Question Paper

Business Law – I (MB261): October 2007

• Answer all questions.
• Marks are indicated against each question.

< Answer >

1. Which of the following contracts, in order to be valid under the Indian Contract Act, 1872, must be in
writing, stamped and registered?
(a) Creation of a trust under the Indian Trust Act
(b) A promise to pay a time barred debt
(c) Cheque
(d) Contracts for sale of immoveable property
(e) Bill of exchange.
(1 mark)
< Answer >
2. Under the Indian Contract Act, 1872, “every promise or set of promises forming the consideration for
each other” is known as
(a) Offer
(b) Contract
(c) Agreement
(d) Consideration
(e) Acceptance.
(1 mark)
< Answer >
3. Under the Indian Contract Act, 1872, if all the parties to a contract substitute a new contract for an
existing contract, it is known as
(a) Rescission
(b) Restitution
(c) Novation
(d) Remission
(e) Waiver.
(1 mark)
< Answer >
4. Which of the following agreements is voidable under the Indian Contract Act, 1872?
(a) Agreements by incompetent parties
(b) Agreements where consent is obtained by way of coercion
(c) Agreements under mutual mistake of fact material to the agreement
(d) Agreements in restraint of marriage
(e) Agreements with unlawful consideration.
(1 mark)
< Answer >
5. Under the Indian Contract Act, 1872, which of the following agreements is not considered to be
opposed to public policy?
(a) Agreements restricting the enforcement of rights
(b) Agreements curtailing the period of limitation
(c) Agreement to refer to arbitration any disputes which have arisen or which may arise in future
(d) Agreements in restraint of marriage
(e) Agreements in restraint of trade.
(1 mark)
< Answer >
6. Under the Indian Contract Act, 1872, the damages which are usually assessed on the basis of the actual
loss suffered by the plaintiff are known as
(a) General damages
(b) Special damages
(c) Vindictive damages
 (d) Nominal damages
(e) Exemplary damages.
(1 mark)
< Answer >
7. Under the Indian Contract Act, 1872, in which of the following circumstances a continuing guarantee
may not be revoked?
(a) By novation
(b) By death of surety in respect of transactions prior to the date of death
(c) Release or discharge of principal debtor
(d) Compounding by the creditor with the principal debtor
(e) Loss of security by the creditor.
(1 mark)
< Answer >
8. Abhimanyu purchased a Ford Ikon car and obtained a comprehensive insurance policy from Continental
Insurance Company. This type of contract is known as
(a) A wagering contract
(b) A contract of guarantee
(c) A voidable contract
(d) A contract of indemnity
(e) A contingent contract.
(1 mark)
< Answer >
9. Under the Indian Contract Act, 1872, the bailment of goods as security for payment of a debt is known
as
(a) Lien
(b) Mortgage
(c) Charge
(d) Pledge
(e) Assignment.
(1 mark)
< Answer >
10. Under normal circumstances which of the following statements is false regarding contract of agency?
(a) An agent should not set up an adverse title to the goods which he receives from the principal as an agent
(b) An agent is duty bound to pay sums received to the principal on his account
(c) An agent is bound to render proper accounts to his principal on demand
(d) An agent should protect and preserve the interests of the principal in case of his death or insolvency
(e) An agent can delegate his authority to a sub-agent.
(1 mark)
< Answer >
11. Which of the following agents is considered as a non-mercantile agent under the Indian Contract Act,
1872?
(a) Auctioneer
(b) Broker
(c) Banker
(d) Factor
(e) Insurance agent.
(1 mark)
< Answer >
12. Which of the following is not considered as a payment in due course under the Negotiable Instruments
Act, 1881?
(a) Payment made in accordance with the apparent tenor of the instrument
(b) Payment made on an instrument before the date of maturity
(c) Payment made to a person who is in possession of the instrument as a holder
(d) Payment made in good faith and without negligence
(e) Payment made to a person in possession of an instrument ‘payable to bearer’.
(1 mark)
< Answer >
13. Which of the following statements is false in respect of presumptions of a negotiable instrument under
the Negotiable Instruments Act, 1881?
 (a) Every negotiable instrument is drawn for consideration irrespective of the consideration
mentioned in the document
(b) Every bill is accepted within reasonable time before maturity
(c) Every accepted bill is transferred before its maturity
(d) The instruments were not endorsed in the order in which they appear on the instrument
(e) The holder of the instrument is holder in due course.
(1 mark)
< Answer >
14. Which of the following matters cannot be referred to arbitration under the Arbitration and Conciliation
Act, 1996?
(a) All matters of civil nature
(b) All matters of breach of contract
(c) Illegal transactions
(d) Disputes of movable property
(e) Disputes of immovable property.
(1 mark)
< Answer >
15. Under the Indian Stamp Act, 1899, the stamp duty payable on transfer of shares or debentures in a
depository scheme is
(a) 15 Paise per Rs.100 or part there of
(b) 20 Paise per Rs.100 or part there of
(c) 50 Paise per Rs.100 or part there of
(d) 75 Paise per Rs.100 or part there of
(e) No stamp duty is required.
(1 mark)
< Answer >
16. Where the mortgager mortgages the property on a condition that on default of payment of the mortgage-
money on a certain date the sale shall become absolute, such a mortgage is known as
(a) Simple Mortgage
(b) Mortgage by Conditional Sale
(c) Usufructuary Mortgage
(d) English Mortgage
(e) Anomalous Mortgage.
(1 mark)
< Answer >
17. The term ‘goods’ under the Sale of Goods Act, 1930, does not include
(a) Stocks and shares
(b) Actionable claims
(c) Growing crops
(d) Grass
(e) Every kind of movable property.
(1 mark)
< Answer >
18. Under the Sale of Goods Act, 1930, in case of breach of a warranty in a contract of sale, the buyer can
(a) Repudiate the contract
(b) Claim damages only
(c) Reject the goods
(d) Refuse to pay the price
(e) Not only reject the goods but also claim damages.
(1 mark)
< Answer >
19. The right of lien available to an unpaid seller by implication of law under the Sale of Goods Act, 1930
is to
(a) Retain the possession of goods for the price
(b) Recover the possession of goods
(c) Recover the price
(d) Recover the damages
(e) Make use of the goods.
 (1 mark)
< Answer >
20. With reference to the Sale of Goods Act, 1930 which of the following statements is false?
(a) A breach of warranty can give rise only to a claim for damages
(b) Warranties are obligations which need to be performed
(c) A breach of a condition can be treated as a breach of warranty
(d) A breach of warranty can be treated as a breach of condition
(e) A particular stipulation is a condition or a warranty will depend upon the facts and
circumstances of each case.
(1 mark)
< Answer >
21. In which of the following cases corporate veil need not be lifted by a Court of law under the Companies
Act, 1956?
(a) Where a company has been formed for defrauding the creditors
(b) Where a company is used to evade taxes and other legal obligations
(c) Where a company is used for the furtherance of welfare legislation
(d) Where there is a complaint of oppression by the shareholders
(e) Where there is a need to determine the enemy character of the company.
(1 mark)
< Answer >
22. As per section 591 of the Companies Act, 1956, a foreign company means
(a) A company incorporated outside India and having place of business in India
(b) A company incorporated in India and having place of business outside India
(c) A company incorporated outside India and having place of business outside India
(d) A company incorporated in India and having place of business in India
(e) A company incorporated in India but not commenced its business.
(1 mark)
< Answer >
23. Under the Companies Act, 1956, a public company which never commenced business is known as a/an
(a) Private company
(b) Closely held public company
(c) Unlimited company
(d) Widely held company
(e) Defunct company.
(1 mark)
< Answer >
24. The Doctrine of Constructive Notice’ is used to protect
(a) Company against outsiders
(b) Outsiders against company
(c) Directors against outsiders
(d) Directors against company
(e) Outsiders against directors.
(1 mark)
< Answer >
25. The directors of a newly floated company want to name it as Zeneca Finance Corporation. Under the
Companies Act, 1956, in order to use the keyword ‘Corporation’ in its name the company must have a
minimum authorized capital of
(a) Rs. 1 crore
(b) Rs. 2 crore
(c) Rs. 5 crore
(d) Rs.10 crore
(e) Rs.25 crore.
(1 mark)
< Answer >
26. The lock in period of minimum promoter’s contribution in case of a public issue is
(a) 1 year
(b) 2 years
(c) 3 years
 (d) 4 years
(e) 5 years.
(1 mark)
< Answer >
27. Under the Companies Act, 1956, if a public company does not register its own set of articles, then
(a) The regulations contained in Table A of Schedule I to the Act automatically apply
(b) The regulations contained in Table C of Schedule I to the Act automatically apply
(c) The regulations contained in Table D of Schedule I to the Act automatically apply
(d) The regulations contained in Table E of Schedule I to the Act automatically apply
(e) The company cannot be incorporated under the Companies Act, 1956.
(1 mark)
< Answer >
28. The maximum number of public companies to which an individual can be appointed as a director at a
time under section 276 of the Companies Act, 1956, is
(a) 10 companies
(b) 15 companies
(c) 20 companies
(d) 25 companies
(e) 50 companies.
(1 mark)
< Answer >
29. Which of the following statements is false under the Companies Act, 1956?
(a) A director must be a member of the company
(b) Minimum seven persons are required for incorporation of a public company
(c) Proxy has no right to speak in the general meeting
(d) Company having profits need not declare dividends
(e) A private company cannot issue prospectus.
(1 mark)
< Answer >
30. Section 292A of Companies Act, 1956 lays down compulsory constitution of ‘Audit Committee’ by
certain public companies. Which of the following companies are required to constitute such
committees?
(a) A public company having a paid-up capital of not less than Rs.1 crore
(b) A public company having a authorised capital of not less than Rs.1 crore
(c) A private company having a paid-up capital of not less than Rs.1 crore
(d) A foreign company having a paid-up capital of not less than Rs.3 crore
(e) A public company having a paid-up capital of not less than Rs.5 crore.
(1 mark)
< Answer >
31. Under the Companies Act, 1956, a public financial institution whose main object is financing shall file
which of the following with the Registrar of Companies for issue of its securities?
(a) Statement in lieu of prospectus
(b) Information memorandum
(c) Red-herring prospectus
(d) Abridged prospectus
(e) Shelf prospectus.
(1 mark)
< Answer >
32. Which of the following statements is false in respect of a proxy under the Companies Act, 1956?
(a) Proxy need not be a member of a company
(b) A member of a private company cannot appoint more than one proxy to attend the same meeting
(c) A proxy can vote only on poll
(d) Where the NCLT directs under Section 167 or 186 of the Companies Act, 1956 one member
present in person or by proxy can constitute a quorum in a meeting
(e) The period fixed for depositing proxies cannot be extended beyond 72 hours before the meeting.
(1 mark)
< Answer >
33. The maximum maturity period for deposits accepted by a public company under the Companies
(Acceptance of Deposits) Rules, 1975, cannot exceed
 (a) 12 months
(b) 24 months
(c) 36 months
(d) 48 months
(e) 60 months.
(1 mark)
< Answer >
34. Where more than one companies are merged together, it is known as
(a) Arrangement
(b) Compromise
(c) Reorganization
(d) Reconstruction
(e) Amalgamation.
(1 mark)
< Answer >
35. The debentures, which are similar to share warrants are known as
(a) Registered debentures
(b) Secured debentures
(c) Bearer debentures
(d) Naked debentures
(e) Irredeemable debentures.
(1 mark)
< Answer >
36. Which of the following is not a ground for winding up of a company by National Company Law
Tribunal under section 433 of the Companies Act, 1956?

(a) Default in holding statutory meeting by a public company limited by shares

(b) Default in holding annual general meeting
(c) Failure to commence business within a year of its incorporation
(d) Inability to pay its debts
(e) Reduction of number of members below statutory minimum.
(1 mark)
< Answer >
37. As per the provisions the Companies Act, 1956, an alternate director can be appointed, in place of the
original director during his absence for a period not less than 3 months, by
(a) Securities Exchange Board of India
(b) Board of directors
(c) Financial Institutions
(d) The Central Government
(e) Share holders of the company.
(1 mark)
< Answer >
38. Under the Companies Act, 1956, the amount held under unpaid dividend account of a company which
remains unpaid or unclaimed for a period of 7 years from the date of such transfer must be transferred
by the company to
(a) Securities premium account
(b) General reserve
(c) Revaluation reserve
(d) Investor education and protection fund
(e) Debenture redemption reserve.
(1 mark)
< Answer >
39. Which of the following statements is true with respect to the requirement of quorum for a general
meeting of a company under the Companies Act, 1956?
(a) Quorum is required at the end of the meeting of the company
(b) Quorum is required only at the beginning of the meeting of the company
(c) Quorum is required throughout the meeting of the company
(d) Quorum is not required for the meeting of the company
(e) Quorum is required only for the listed companies.
 (1 mark)
< Answer >
40. Which of the following category of directors cannot be removed by the members of the company in
general meeting under section 284 of the Companies Act, 1956?
(a) The director appointed in casual vacancy
(b) The director appointed as additional director
(c) The director appointed as alternate director
(d) The director appointed by the Central Government
(e) Director appointed as regular director in a general meeting.
(1 mark)
< Answer >
41. An auctioneer in Bangalore advertised in a newspaper dated July 1, 2007 that a sale of office computers
would be held on July 31, 2007. A broker came from Trivandrum to attend the auction, but the auction
was withdrawn. The broker from Trivandrum sued the auctioneer for damages for the loss of his time
and expenses. Which of the following statements is true in respect of the auction under the Indian
Contract Act, 1872?
(a) The broker can claim his expenses as well as damages from the auctioneer for his failure to
conduct auction
(b) The broker will not succeed in getting compensation as the advertisement of auction sale will
not amount to a valid offer
(c) An invitation to make an offer is binding if a proposal is received in reply to such invitation
(d) The arrival of the broker to participate in the auction amounts to implied acceptance, the
auctioneer is bound to sell the computers
(e) As the auctioneer has a right to cancel the auction, the broker can claim only his expenses, but
not any damages.
(2 marks)
< Answer >
42. Sudha Devi, a senior citizen, by deed of a gift made over certain property to her daughter Lalita Devi
with a condition that she should pay her aunt, Rajeshwari Devi, the sister of the senior citizen, a certain
sum of money annually. The same day Lalita Devi entered into an agreement with Rajeshwari Devi to
pay her the agreed amount. Later, Lalita Devi refuses to pay the amount on the plea that no
consideration moved from Rajeshwari Devi to her. Rajeshwari Devi proposes to file a suit for the
payment of money to her. Which of the following statements is true under the Indian Contract Act,
1872?
(a) The suit filed by Rajeshwari Devi is not maintainable as she is stranger to the contract
(b) The suit filed by Rajeshwari Devi is not maintainable as there is no consideration
(c) An agreement made out of love and affection is not enforceable in law and hence Rajeshwari
Devi will not succeed
(d) Rajeshwari Devi will succeed in her move to sue Lalita Devi in a court of law
(e) Lalita Devi can refuse to pay the amount as she has accepted property under a gift.
(2 marks)
< Answer >
43. Naveen, who was a minor, had sufficient clothes with him. However, Motilal, a cloth merchant offered
highly attractive discount and supplied additional clothes to Naveen on credit. Later, Naveen refused to
pay the money on the plea of his minority. Which of the following statements is true in respect of the
liability of Naveen under the Indian Contract Act, 1872?
(a) Naveen is liable to pay for the additional clothes as he had bought them from Motilal out of his
free consent
(b) Naveen is not liable to pay for the additional clothes as a contract with a minor is void ab initio
(c) Naveen is liable to pay as the supply of additional clothing to a minor is regarded as supply of
necessaries
(d) Naveen is not liable to pay as the supply of additional clothing to a minor having sufficient
clothes cannot be regarded as supply of necessaries
(e) Naveen is liable to pay for the additional clothes only upon attaining majority.
(2 marks)
< Answer >
44. Ramanath Jha, the seller of a coal mine, made some exaggerating statements about the earning capacity
of the coal mine. However, Rajivprasad Shukla, the buyer got an independent evaluation done and
based on that report proceeded ahead with the purchase of the mine. Later, Rajivprasad Shukla came to
know that there was no sufficient coal and he wants to proceed against Ramanath Jha for committing
 fraud in selling the mine to him. Which of the following statements is true in respect of the rights of
Rajivprasad Shukla under the Indian Contract Act, 1872?
(a) Rajivprasad Shukla can recover only the amount paid to Ramanath Jha
(b) Ramanath Jha can be held liable for fraud having made exaggerating statements about the
earning capacity of the mine
(c) Rajivprasad Shukla can only rescind the contract
(d) Ramanath Jha cannot be held liable for misrepresentation as an independent evaluation was done
by Rajivprasad Shukla
(e) Rajivprasad Shukla can not only cancel the contract but also claim damages.
(2 marks)
< Answer >
45. Malati, who lost her gold ornaments, registered a complaint with the Police Department. The Police
Department tracked down the ornaments and recovered them. The ornaments disappeared from the
custody of the Police Department, before the completion of other required formalities. Which of the
following statements is true in respect of the liability of the Police Department under the Indian
Contract Act, 1872?
(a) The Police Department is liable to restore the ornaments as it was in the position of a bailee
(b) The Police Department is not liable to restore the ornaments as it had already found them
(c) As Malati had not handed over the ornaments to the Police Department, there is no contract of
bailment
(d) The Police Department is not liable as Malati is the true owner who has to bear the loss
(e) The Police Department is not liable as it is only a gratuitous bailment, without any consideration.
(2 marks)
< Answer >
46. Abhilash, Biswajeet and Sukant are co-sureties to Deepak for a sum of Rs.60,000 loan given by Vikrant
Patel. In the event of default by Deepak, Abhilash’s liability is to the extent of
(a) Rs.10,000
(b) Rs.15,000
(c) Rs.20,000
(d) Rs.30,000
(e) Rs.60,000.
(2 marks)
< Answer >
47. Anuradha purchased golden bangles from M/s. Toshinwal Jewellers and requested small modification
by inserting diamonds on the bangles. She had paid the full amount. On the same night the shop was
burgled and the bangles were also stolen along with the other jewellery. In respect of the above which
of the following statements is true under the Sale of Goods Act, 1930?
(a) Anuradha cannot recover the bangles from M/s. Toshinwal Jewellers, but can claim damages
(b) Anuradha can recover the price from M/s. Toshinwal Jewellers
(c) Anuradha can recover the bangles if the police could trace the bangles
(d) Anuradha can recover the bangles from M/s. Toshinwal Jewellers
(e) M/s. Toshinwal Jewellers is not responsible for any loss as Anuradha is the true owner who has
to bear the loss.
(2 marks)
< Answer >
48. Which of the following instances is not treated as ‘crossing’ under the Negotiable Instruments Act,
1881?
(a) A cheque bearing across its face the words ‘account payee’ without two transverse parallel lines
(b) A cheque bearing across its face the words ‘not negotiable’ with two transverse parallel lines
(c) A cheque bearing across its face the words ‘not exceeding rupees two hundred’ within two
transverse parallel lines
(d) A cheque bearing across its face the words ‘State Bank of India, Karol Bagh Branch, New
Delhi’ within two transverse parallel lines
(e) A cheque bearing across its face the words ‘Andhra Bank, Daryaganj Branch, New Delhi’
without two transverse parallel lines.
(2 marks)
< Answer >
49. Ananth signed as maker of a promissory note, a blank stamped paper and gave it to Bhushan and
authorized him to fill it as a promissory note for Rs.500. Bhushan fraudulently filled it up as a
 promissory note for Rs.1,000 and endorsed it in favour of Chinmay, who in good faith advanced
Rs.1,000. Can Chinmay, as a holder in due course recover Rs.1,000 from Ananth under the Negotiable
Instruments Act, 1881?
(a) Chinmay cannot recover the amount from Ananth
(b) Chinmay can recover the amount from Ananth
(c) Chinmay cannot recover from Ananth but can recover from Bhushan
(d) Chinmay does not get valid title to the instrument, hence he cannot collect from either of them
(e) Chinmay cannot recover the amount of Rs.1,000 from Ananth, but can recover damages from
Ananth.
(2 marks)
< Answer >
50. Prakash has drawn a bill of exchange, payable after four months. The maturity date of the bill falls on
January 26, 2008 (Republic Day). Under the Negotiable Instruments Act, 1881, the bill shall be deemed
to be due on
(a) January 25, 2008
(b) January 26, 2008
(c) January 27, 2008
(d) Either January 25, 2008 or January 27, 2008, as the parties decide
(e) Either January 25, 2008 or January 26, 2008, as the parties decide.
(2 marks)
< Answer >
51. Srinath, whose pet dog was lost, announced a reward of Rs.2,000 to the person who would bring his dog
back to him. Gopal, a neighbour of Srinath, traced the lost dog and brought it to Srinath, without having
heard of the reward announced by Srinath. In respect of the above circumstances, which of the
following statements is true under the Indian Contract Act, 1872?
(a) Gopal can refuse to hand over the pet dog until the reward is paid to him
(b) Gopal cannot claim the reward of Rs.2,000 as he had no knowledge of the reward
(c) Gopal can claim the reward of Rs.2,000 as he had found the dog and brought it back
(d) As Srinath had announced the award, he is bound to pay the reward to Gopal
(e) Srinath is not bound to pay the reward as the announcement of reward is a social agreement
which is not enforceable by law.
(2 marks)
< Answer >
52. Avinash is the holder of a bill for Rs.10,000. He makes an indorsement stating that, ‘pay Rs.3,000 to
Brijesh or order and pay Rs.7,000 to Chiraag or order’. Which of the following statements is true with
respect to the indorsement under the Negotiable Instruments Act, 1881?
(a) The indorsement is invalid as it is a partial indorsement prohibited by the Act
(b) The indorsement to Brijesh is not valid as in case of partial indorsement only the subsequent
indorsement is valid
(c) The indorsement to Chiraag is not valid as only Brijesh can indorse the balance in favour of
Avinash
(d) The indorsement is valid as partial indorsement is valid under the law
(e) For a partial indorsement to be valid, it must be in equal proportions.
(2 marks)
< Answer >
53. Ajit, a timber merchant agreed to supply best teak at a certain agreed price to Bharat, a furniture
manufacturer who informed him of the fact that the timber was to be used for making furniture.
Thereupon, Bharat paid him an advance of Rs.10,000. Later, Ajit supplied timber which was identified
as ordinary class timber that was unsuitable for making furniture and demanded the payment of balance
purchase price from Bharat. In respect of the above situation, which of the following statements is true
under the Sale of Goods Act, 1930?
(a) Bharat can reject the timber and can claim damages from Ajit
(b) Bharat has to accept the timber and pay the balance amount of agreed price as per the contract
(c) Ajit can appropriate the advance and claim the balance amount
(d) As Ajit was aware of the use of the timber he cannot be held liable for supplying inferior quality
of timber
(e) Bharat can return the timber and take his advance back, but cannot claim damages.
(2 marks)
< Answer >
54. Vinay purchased a colour television under hire-purchase agreement and two installments are due to the
seller. Vinay sells the television to Anil, who buys in good faith and without notice of the right of the
owner. In respect of the given case which of the following statements is true under the Sale of Goods
Act, 1930?
(a) Anil will get the good title since he purchased the television in good faith and for consideration
(b) Vinay who purchased the television on hire-purchase has the right to sell it
(c) The hire purchaser will get ownership to the goods he purchased even though the amounts are due to the
owner
(d) Anil will not get a good title
(e) Vinay who has purchased the television on hire-purchase has the right to sell it and will get ownership to
the goods even though the amounts are due to the owner.
(2 marks)
< Answer >
55. Nitish went to Agarwal Enterprises to buy a hot water bottle for his wife who was suffering from severe
headache. Agarwal Enterprises sold one hot water bottle to him informing that the bottle was suitable
only for hot water and not for boiling water. However, the bottle burst and Nitish’s wife was injured.
Under which of the following implied conditions of Sale of Goods Act, 1930, Nitish can take action
against the seller?
(a) Condition as to sale by description
(b) Condition as to quality or fitness
(c) Condition as to merchantability
(d) Condition as to wholesomeness
(e) Condition implied by custom.
(2 marks)
< Answer >
56. Rakesh and Rahul together formed a company Rock Ltd., a private limited company. They were the
only two members of the company. While on their way to attend a business seminar in Malaysia both of
them died in an air crash. What is the position of the company in such a situation?
(a) The company ceases to exist as there are no members
(b) The Registrar of Companies takes over the management of the company
(c) The legal heirs of Rakesh and Rahul will become the members
(d) The employees of the company will become the members of the company
(e) The creditors of the company will become the members of the company.
(2 marks)
< Answer >
57. Veedol Ltd. was incorporated on May 3, 2007. However, the company could obtain its certificate to
commence business only on September 25, 2007. The company, in the meanwhile had entered into
contracts with suppliers for import of machinery. Such contracts entered into after incorporation but
before obtaining certificate of commencement of business are considered as
(a) Voidable contracts
(b) Provisional contracts
(c) Pre-incorporation contracts
(d) Illegal contracts
(e) Void contracts.
(2 marks)
< Answer >
58. The directors of Western Sugars Ltd. borrowed a sum of Rs.10 lakh from Arvind Raheja. The
company’s articles provided that the directors might borrow on bonds from time to time to be
authorized by a resolution passed at a general meeting of the company. The directors of Western Sugars
Ltd. gave a bond to Arvind Raheja for the amount borrowed, without the authority of any resolution.
Which of the following statements is true in respect of the borrowing under the Companies Act, 1956?
(a) The borrowing is within the powers conferred on the directors, hence the company can be held
liable for repayment of the sum borrowed on bonds
(b) As the borrowing is ultra vires the articles of the company, it cannot be held liable for repayment
of amount borrowed on bonds
(c) The company cannot refuse to repay the loan as directors are the agents of the company and
being the principal the company is liable for the acts of its directors
(d) As the director’s borrowing is ultra vires, the directors are personally liable for repayment
 (e) As the directors were accustomed to borrowing on bonds Arvind Raheja need not enquire about
the passing of resolution and he can sue the company on strength of the bond.
(2 marks)
< Answer >
59. The Board of directors of Shanti Biotech Ltd., made a call on the shares of the company by passing a
resolution in the board meeting. Due to inadvertent error, the due date of payment of the call money was
not mentioned in the notice. Amitav Bose, a shareholder failed to pay the call money and consequently
his shares were forfeited. The Board of directors of Shanti Biotech Ltd., subsequently discovered the
mistake and rescinded earlier resolution in respect of the forfeiture. They then made a fresh call upon
the shares of Amitav Bose and he objected the call by contending that his shares had already been
forfeited and he is not liable to pay the call amount. Which of the following statements is true in respect
of forfeiture of shares under the Companies Act, 1956?
(a) Amitav Bose is not liable to pay the call money as his shares were already forfeited
(b) Amitav Bose is not liable to pay the call money as the Board of directors has no right to rescind
the resolution for forfeiture without approval of the general meeting
(c) Amitav Bose is liable to pay the call money as the forfeiture of his shares is not valid due to
absence of date in the notice for payment of call
(d) Amitav Bose is liable to pay the call money as forfeiture of shares will not extinguish his
liability as a shareholder
(e) Amitav Bose has the right to decide whether he wants to treat the forfeiture as valid or to
continue as a member of the company.
(2 marks)
< Answer >
60. XYZ Ltd. issued a prospectus to the public for subscription of its shares. In the prospectus, the
promoters assured a return of 40% in future, by estimating the demand and sales for the product.
However, the company could announce a dividend of 10% at the end of two years, since the sales did
not take place as expected. Mr. Abdul Rehman, one of the shareholders proposes to file a suit for
recovery of amount invested and damages against the Board of Directors for making untrue statements
in the prospectus. Which of the following statements is true in respect of the above circumstances under
the Companies Act, 1956?
(a) Only promoters of the company can be made personally liable for untrue statements in the
prospectus
(b) The technical expert who estimated the demand and sales of the company is personally liable for
payment of damages
(c) Every director of the company can be made personally liable for untrue statements in the
prospectus
(d) The promoters, directors or experts cannot be held liable since quoting expected profits does not
amount to material misstatement in the prospectus
(e) Mr. Abdul Rehman can only rescind the purchase of shares as he is not entitled to any damages.
(2 marks)
< Answer >
61. Ramesh Mathur, owner of shares in Beltex Ltd., gave his share certificates to Vikram for the sale of the
shares. Vikram, by forging the signature of Ramesh Mathur, transferred some shares in favour of Uday,
who lodged the share certificate together with the transfer form with the company for transfer of the
shares in his name. The company duly transferred the shares in the name of Uday and issued a fresh
share certificate in respect of the shares. Later, when Ramesh discovered the forgery, he asked the
company to give his shares back as it was a fraudulent transfer. Which of the following statements is
true in respect of the transfer of the shares under the Companies Act, 1956?
(a) As the company has issued the fresh share certificate in favour of Uday, he is the rightful
member of the company
(b) The company is guilty of issuing share certificate in respect of forged transfer, hence the
company has to pay damages to Ramesh Mathur
(c) The company need not issue a fresh share certificate in favour of Ramesh Mathur
(d) Uday is entitled to have the shares in his own name as he has purchased those shares in good
faith and for consideration
(e) The company has to restore the name of Ramesh Mathur in its register as he is the rightful owner
of the shares.
(2 marks)
< Answer >
62. Which of the following acts of directors has not been held as oppressive under the Companies Act,
 1956?
(a) Acts done by a person who usurped the office of a director and who has no authority at all
(b) Conducting the affairs of the company in an arbitrary manner and not doing anything to defend
the interests of the company
(c) Inefficient management of affairs by the directors of the company
(d) Diverting a business opportunity to a company controlled by a director who holds a major stake
in the first company
(e) Directors refusing to register a transfer of shares according to the directions contained in a will.
(2 marks)
< Answer >
63. Poornima Textiles Ltd. is continuously making profits for the past five years. However, the directors of
the company have not recommended dividend for any of these five years. At the general meeting of the
company the shareholders decided that the company should declare a dividend and passed an ordinary
resolution declaring 25% dividend. Which of the following statements is true with respect to the
declaration of dividend under the Companies Act, 1956?
(a) The shareholders cannot declare dividend at the general meeting
(b) The share holders can declare dividend at the general meeting only by passing a special
resolution
(c) The resolution passed by the shareholders is valid as it was passed by a majority
(d) The shareholders can only approve the rate of dividend recommended by the Board of Directors,
they cannot increase or decrease it
(e) The share holders can approve or decrease the recommended rate of dividend, but they cannot
increase it.
(2 marks)
< Answer >
64. The Board of Directors of Sigma Ltd. appointed M/s Chandra & Co. as the first auditors of the
company. At the statutory meeting of the company some shareholders suggested that the appointment of
M/s Chandra & Co. as the first auditors of the company by the Board of Directors was invalid and they
proposed that a resolution must be passed for confirming their appointment as the first auditors of the
company, failing which the auditors must resign from their office. In respect of the above
circumstances, which of the following statements is true under the Companies Act, 1956?
(a) The Board of Directors are not empowered to appoint the first auditors
(b) The first auditors can be appointed only at the statutory meeting of the company
(c) The first auditors appointed by the Board of Directors can hold office only up to the end of the
statutory meeting of the company
(d) The appointment of first auditors by the Board of Directors is valid only if it is approved by the
members at the general meeting following the appointment
(e) The first auditors shall be appointed by the Board of Directors and hold office until the
conclusion of the first Annual General Meeting of the company.
(2 marks)
< Answer >
65. Sunrise Limited, a public company was incorporated on 12-05-2006 has been issued a certificate for
commencement of business on 12-08-2006. Under section 165 of the Companies Act, 1956, the
company may hold its statutory meeting between
(a) 12-05-2006 to 12-11-2007
(b) 12-06-2006 to 12-12-2007
(c) 12-09-2006 to 12-09-2007
(d) 12-08-2006 to 12-02-2007
(e) 12-09-2006 to 12-02-2007.
(2 marks)
< Answer >
66. Surendranath has been appointed as director of Crown Engineering Ltd. The market value of each share
of the company is Rs.200. The nominal value of each share is Rs.50 and the paid-up value of share is
Rs.25. The Articles of Association of the company does not prescribe any qualification shares to be
held by a director. How many shares are required to be held by Surendranath as qualification shares
under the Companies Act, 1956?
(a) Nil
(b) 1 share
(c) 10 shares
 (d) 100 shares
(e) 200 shares.
(2 marks)
< Answer >
67. A meeting of the Board of directors of Himalaya Resorts Ltd. was convened on September 30, 2007.
Out of 11 directors of the company, 10 directors attended the meeting, of whom 2 directors were
interested in the proposed resolution. There was a tie as 4 directors voted in favour of the resolution
while the other 4 voted against the resolution. Which of the following statements is true in respect of
the course of action available to the company under the Companies Act, 1956?
(a) The resolution has to be decided upon the vote of the absent director at a subsequent board
meeting
(b) The matter must be referred to the general meeting of the members
(c) The Chairman of the meeting can give his second or casting vote which shall be decisive of the
matter
(d) The vote of the auditor of the company can be used to arrive at a decision
(e) The interested directors can be allowed to vote on the matter.
(2 marks)
< Answer >
68. Hasmukh Joshi picked up a diamond ring from the floor of Divya Diamonds and Jewellers,
Gandhinagar and handed it over to Khemchand Bhatia, the manager of Divya Diamonds and Jewellers,
with a request to hand it over to the true owner. The true owner could not be traced in spite of best
efforts of Khemchand. Hasmukh Joshi paid the expenses incurred by Khemchand and asked him to
return the diamond ring to him. Which of the following statements is true under the Indian Contract
Act, 1872?
(a) Khemchand is under no obligation to return the ring to Hasmukh Joshi as the ring was found on
the floor of his shop
(b) Khemchand is under an obligation to return the diamond ring only to the true owner
(c) Khemchand and Hasmukh Joshi can share the value of the diamond ring equally
(d) Hasmukh Joshi being the finder of lost goods can retain the diamond ring against everyone
except the true owner
(e) Khemchand can retain the diamond ring against everyone including the true owner.
(2 marks)
< Answer >
69. Varun delivered a DVD player to Vijay on ‘sale or return’ basis. Vijay sent the same DVD player to
Rajesh on the same terms and conditions, without intimating anything to Varun. The DVD player was
stolen from the custody of Rajesh. Which of the following statements is true in respect of goods sent on
sale or return basis under the Sale of Goods Act, 1930?
(a) Vijay is liable to Varun for the loss of goods
(b) Varun can recover the price neither from Rajesh nor from Vijay
(c) Varun can recover the price from Rajesh as the goods were lost in his custody
(d) Varun cannot recover any thing from Rajesh as there is no agreement between them for the sale
of the DVD player
(e) Varun cannot recover any thing from Vijay as the goods were sent on sale or return basis and no
intimation was sent to him.
(2 marks)
< Answer >
70. Nagendra issued a cheque in favour of Happy-home, a charitable institution, as his share of charitable
subscription. The banker returned the cheque for the reason of insufficiency of funds in the drawer’s
account. The demand for payment by way of written notice to Nagendra by Happy-home should be
made within how many days from the date of receipt of information of the dishounour to initiate an
action under section 138 of the Negotiable Instruments Act, 1881?
(a) 7 days
(b) 14 days
(c) 21 days
(d) 30 days
(e) No action can be taken as the cheque was issued as a charitable subscription.
(2 marks)
 Suggested Answers
Business Law – I (MB261): October 2007
1. Answer : (d) < TOP >
Reason : It must be noted that a contract need not be in writing, unless there is specific provision in law that it
should be in writing. Certain contracts must be in writing, otherwise they are not enforceable in law.
Following are the examples of such contracts.
• Contract for sale of immoveable property must be in writing, stamped and registered.
• Certain other contracts do not require registration, yet must be in writing like the following:
- Bills of exchange
- Promissory notes
- Cheques
- A trust created under the Indian Trust Act
- A promise to pay a time-barred debt
- Contracts made without consideration with natural love and affection.
Hence, (d) is correct answer.
2. Answer : (c) < TOP >
Reason : According to section 2(e) of the Indian Contract Act, 1872, “Every promise and every set of promises,
forming the consideration for each other”, is known as an agreement.
3. Answer : (c) < TOP >
Reason : If a new contract is substituted for an existing contract, it is called novation.
• When a contract becomes void, any benefit derived out of the contract by one party is required to
be restored to the other. This is called restitution.
• Rescission means cancellation. In a contract, the injured party can cancel the contract and refuse
the performance of contract.
• Remission means giving relief.
• Waiver means the act of giving up a claim or right.
Hence, correct answer is (c).
4. Answer : (b) < TOP >
Reason : A contract is voidable when the consent of a party to a contract is obtained by fraud,
misrepresentation, coercion or undue influence. In all the other options the contract is void. Hence, (b)
is correct answer.
5. Answer : (c) < TOP >
Reason : An agreement to refer to arbitration any disputes which have arisen or which may arise in future is
valid.
• Agreements in restraint of legal proceedings renders void two kinds of agreements namely:
• Agreements restricting the enforcement of rights;
• Agreements curtailing period of limitation.
Agreements in restraint of marriage and agreements in restraint of trade are also considered as
agreements opposing the public policy. Hence, (c) is correct answer.
6. Answer : (a) < TOP >
Reason : General or ordinary damages are damages which naturally arise in the usual course of things from
breach of contract. General Damages are usually assessed based on the actual loss suffered. Hence, (a)
is correct answer.
7. Answer : (b) < TOP >
Reason : In the absence of any contract to the contrary, death of surety operates as a revocation of continuing
 guarantee so far as regards to future transactions. (Section 131). The liability of the surety for previous
transactions however remains. Hence, (b) is correct answer.
8. Answer : (d) < TOP >
Reason : It is a contract of indemnity wherein one party promises to save the other from loss caused to him by
the conduct of indemnified himself or any other person. Hence, (d) is correct answer.
9. Answer : (d) < TOP >
Reason : The bailment of goods as security for a debt or performance of a promise is called pledge.
• Lien is a right exercised by one person to retain that, which is in his possession, belonging to
another, until some debt or claim is paid. Bankers, factors have general lien.
• A mortgage is the transfer of an interest in specific immovable property for the purpose of
securing a loan
• Hypothecation means creation of claim in movable goods for a loan without transferring the
possession of goods to the lender.
• Assignment of security to a third party is done to borrow, which is secured by that debt. The
correct answer is (d).
10. Answer : (e) < TOP >
Reason : An agent can not delegate his authority to a sub-agent. Duties of an agent include the following:
• An agent should not set up an adverse title to the goods which he receives from the principal as
an agent,
• An agent is duty bound to pay sums received to the principal on his account,
• An agent is bound to render proper accounts to his principal on demand and
• An agent should protect and preserve the interests of the principal in case of his death or
insolvency.
Hence, the answer is (e).
11. Answer : (e) < TOP >
Reason : The definition of mercantile agents covers factors, brokers, auctioneers, commission agents, Del
credere agents and bankers. Insurance agents, advocates, etc., are considered as non-mercantile agents.
Hence, (e) is correct answer.
12. Answer : (b) < TOP >
Reason : An instrument should be payable either at maturity or after the date of maturity. An instrument paid
before the date of maturity is not a payment in due course. It was held in Burbridge vs. Manners that a
bill paid before maturity and subsequently endorsed is valid in the hands of a bona fide endorsee.
Hence, (b) is correct answer.
13. Answer : (d) < TOP >
Reason : According to Sections 118 and 119 of the Negotiable Instruments Act, 1881, negotiable instruments
are subject to the following presumptions:
• Every negotiable Instrument is drawn for consideration irrespective of consideration mentioned
in the document.
• Every bill is accepted within reasonable time before maturity and is transferred before maturity
• The instruments were endorsed in the order in which they appear on the instrument
The holder of the instrument is holder in due course. Hence, (d) is correct answer.
14. Answer : (c) < TOP >
Reason : Matters of criminal nature, illegal transactions, matrimonial matters cannot be referred to arbitration.
Hence, (c) is correct answer.
15. Answer : (e) < TOP >
Reason : No stamp duty is required to be paid for transfer of shares under the depository system.
16. Answer : (b) < TOP >
Reason : Where the mortgager mortgages the property on a condition that on default of payment of the
mortgage-money on a certain date the sale shall become absolute is known as Mortgage by Conditional
Sale. Hence, (b) is correct answer.
17. Answer : (b) < TOP >
 Reason : The term ‘goods’ under Sale of Goods Act, 1930 does not include Actionable claims and money.
18. Answer : (b) < TOP
Reason : A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise
to a claim for damages but not a right to reject the goods and treat the contract as repudiated. [Section
12(3)]
19. Answer : (a) < TOP >
Reason : The right of lien exercised by an unpaid seller is to retain the possession of goods, if he has not parted
the goods . Hence, (a) is correct answer.
20. Answer : (d) < TOP >
Reason : The breach of warranty cannot be treated as a breach of condition. All other options are true under the
Sale of Goods Act, 1930.
21. Answer : (c) < TOP >
Reason : Principally, company has identity separate and independent from its members. Though this principle
behind the judgment of ‘Solomon vs. Solomon & Co. Ltd.’ is still valid, now such purist approach is
not taken. Often, people behind the company who really control the affairs of the company are looked
into. This is termed as ‘lifting of the corporate veil’. Many Statutes also now provide for such lifting of
corporate veil. Courts also often look behind the corporate veil and see the persons who are controlling
the company.
• Statutory provisions for lifting of the veil: -
• Holding and Subsidiary company
• Foreign Investment control under ‘FEMA’
• SEBI’s take over regulations
• When the number of members fall bellow statutory minimum
• Tax liability of directors of a private company
• Punishment provisions.
Judicial Decisions regarding lifting of corporate veil:-
Courts also lift the corporate veil to see the real state of affairs. It may be noted that the corporate veil
can be lifted for benefit of the company as well as for purposes of penalizing the company.
Some cases where courts did lift the veil are as follows:
1. Prevention of Fraud
2. Decide foreign character.
3. Decide whether company is a joint venture
4. Decide company is partnership in subsistence
5. To deicide complaint of oppression
6. Tax avoidance device
7. Production of subsidiary can be own production
8. To ascertain true nature of transaction if alleged as sham.
9. Device to avoid welfare legislation
10. If opposed to justice or public interest
11. Experience of directors is experience of the company.
12. Punishing for contempt of court
13. Abuse of process of law.
22. Answer : (a) < TOP >
Reason : As per section 591 of the Companies Act, 1956, a foreign company means a company incorporated out
side India and having place of business in India.
23. Answer : (e) < TOP >
Reason : Under section 560 of the Companies Act, 1956, a public company which never commenced business
is known as a defunct company.
24. Answer : (a) < TOP >
Reason : The doctrine of constructive notice is to protect company against outsiders, while doctrines of indoor
 management and ostensible authority to protect outsiders against the company.
25. Answer : (c) < TOP >
Reason : The Department of Company Affairs in its circular dated 7-3-1989, has clarified that if a company uses
any of the following keywords in its name under Sections 20 and 21, it must have a minimum
authorized capital mentioned against the keywords:
Required Authorized
Keywords
Capital (Rs.)
1. Corporation 5 crore
2. International, Globe, Universal, Continental, Inter Continental, 1 crore
Asiatic, Asia, being the first word of the name
3. If any of the words at (2) above is used within the name (with or 50 lakh
without brackets)
4. Hindustan, India, Bharat, being the first word of the name 50 lakh
5. If any of the words at (4) above is used within the name (with or 5 lakh
without brackets)
6. Industries/Udyog 1 crore
7. Enterprises, Products, Business, Manufacturing 10 lakh
Hence (c) is correct answer.
26. Answer : (c) < TOP >
Reason : In a public issue the minimum promoter’s contribution shall be locked in for a period of 3 years.
27. Answer : (a) < TOP >
Reason : Under the Companies Act, 1956, if a public company does not register its own set of articles, then the
regulations contained in Table A of Schedule I to the Act automatically apply.
28. Answer : (b) < TOP >
Reason : As per section 276 of the Companies Act, 1956, an individual cannot be director of more than fifteen
public companies at a time.
29. Answer : (a) < TOP >
Reason : Director need not be member of the company, if the company’s articles so provide to take qualification
shares then the directors are required to take shares in the company otherwise for the directors to
become members of the company is absolutely optional.
30. Answer : (e) < TOP >
Reason : Section 292A of Companies Act, 1956, lays down compulsorily constitution of Audit Committee by
certain public companies. A public limited company having a paid-up capital of not less than Rs.5
crore is required to constitute such committees.
31. Answer : (e) < TOP >
Reason : Under the Companies Act, 1956, a public financial institution whose main object is financing shall file
a shelf prospectus with the Registrar of Companies for issue of its securities.
32. Answer : (e) < TOP >
Reason : According to the provisions of Companies Act, 1956 relating to proxies, the period fixed for
depositing proxies cannot be extended beyond 48 hrs before the meeting.
33. Answer : (e) < TOP >
Reason : The minimum tenure for which public deposits can be accepted or renewed is 12 months (earlier 6
months). It is also stipulated that the maximum maturity period for the deposits cannot exceed 60
months (earlier 36 months).
34. Answer : (e) < TOP >
Reason :
• Where one or more companies are merged together it is known as Amalgamation.
• The term compromise indicates the existence of a dispute between two parties, which needs to
be settled amicably. The dispute usually relates to the rights of the parties.
• Section 390(B) of the Companies Act, 1956 defines the term arrangement to include
reorganization of the share capital of a company by consolidation of shares of different classes or
by the division of shares into shares of different classes or by both of these methods.
• The reconstruction is said to have taken place when an undertaking is being carried on by a
company and is in substance transferred, not to an outsider, but to another company consisting
 substantially of the same shareholders with a view to its being continued by the transferee company.
Hence, (e) is correct answer.

35. Answer : (c) < TOP >

Reason : Bearer debentures are similar to share warrants in that they too are negotiable and transferable by mere
delivery.
36. Answer : (b) < TOP >
Reason : Default in holding Annual General Meeting is not a ground for issue of winding up order by National
Company Law Tribunal. All other grounds in options (a), (c), (d) and (e) are the grounds for issue of
winding up order.
37. Answer : (b) < TOP >
Reason : Section 313 of the Companies Act, 1956, lays down that the Board of Directors of a company can
appoint an alternate director in place of the original director during his absence for a period not less
than three months from the date in which the board meetings are held. This power can be exercised,
only if authorized by the articles or by a resolution passed by the company in a general meeting.
38. Answer : (d) < TOP >
Reason :
• Share premium account represents the amount of premium collected by the company from the
shareholders for every share issued at premium.
• General reserve represents the amount of profits ploughed back as reserve.
• Revaluation reserve represents the surplus generated by revaluing the fixed assets of
the company.
• Amount held under unpaid dividend account of a company which remains unpaid or unclaimed
for a period of 7 years from the date of such transfer is to be transferred to Investor education and
protection fund
• Debenture redemption reserve fund represents the reserve fund created out of profits every year,
to redeem the debentures on the due date.
39. Answer : (b) < TOP >
Reason : The Articles of Association of a company require the presence of the quorum at the time when the
meeting proceeds to business then such requirement will be deemed to be complied with if the quorum
is present at the beginning of the meeting. This means quorum need not present throughout the meeting
or when the meeting proceeds to vote. Hence option (b) is correct.
40. Answer : (d) < TOP >
Reason : The director appointed by the Central government cannot be removed by the members under section
284 of the Act and all others can be removed by the members in general meeting.
41. Answer : (b) < TOP >
Reason : The broker will not succeed in getting compensation, as the advertisement of auction sale will not
amount to a valid offer. An advertisement placed in the newspaper by an auctioneer to sell goods is an
invitation to make an offer. This can be elucidated by referring to the ruling given in Harris vs
Nickerson. In the aforementioned case, information regarding an auction was advertised in the
newspaper. However, the auction was subsequently canceled and a broker who traveled to the place of
auction to attend it sued the auctioneer for recovery of travel expenses. His claim was not entertained
as there was no binding contract between the two parties.
42. Answer : (d) < TOP >
Reason : Under the Indian Contract Act, 1872, consideration may move from the promisee or any other person,
even a stranger. All that matters is the presence of consideration and not the person giving it. The facts
in the given case are similar to the decided case of Chinnayya vs Ramayya. In this case, an old lady by
deed of a gift made over certain property to her daughter ‘D’, under the direction that she should pay
her aunt ‘P’ the sister of the old lady, a certain sum of money annually. The same day ‘D’ entered into
an agreement with ‘P’ to pay her the agreed amount. Later ‘D’ refused to pay the amount on the plea
that no consideration had moved from P to D. It was held that P was entitled to maintain suit as
consideration had moved from the old lady, sister of P, to the daughter.
Hence the suit by Rajeshwari Devi is maintainable.
43. Answer : (d) < TOP >
 Reason : If at the time of supply, the minor is already having sufficient supply of the said goods, then further
supply of the same will not be considered as necessaries. In Nash vs Inman, a minor who was already
having sufficient supply of clothing was supplied further clothing by a tailor. It was held that the price
could not be recovered. Hence, Naveen is not liable to pay for the additional clothing.
44. Answer : (d) < TOP >
Reason : The facts are similar to the decided case of Attwood vs. Small where the seller of a mine made some
exaggerating statements about the earning capacity of the mine. However, the buyer got an independent
evaluation done and based on that report went ahead with the purchase. In an action brought about by
the buyer to rescind the contract on the ground of misrepresentation, it was held that such an action
would not succeed as he had relied on an independent report. Therefore, Ramanath Jha cannot be held
liable for fraud as an independent evaluation was done by Rajivprasad Shukla. Hence, (d) is correct
answer.
45. Answer : (a) < TOP >

Reason : It is not necessary that a contract be entered for a bailor and bailee relationship to be formed. The facts
of the given case are similar to the decided case of Basava K D Patil vs State of Mysore (1977),
wherein, E’s ornaments having been stolen and recovered by the police disappeared from police
custody. Held, the state was liable, the contract of bailment having been implied. Hence, (a) is correct
answer.
46. Answer : (c) < TOP >

Reason : As Abhilash, Biswajeet and Sukant are co-sureties, on default Abhilash will be liable for one-third of
the amount lent to Deepak which is Rs.20,000.
47. Answer : (d) < TOP >
Reason : Where there is a contract for the sale of specific goods and the seller is bound to do something to the
goods for the purpose of putting them into a deliverable state, the property does not pass until such
thing is done and the buyer has notice thereof.
In Underwood vs. Burgh Castle Cement Syndicate, there was a contract for sale of a fixed condensing
engine. According to the contract, the engine was to be severed and delivered free on rail at a specified
price. However, the goods were damaged before it reached the railway. It was held that the property in
the goods did not pass as the goods were not in a deliverable state when it reached the railway. Hence,
Anuradha can recover the bangles for M/s Toshinwal Jewellers.
48. Answer : (a) < TOP >
Reason : In case of a special crossing (i.e. from one bank to another) the crossing is permitted even without two
traverse lines. But in case of general crossing or any other crossing there should two transverse lines.
The instances cited in (b), (c), (d) and (e) are “crossing” under the Negotiable Instruments Act, 1881.
Hence (a) is correct answer.
49. Answer : (b) < TOP >
Reason : When one person signs and delivers to another, a stamped instrument which is either wholly blank or
incomplete, he thereby gives a prima facie authority to the holder thereof to make or complete, as the
case may be, upon it a negotiable instrument, for any amount specified therein, and not exceeding the
amount, covered by the stamp. Therefore, Chinmay can recover the amount from Ananth as Chinmay
being the holder in due course but the stamp affixed must permit the amount. Hence, (b) is correct
answer.
50. Answer : (a) < TOP >
Reason : According to section 25 of the Negotiable Instruments Act, 1881, when the day on which a promissory
note or bill of exchange is at maturity is a public holiday, the instrument shall be deemed to be due on
the next preceding business day, i.e. January 25, 2008. Hence, (a) is correct answer.
51. Answer : (b) < TOP >
Reason : Under the Indian Contract Act, 1872, an offer will be valid only if it is communicated to the offeree.
Communication of an offer is complete when it comes to the knowledge of the offeree. A person who
acts according to the terms of an offer which has not been communicated to him will not be deemed to
have accepted the offer.
The facts of the given case are similar to the decided case of Lalman Shukla vs Gauri Dutt. The
plaintiff who was successful in tracing the missing nephew of the defendant claimed the reward in spite
of not being aware of the offer. The contention of the plaintiff was that he was entitled to the reward as
he had traced the missing boy. It was held that as the plaintiff was oblivious of the offer he was not
 entitled to the reward.
Hence, in the given case, Gopal cannot claim the reward of Rs.2,000 as he had not heard of the offer
of reward by Srinath.
52. Answer : (a) < TOP >
Reason : Even though the total amount of the bill has been negotiated Brijesh and Chiraag are endorsees for
only a part of the amount and hence the indorsement is invalid.
According to section 56 of the Negotiable Instruments Act, 1881, no writing on a negotiable
instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the
amount appearing to be due on the instrument; but where such amount has been partly paid, a note to
that to that effect may be endorsed on the instrument, which may then be negotiated for the balance.
According to the later part of sec.56, A bill which has been endorsed ‘pay ‘A’ or order Rs.500 being
unpaid residue of the bill’ is a valid endorsement. Hence, (a) is correct answer.
53. Answer : (a) < TOP >
Reason : The facts of the case are similar to the decided case of Shivallingappa Shankarappa vs. Balakrishna &
Son, where the buyer ordered for the best quality of ‘tur dal’. However, on arrival at the destination,
the “tur dal” had been damaged by moisture and was no longer of merchantable quality. It was held
that the buyer could reject the goods and claim damages from the seller. Hence, (a) is correct answer.
54. Answer : (d) < TOP >
Reason : Under the Sale of Goods Act, 1930, Anil will not get a valid title as the hire purchaser has no valid title
until all the agreed installments are paid by him.
55. Answer : (b) < TOP >
Reason : Nitish can take action against seller as he had committed breach of condition as to quality or fitness
under section 16(1) of Sale of Goods Act, 1930 and hence seller was liable to pay damages to Nitish.
The facts of the given case are similar to the decided case of Priest vs. Last, where the plaintiff who
wanted to buy a hot water bottle for his spouse went to the defendant and asked for one. The defendant
sold him an American rubber bottle and on enquiry informed the plaintiff that the bottle would be
suitable only for hot water and not boiling water. However, the bottle burst and injured the plaintiff’s
spouse while she was using it. The Jury concluded that the bottle was not fit for use as a hot water
bottle. The seller had committed a breach of condition and hence was liable to pay damages to the
plaintiff.
56. Answer : (c) < TOP >
Reason : The company being an artificial person, enjoys perpetual succession. The company remains unaffected
by the death, insolvency or retirement of its members. In the given case, the legal heirs of Rakesh and
Rahul will become the members.
57. Answer : (b) < TOP >
Reason : A contract entered after incorporation but before obtaining certificate for commencement of business
is a provisional contract. It automatically gets confirmed as soon as certificate for commencement of
business is obtained. No further ratification is necessary
In case of a private company, it does not require any certificate of commencement of business, as
section 149 is not applicable to private company. Hence question of provisional contract does not arise
in case of a private company.
58. Answer : (e) < TOP >
Reason : The facts are similar to the decided case of Royal British Bank vs. Turquand (1856), where the
directors of a company borrowed a sum of money from the plaintiff. The company’s articles provided
that the directors might borrow on bonds from time to time to be authorized by a resolution passed at a
general meeting of the company. The directors gave a bond to Turquand without the authority of any
such resolution. It was held that Turquand could sue the company on the strength of the bond, as he
was entitled to assume that the necessary resolution had been passed.
Hence (e) is correct answer.
59. Answer : (c) < TOP >
Reason : If a shareholder of a company fails to pay any call money the company can forfeit his shares.
The forfeiture must be authorized by the Articles of the Company and a due notice is required to be
issued to the defaulting shareholders. A notice has to be given to the shareholder giving time of at least
14 days to pay-up the required amount. This is to give a last chance to the shareholder to pay for the
call money and interests due thereon. The notice shall also state that in the event of non-payment the
 shares are liable to be forfeited.
In the given case the Board of Directors of Shanti Biotech Ltd., failed to mention the time of the
payment, which invalidates the forfeiture of shares of Mr. Amitav Bose and he is liable to pay the call
money.
60. Answer : (d) < TOP >
Reason : The misrepresentation should relate to a material fact. Where it is represented that something will
happen or be done in future, this does not amount to a representation of fact. It is only an estimate or a
forecast. Hence, there should be a misstatement relating to an existing fact. In Bentley vs. Black it was
held that a calculation of future profits is not a representation of fact. Hence, (d) is correct answer.
61. Answer : (e) < TOP >
Reason : A forged transfer is a nullity and does not confer a good title to the transferee even if he has acquired
the shares in good faith and for consideration.
The company is bound to restore the name of the rightful owner in the register of members on
becoming aware of the fact of forgery. In such an event, the transferee is required to surrender the share
certificates to the company and repay all the dividends, benefits, etc. received by him. In Kaushalya
Devi v National Insulated Cable Company of India Limited, it was held that a person who becomes a
holder of shares under a forged transfer does not acquire a good title and is bound to return the shares
to the rightful owner. Therefore, the company has to restore the name of Ramesh Mathur as the
rightful owner of the shares. Hence, (e) is the correct answer.
62. Answer : (c) < TOP >
Reason : Inefficient management by the directors is not an act of oppression by the directors. All the other acts
are held as oppressive. Hence, (c) is correct answer.
63. Answer : (e) < TOP >
Reason : A final dividend for any financial year can, as a rule, be declared and paid only when the balance sheet
and profit and loss account are presented to the shareholders at the annual general meeting, and the
shareholders after a consideration of the amount recommended by the directors, approve the same or
such lesser amount as may appear to them to be reasonable and proper. The shareholders can approve
the recommended rate of dividend or lower the same, but cannot increase the amount of dividend.
Where the shareholders of a company desire to increase the rate of dividend, the proper course of
action would be to adjourn the annual general meeting, hold a board meeting for increasing the rate of
dividend and adoption of revised accounts and then hold the adjourned annual general meeting for
declaration of dividend. Hence, (e) is correct answer.
64. Answer : (e) < TOP >
Reason : The First Auditor/s of a company shall be appointed by the Board of Directors within three months of
the date of registration of the company by passing a resolution to that effect. Such an auditor shall hold
office till the conclusion of the first annual general meeting.
However, the company has the power to remove any such auditor and appoint any other person/s
nominated by any member of the company by giving not less than 14 days notice before the date of the
meeting. Such an appointment can be made at a general meeting.
Where the Board fails to exercise its powers to appoint the first auditors, the company in general
meeting may appoint the first auditor/s. Hence, (e) is correct answer.
65. Answer : (e) < TOP >
Reason : Statutory meeting must be held not less than one month but within 6 months from date of
commencement of business. (Sec.165). Hence the statutory meeting should be held any time during 12-
09-2006 to 12-02-2007. On 12-09-2005, one month is just over. Hence, meeting can be held on that
day, as the words used are not less than one month. Similarly, sixth month gets over on 12-02-2006.
Hence, meeting can be held on that date.
66. Answer : (a) < TOP >
Reason : Section270 of the Companies Act, lays down that a director is required to hold qualification shares
within 2 months from the date of his appointment. The nominal value of such shares required to be held
by a director is Rs.5,000 where the nominal value of share to be held exceeds Rs.5,000, the number of
shares required to be held is one share. A director will have to take up qualification shares only if
required by the articles of association Therefore, the minimum number of shares required to be held by
Mr. Surendranath is nil.
67. Answer : (c) < TOP >
Reason : A chairman is required to maintain order and decorum at a meeting, to give ruling on points of order,
 to decide priority of speakers, to maintain relevancy and order in debate, to adjourn a meeting, to exercise a
casting vote in case of a tie and to ascertain the sense of meeting and declare the result of voting.
Hence, (c) is correct answer.

68. Answer : (d) < TOP >

Reason : Hasmukh Joshi being the finder of lost goods can retain the diamond ring against everyone except the
true owner. The facts are similar to the decided case of Hollins vs. Fowler, where it was held that the
finder of lost goods could retain the goods against everyone except the true owner.
69. Answer : (a) < TOP >
Reason : In Geen vs. Winkel, a person who received goods on sale or return basis gave them to another person
on the same terms. While in the custody of that person, the goods were lost. It was held that by giving
the goods to another person on the same terms, the person receiving goods on ‘sale or return basis’, had
performed an act adopting the transaction. As a result the property in the goods had passed to him.
Hence, in the given case Vijay is liable to compensate Varun for the DVD player.
70. Answer : (e) < TOP >
Reason : To initiate an action under section 138 of the Negotiable Instruments Act, 1881, the payee or the
holder in due course should have made a demand for payment by way of a written notice to the drawer,
within 30 days of receipt of information of the dishonored cheque.
Where a cheque is issued as a gift or to discharge a moral obligation or for an illegal/unlawful
consideration, Section 138 will not be applicable.
Hence, (e) is correct answer.

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