Express Contracts
A contract would be an express contract if the terms are expressed by words or in writing.
Section 9 of the Act provides that if a proposal or acceptance of any promise is made in words
the promise is said to be express.
5. Implied Contracts
Implied contracts come into existence by implication which is mostly by law and or by action.
Section 9 of the Act contemplates such implied contracts when it lays down that in so far as such
proposal or acceptance is made otherwise than in words, the promise is said to be implied. For
instance ‘A’ delivers goods by mistake at the warehouse of ‘B’ instead of that of ‘C’. Here ‘B’
not being entitled to receive the goods is obliged to return the goods to ‘A’ although there was no
such contract to that effect.
6. Tacit Contracts
Tacit contracts are those that are inferred through the conduct of parties. An example of tacit
contract is where a contract is assumed to have been entered when a sale is given effect to at the
fall of hammer in an auction sale.
7. Executed Contract
The consideration in a given contract could be an act or forbearance. When the act is done or
executed or the forbearance is brought on record, then the contract is an executed contract.
8. Executory Contract
In an executory contract, the consideration is reciprocal promise or obligation. Such
consideration is to be performed in future only and therefore these contracts are described as
executory contracts.
9. Unilateral Contract
Unilateral contracts is a one sided contract in which only one party has to perform his duty or
obligation.
Performance of Contracts
Performance by all the parties of the respective obligations is the natural and normal mode of
termination or discharging of a contract. Section 37 of the Contract Act, states that the parties to
a contract must either perform or offer to perform their respective promise under the contract. In
case of performance involving personal skill, taste, credit etc., the promisor himself must
perform the contract. In case of contract of impersonal nature, the promisor himself or his agent
must perform the contract, but in case of death of the promisor before the performance, the
liability of performance falls on his legal representative. Section 41 states that if the promisee
accepts the performance of the promise from a third party, he cannot afterwards enforce it
against the promisor.
Termination of Agency
Section 201 provides the circumstances under which an agency can be terminated. According to
this, an agency is terminated by the principal revoking his authority, or by the agent renouncing
the business of the agency being completed, or by either the principal or the agent dying or
becoming of unsound mind, or by the principal being adjudicated an insolvent.
Finder of lost goods and his position
In terms of Section 71 ‘A person who finds goods belonging to another and takes them into his
custody is subject to same responsibility as if he were a bailee’.
Thus a finder of lost goods has:
I. To take proper care of the property as men of ordinary prudence would take
II. No right to appropriate the goods and
III. To restore the goods if the owner is found.
Rights and Duties of Finder of Goods
A ‘finder of lost goods’ is as good as a bailee and he enjoys all the rights and carries all the
responsibilities of a bailee.
The bailee has the following rights:
I. To claim compensation for any loss arising from non-disclosure of known defects in the
goods.
II. To claim indemnification for any loss or damage as a result of defective title.
III. To deliver back the goods to joint bailers according to the agreement or directions
IV. To deliver the goods back to the bailor whether or not the bailor has the right to the --
goods
V. To exercise his ‘right of lien’. This right of lien is a right to retain the goods and is
exercisable where charges due in respect of goods retained have not been paid. The right
of lien is a particular lien for the reason that the bailee can retain only these goods for
which the bailee has to receive his fees/remuneration.
VI. To take action against third parties if that party wrongfully denies the bailee of his right
to use the goods.
Apart from the above, the ‘finder of lost goods’ can ask for reimbursement for expenditure
incurred for preserving the goods but also for searching the true owner. If the real owner refuses
to pay compensation, the ‘finder’ cannot sue but retain the goods so found. Further where the
real owner has announced any reward, the finder is entitled to receive the reward. The right to
collect the reward is a primary and a superior right even more than the right to seek
reimbursement of expenditure. Lastly the finder though has no right to sell the goods found in
the normal course, he may sell the goods if the real owner cannot be found with reasonable
efforts or if the owner refuses to pay the lawful charges subject to the following conditions.
a. When the article is in danger of perishing and losing the greater part of the value or
b. When the lawful charges of the finder amounts to two-third or more of the value of the
article found.
UNIT – II
Elements of Law Relating to Sale of Goods under Sale of Goods Act, 1930
In India, the law relating to negotiable instruments is contained in the Negotiable Instruments
Act, 1881. It deals with Promissory Notes, Bills of Exchange and Cheques, the three kinds of
negotiable instruments in most common use. The Act applies to the whole of India and to all
persons resident in India, whether foreigners or Indians. The act also applies to ‘hundis’, other
documents such as treasury bills, dividend warrants, bearer debentures, etc. These instruments
are also recognised as negotiable instruments, either by mercantile customs or under other act
like the Companies Act, 1956.
Crossing of Cheques
Cheques may be open cheques or crossed cheques. An open cheque is one that is payable across
the counter of a bank. Crossing helps in preventing any probable loss that may occur, in the
event of an open cheque getting into the hands of a wrong person. Crossing is a unique feature
associated with a cheque that affects a certain obligation of the paying banker and also its
negotiable character. Crossing of a cheque is effected by drawing two parallel transverse lines
with or without the words ‘and company’ or any abbreviation. If a cheque bears across its face
and addition of the words ‘and company’ or any abbreviation between two parallel transverse
lines or transverse lines simply, either with or without the words ‘not negotiable’ that shall be
deemed a crossing and the cheque shall be deemed to be crossed. Since the payment cannot be
claimed across the counter on a crossed cheque, crossing of cheques serves as a measure of
safety against theft or loss of cheques in transit.
According to Section 126 of the Act, a cheque can be crossed by any of the following persons:
1. The drawer of a cheque
2. The holder of the cheque
3. The banker
Dishonor of instruments
A negotiable instrument may be dishonored by (i) non – acceptance or (ii) non – payment. As
presentment for acceptance is required only in case of bills of exchange, it is only the bills of
exchange which may be dishonored by non – acceptance. Of course any type of negotiable
instrument – promissory note, bill of exchange or cheque – may be dishonored by non –
payment.
1. Dishonor by Non – acceptance : A bill of exchange is said to be dishonored by non –
payment in the following cases:
a. When the drawee or one of several drawees (not being partners) makes default in
acceptance upon being duly required to accept the bill.
b. Where the presentment for acceptance is excused and the bill is not accepted, i.e.,
remains unaccepted.
c. Where the drawee is incompetent to contract.
d. Where the drawee makes the acceptance qualified.
e. If the drawee is a fictitious person or after reasonable search cannot be found.
Director
The Companies Act, 1956 defines a ‘director’ as any person occupying the position of director
by whatever name called. A body corporate, association or firm, cannot be appointed as a
director. Though the Act makes it obligatory for all the companies to have directors, it does not
provide guidelines as to who can be appointed as directors.
Type of Directors
Directors could be broadly classified into two types:
1. Inside directors: Inside directors are those directors who are in the whole – time
employment of a company. This category includes managing director, whole – time
director, technical director executive director, etc.
2. Outside directors: Directors, who are not in the whole – time employment of the
company and as such are not associated with its day – to – day working, are outside
directors. They include professional directors, nominated directors and statutory
directors.
Number of Directors
The minimum number of directors in case of a public company is three and that of a private
company is two. Under the Companies Act, 1956 the maximum number directors was 12, but
now it has been raised to 15, and more can be appointed by passing a special resolution,
Companies Act, 2103 (Section 149).
Appointment of Directors
The first directors of a company may be named in its Articles of Association. First director is one
who assumes the office from the incorporation of the company. Directors, other than first are
appointed in the general meeting. Additional directors are appointed by the Board of Directors of
a company. An independent director may be selected from a data bank containing the names,
addresses and qualifications of persons who are eligible and willing to act as independent
directors.
Remuneration of Directors
Managerial remuneration can take the form of monthly payments which includes salary or a
specified percentage of net profit or a commission/ or fee for attending each meeting of the board
called sitting fees. In the absence of a specific agreement, directors are not entitled to
remuneration for their services. The remuneration payable to the directors of the company is
determined either by the Articles or by a resolution passed in the general meeting. Maximum
limit of 11% of net profit in the case of public limited companies is applicable. For companies
with no profits or inadequate profits remuneration shall be payable in accordance with new
Schedule (Schedule V) of Remuneration and in case a company is not able to comply with the
Schedule V, approval of Central Government would be necessary.
Appointment of Key Managerial Personnel and Tenure
An important new provision incorporated under the Companies Act, 2013 is the definition given
to ‘key managerial personnel (KMP)’ and their appointment. KMP, according to section 2 [51]
means the Chief Executive Officer or the managing director, the Chief Financial Officer; and
such other officer as may be prescribed. Every company belonging to such class or classes of
companies as may be prescribed shall have the whole time KMP. Unless the Articles of a
company provide otherwise or the company does not carry multiple businesses, an individual
shall not be the chairperson of the company as well as the managing director or Chief Executive
Officer at the same time. This is not applicable to such class of companies engaged in multiple
businesses and which has appointed one or more Chief Executive Officers for each such
business. The company secretary can be appointed as whole – time KMP by a resolution of the
Board which stipulating the terms and conditions of appointment including the remuneration. If
the office of any whole – time KMP is vacated, it can be filled up by the Board at a meeting of
the Board within a period of six months from the date of such vacancy. If a company does not
appoint a KMP, the penalty proposed under the Act is Rs. 1,00,000 which may extend to Rs.
5,00,000, Rs. 50,000 and Rs. 1,000 per day if contravention continues on every director or key
managerial position.
Powers of the Board
The Board enjoys the following powers:
1. Power exercisable only at board meetings: The Board of Directors of a company shall
exercise the following powers on behalf of the company at the meeting of the board:
a) Power to make calls on shares in respect of money unpaid on their shares,
b) Power to authorize the buy – back ,
c) Power to issue debentures,
d) Power to borrow moneys otherwise than on debentures,
e) Power to invest the funds of the company and
f) Power to make loans.
2. Powers exercisable only with the consent of the company in general meeting: The
BoD of a public company, or of a private company which is subsidiary of a public
company, shall do the following only with the consent of a general meeting:
a) Sell, lease or otherwise dispose off the whole undertaking of the company.
b) Remit or give time for the repayment of any debt due by a director except
in the case of renewal or continuance of an advance made by a banking
company to its director.
c) Invest, otherwise than in trust securities, the amount of compensation
received by the company in respect of compulsory acquisition, etc.
d) Borrow money, where the money is to be borrowed, together with the
money already borrowed by the company.
e) Contribute to charitable and other funds not directly relating to the
business of the company or welfare of its employees.
Liabilities of Directors
The liabilities of directors are the following:
1. Liability towards the company: A director is liable to the company due to breach of
fiduciary duty, acts which are ultra vires the Memorandum and Articles of
Association, negligence, breach of trust and misfeasance.
2. Liability to third parties: The directors are personally liable to third parties for
misstatement of facts in prospectus, irregular allotment etc.
3. Liability for breach of statutory duties: Directors are bound to comply with the
statutory duties. Any default in compliance of these duties attracts penal
consequences.
4. Liability for acts of co – directors : A director is an agent only of the company and
not of the other members of the board. So any action done by the board does not
impose any form of liability on the director who did not participate in their action or
did not have any knowledge of it.
5. Criminal liability: Actions on the part of directors such as filing of prospectus or
statement in lieu of prospectus containing untrue statement, failure to repay deposits
within the prescribed limit, knowingly making a false or misleading statement thereby
inducing persons to invest money, fraudulently renewing share certificates or issuing
a duplicate certificate, failure to submit balance sheet, profit and loss account at the
annual general meeting, etc. will invite criminal liability to the directors.
Prospectus and Allotment of Securities
Prospectus means any document described or issued as a prospectus includes any notice,
circular, advertisement or other document inviting deposits from the public or inviting offers
from the public for the subscription or purchase of any shares in, or debentures of a body
corporate.
Prospectus has the following characteristics:
1. It must be an invitation to the public.\
2. The invitation must be made by, or on behalf of, the company, or in relation to an
intended company.
3. The invitation must be to subscribe must be to subscribe or purchase shares or
debentures or such other instrument.
Statement in lieu of Prospectus
As per the Act, all public companies are required to either issue a prospectus or file a statement
in lieu of prospectus with the Registrar. A private company is not required to have either of the
above documents. However, when a private company converts itself into a public company it
must either file a prospectus or file a statement in lieu of prospectus.
Issue of Shares
Shares can be issued in any of the following ways:
I. Issue at par: Shares are deemed to have been issued at par when subscribers are
required to pay only the amount equivalent to the nominal or face value of the
shares issued.
II. Issue at premium: If the buyers of shares are required to pay more than the face
value of the share, then that share is said to be issued or sold at a premium.
III. Issue at discount: Prior to the enactment of Companies Act, 2013 issue of shares
at discount was allowed, subject to certain regulations. But as per the new Act,
except for issue of sweat equity shares, a company cannot issue shares at a
discount.
IV. Issue of sweat equity shares: Sweat equity shares mean equity shares issued by
the company to employees or directors at a discount or for the consideration other
than cash. These shares may be issued for providing know – how or making
available intellectual property rights (patents) or value additions.
V. Bonus Shares: A company may, subject to the Articles, capitalize profits by
issuing fully paid – up shares to the members. This involves transferring the sum
capitalized from the profit and loss account or reserve account to the share capital.
Such shares are known as bonus shares and are issued to the existing members of
the company free of charge.
VI. Right shares: The existing members of the company have a right to be offered
shares, when the company wants to increase its subscribed capital. Such shares
are known as right shares but they are not issued free of charge.
Company Meetings
Meetings include meetings of directors, shareholders, creditors, debenture holders, etc. who
discuss matters relating to the affairs of the company and take decisions affecting the company.
Different Kinds of Meetings:
The different kinds of meetings include the following:
1. Meeting of Board of Directors: The directors together constitute a body called
Board of Directors, and the power of management of a company is vested in the
Board of Directors. Meetings of the Board must be held at least once in every three
months, with a minimum of four in a year.
2. Meeting of Shareholders: Meetings of the shareholders fall under the following
categories, namely, Statutory Meeting, Annual General Meeting and Extraordinary
General Meeting.
3. Meeting of Debenture holders: Meeting of debenture holders is usually held for
varying the security of debentures or modifying the rights attached to debentures or
altering the rate of interest or altering any provision in the trust deed.
Legal Requirements of Meetings
Any meeting has certain legal requirements to be met, which include the following:
1. Notice of meeting
2. Required quorum
3. Proxy
4. Chairman
5. Minutes of the meeting
Company Secretary and his Position
Section 2(45) of companies Act 1956 defines the term “Secretary” in the following words:-
Secretary means a company secretary within the meaning of section 2(1)(c) of the company
Secretaries Act 1980 and includes any other individual possessing the prescribed qualifications
and appointed to form the duties which may be performed by a secretary under the Act Sec
2(1)(c) of the company secretaries Act, 1980 provides company secretary means a person who is
a member of the Institute of company secretaries of India.
Position in a company:
The position of a company secretary is that he is an officer of the under section 2(30). Various
Laws recognize company secretary as a prime officer of the company. For example, Income tax
Act, MRTP Act, Stamps Act etc. call him/her principal officer of the company.
Corporate Governance
The Companies Act, 2013 has tried to overhaul the various provisions relating to strong
Corporate Governance. The provisions relating to independent directors are examples which
confer greater power and responsibility in the governance of a company. There are no explicit
provisions for independent directors under the six decade old Companies Act, 1956 and only
clause 49 of the Listing Agreement prescribed for the induction of independent directors and
made it mandatory for listed companies. Thereafter, the Ministry of Corporate Affairs carried out
corresponding changes to the provisions of 1956 Act, in an attempt to include the requirement of
having an independent director on the board of listed companies and selective unlisted public
companies to oversee corporate governance under the new Companies Act, 2013. These
provisions are now applicable from 01st April, 2014. In a step towards making listed companies
more transparent and to align the provisions related to listing agreement with the Companies Act
2013, the Capital Markets Regulator, The Securities and Exchange Board of India (SEBI) has
also now amended the Clause 49 of the Listing Agreement. The objectives of the revised Clause
49 aligns with the provisions of the Companies Act, 2013, focuses on adopting best practices on
corporate governance and aims at making the corporate governance framework more effective.
The said amendments of the revised clause 49 will be made effective on all listed companies w.
e. f. 1st October, 2014.
E- Governance:
With the increase in the economic activity the registration and management of incorporated
bodies has risen exponentially. Monitoring such a large number of companies whether they
regularly file returns is monumental and arduous task. The solution is provided by using the
digital infrastructure installed all over the country. The Ministry of cooperate affairs has
embarked an ambitious E-Governance project. The MCA has launched a new portal Mca-21 on
20th Feb 2006.
Services available on MCA 21 (Corporate feature of E- governance)
1. Registration and incorporation of new companies.
2. Filling of annual returns and balance sheets.
3. Filling of forms for change of names / address/ Directors details.
4. Registration and verification of charges.
5. Inspection documents.
6. Application for various statutory services from MCA.
7. Investor Grievance Redressal.
Winding up/ Liquidation of a Company
Winding up of a company means the process by which its life is ended and its property is
administered for the benefit of its creditors and members. The provisions are contained in
Section 272 of the Companies Act, 2013. The statutory process by which this is achieved is
called Liquidation. An administrator by the name “liquidator” is appointed to take control of the
company, collect its assets, pay its debts, and distribute any surplus among the members in
accordance with their rights.
Voluntary winding up
Voluntary winding up means winding up of the company by creditors or members, without any
intervention of the court. In voluntary winding up, the company and the creditors are free to
settle their affairs without going to the court, although they may apply to the court for directions
for orders if and when necessary. A company may be wound up voluntarily if the company in the
general meeting passes an ordinary resolution for voluntary winding up where the period fixed
by the Articles for the duration of the company has expired or if the company resolves by special
resolution that it shall be wound up voluntarily. Voluntary winding up may be of two types:
1. Members’ voluntary winding up: Members’ voluntary winding up is possible
only when the company is solvent and is able to pay its liabilities in full. In this
case, a declaration of solvency has to be specified by its directors through its
board meeting. This has to be verified by an affidavit stating that they have made
a full enquiry into the affairs of the company and have formed the opinion that the
company has no debts, or that it will be able to pay its debts in full within such
period not exceeding three years from the commencement of winding up. The
declaration of solvency has to filed with the Registrar.
In members’ voluntary winding up, a liquidator has to be appointed at the general meeting. His
remuneration should also be fixed in the meeting. On the appointment of the liquidator, all the
powers of the Board of Directors and of the managing or whole – time directors or managers
shall cease except for the purpose of giving a notice of such appointment to the Registrar.
However, their powers may continue if sanctioned by the general body or by the liquidator. The
company must give notice to the registrar regarding the appointment of the liquidator within 10
days of his appointment.
2. Creditors’ voluntary winding up: This is done based upon the assumption that
the company is solvent. Meeting of creditors are held in addition to those of the
members from the beginning itself. The power to appoint the liquidator is in the
hands of creditors. The meeting of the creditors may be held on the same day or
the next day after the meeting at which the resolution for voluntary winding up is
to be proposed. Notices of the meeting have to be sent by post to the creditors. It
should also be advertised in the Official Gazette and in two newspapers
circulating in the district of the registered office or principal place of business of
the company.
The Board of Directors must prepare and lay before the meeting a statement of the position of
the company’s affairs, together with a list of its creditors and the estimated amounts of their
claims. A copy of any resolution passed at the creditors’ meeting must be filed with the Registrar
within 10 days of the passing. The creditors may and the members at their respective first
meetings may nominate a person to be the liquidator for the purpose of winding up the affairs
and distributing the assets of the company. The creditors may also appoint a committee of
inspection of not more than five members. As soon as the affairs of the company are fully wound
up, the liquidator makes up an account of the winding up showing how the winding up has been
conducted and the property of the company has been disposed off. He should also call a general
meeting of the company for the purpose of laying the account before it, and giving any
explanation thereof.