1

THE CONTRACT ACT

Definition of contract : An agreement enforceable by law. Contracts are those agreements which have been entered into by parties competent to contract, with an intention of creating legal relationship, with a free consent for a lawful consideration with a lawful object, which are not expressly declared to be void, the terms of which are certain, can possibly be performed and wherever necessary legal formalities are complied with. Essentials of a valid contract: 1) A contract should be an agreement between [b/w] 2 OR more parties: There must be a lawful proposal. A proposal is lawful when it is absolute & unconditional & it is made with an intention to legally bind the other party. If the proposal is not absolute it is not valid. A proposal may be made to the world at large OR to a specific person. This proposal should be lawfully accepted. An acceptance is lawful when its absolute & unconditional. When a proposal is made to the world at large any person has a right to accept it. When the proposal is to a specific person only that person has a right to accept it. When a valid proposal is accepted it becomes an agreement. 2) The agreement must be enforceable by law: An agreement is enforceable by law when there is an intention of the parties to the agreement to legally bind each other. If such an intention is not present in an agreement the agreement cannot be termed as a contract because where there is no intention of the parties to legally bind themselves it would not be possible to enforce the agreement by law. E.g.: a) A & B agree b/w themselves to go for a cinema. A commits breach of the agreement & does not go. Here we could not take the help of law to compel A to perform his part of the agreement. b) A & B entered into an agreement whereby A agrees to sell his car to B for a total consideration of Rs. 2Lac. A, commits a breach of the agreement by refusing to sell his car to B. In this case B can take the help of law to compel A to sell his car for Rs. 2Lac. In both the above cases we see that there was an agreement b/w 2 parties but in the first there was a mere social agreement without any intention of the parties to legally bind each other. Hence the same was not enforceable by law. However in the second there was a definite intention of the parties to legally bind each other & law could enforce therefore the agreement. Only those agreements that are enforceable by law can be termed as a contract. We therefore see that the term agreement has a broader meaning than the term contract. Thus we say that all contracts are agreements but all agreements are not contracts.

2 3) Free consent: Consent means to agree upon a particular thing in the same sense. Consent must be free. If the consent is not free the contract would not be valid. Consent is not free when it is obtained by i) Coercion, ii) undue influence, iii) fraud, iv) misrepresentation, v) Mistake. 4) Parties to the contract : The parties to the agreement must be competent to contract. The following parties are incompetent to contract: i) Any person who has not attained the age of 18 years at the time of entering into the contract. ii) A lunatic, an idiot OR an insane person. iii) A person disqualified to contract. iv) An insolvent person. 5) A lawful consideration: Consideration means what one gets in return of the promise. The consideration of the contract must be lawful. Consideration is lawful when: i) It is not forbidden by law. ii) It does not defeat any provision of law. iii) It does not cause any injustice OR injury to another person OR his property. iv) It is not opposed as public policy OR regarded as immoral. v) It is not fraudulent. Consideration must be real. It may be past, present OR future. It may be by way of: i) an act, ii) forbearance {omission of an act}, iii) may be in cash, iv) may be in kind, v) may be a promise to do an act, Consideration need not be adequate 6) Lawful object:+ The lawful object for which an agreement is entered into should be lawful in order to enable the agreement to be enforceable by law. The object of a contract is lawful when: a) Law does not forbid it. b) It should not defeat any provision of law. c) It should not cause injury to any person OR his property. d) It should not be opposed to public policy OR be regarded as immoral. e) It should not be fraudulent. Where the object of a contract is unlawful it is not a valid contract. 7) The agreement must not be expressly declared to be void:

3 Some of the agreements which are declared void under the Indian Contract Act are as follows: i) An agreement in restraint of trade. ii) An agreement in restrain of legal proceedings. iii) An agreement in restrain of marriage. iv) An agreement of wager. v) Agreements the terms whereof are not definitive. 8) Legal formalities: Whenever a law specifies a contract should be in writing & should comply with all the legal formalities. If the legal formalities are not complied with, the contract will not be valid. 9) The terms must be certain: The agreement should not be vague. 10) Possibility of performance It should be possible to perform the terms of the agreement. Definition of a proposal: Whenever a person signifies, to another, his willingness to do or abstain from doing anything with a view of obtaining the assent of that other person to such an act or abstinence he is said to have made a proposal. A proposal is also known as an offer. An offer when accepted becomes a promise. The person making the proposal is called as the promisor {offeror} & the person accepting the proposal is called the promise {offeree}. When an offer is accepted it results into a contract. An offer that has not been accepted is inert, ineffective & powerless. Rules regarding a valid proposal:1) The terms of offer must be definite. 2) The offer must contemplate the creation of legal relationship b/w the offeror & the offeree. 3) An offer may be expressed OR implied. 4) An expressed offer is that which is made to the offeror either in writing OR by spoken words. Eg: i) A writes to B about his desire to sell his flat to B for Rs.1000000. An implied offer is that which is implied OR understood by the conduct of the offeror. ii) A taxi standing parked on the road. This is an implied offer of the taxi driver to carry passengers for a fare as per the meter reading. 5) Person to whom an offer may be made : a) To a definite person Eg: A offers to sell his house to B for Rs.50 Lac. This is an offer that is made to B & it is only B who has a right to accept the offer. b) To a specific class of persons. Eg: X puts a notice of reward to any student finding & returning his lost book. This offer is made to a definite class of persons namely the students.

4 c) To the world at large. Eg: A advertises in the news papers for a reward to any person finding OR giving information about his missing son. Distinction b/w an Offer & an invitation to offer: When an offer is accepted it results in the creation of an agreement. However when an invitation for an offer is accepted it results into an offer itself. An offer remains open till: a) It is rejected. b) It is lapsed. c) It is accepted. d) By non-acceptance. e) It is revoked. When an offer is made which is not accepted, not rejected, not revoked, then after a reasonable period the offer will be deemed to have come to an end. Eg: An offer for sale of a flat for Rs. 50 Lac cannot be accepted after an unreasonable time that is say after a year of the offer. Communication of an offer: An offer has to be communicated to the offeree without which there would be no valid offer. Any special condition if contained in the offer will be binding upon the offeree. An offer may be communicated expressly OR it may be implied. An offer is said to have communicated when it has come to the knowledge of the offeree. Valid acceptance: a) An offer can be accepted only by the offeree & therefore there can be a valid acceptance only if the acceptance is made by the offeree. b) Acceptance should be absolute & unconditional. c) A qualified acceptance OR acceptance with variation is not an acceptance but is a counter offer. d) The acceptance should be within a reasonable time. e) An offer may be accepted either expressly that is in writing OR orally, by conduct OR by following the prescribed manner of the offer. f) Mental acceptance is not sufficient. g) Acceptance must be communicated to the offeree. h) Acceptance is acceptance for all terms. i) Acceptance must be before lapse. Revocation of an offer: a) Revocation of an offer can be made by communication by way of a notice of revocation. The notice of revocation of an offer must reach the offeree before the offer has been validly accepted. b) An offer is revoked automatically by lapse of the prescribed time. c) When there is no prescribed time specified in the offer, the offer will be deemed to have been revoked after a reasonable time. d) By failure of condition precedent. e) By death OR insanity of the proposal. f) By death OR insanity of the offeree.

5 g) Revocation by counter offer. h) When an offer has not been accepted according to the prescribed manner i.e. when the acceptance is defective the offer will be deemed to have been revoked. i) By the refusal OR rejection of the offer by the offeree. Consideration: When at the desire of the promiser the promisee OR any other person a) has done OR abstained from doing, b) does OR abstains from doing, c) promises to do OR abstain from doing, something, then such an act, promise OR abstinence is called as the consideration of the contract. Consideration is therefore what one gets in return of the promise. Essentials of a consideration: 1) It must be something that is done at the desire of the promisor. If any act has been done voluntarily i.e. not at the desire of the promiser then such an act will not amount to a consideration. Eg: a) As house is on fire. As son is in the house. B voluntarily enters the house & saves his son. Here as the act of saving As son is voluntarily & not at the desire of A. B cannot demand any reward from B. b) As house is on fire. As son is in the house. A offers a reward of Rs. 1Lac, for saving his son. On the offer being made B enters the house & saves the child. Here B is entitled for reward as his saving of the child was at the desire of A. The act, abstinence OR promise {consideration} may be given by the promisee OR any other person. 2) As per the India Contract Act the consideration may be given by the promisee OR any other person. Under the English Act the consideration must be given by the promisee only. As per English law a stranger to a contract has no right to enforce the same. Eg: A enters into an agreement with B, her daughter where A agreed to give B a piece of land & B agreed to pay a fixed sum to C her uncle. A dies, B refuses to pay the amount to C. In this case C, the uncle though is a stranger to the contract {not a party to the contract} can enforce the contract against B. The defense at B that the uncle had given no consideration for the contract & therefore was not entitled for the money, could not be considered because as per the Indian Contract Act consideration may be given by the promisee OR any other person therefore the uncle who was a stranger to the contract could enforce the contract against B. Only a stranger who is a beneficiary of the contract can enforce the contract in the following cases. A stranger may enforce the contract:

6 1) The nominee of an insurance policy. 2) Beneficiary of trust property. 3) Third party Insurance contracts. 4) Endorsee of a negotiable instrument. 5) Holder of a document in title {holder of a bill of lading}. 6) Legal representatives. 7) Undisclosed principles. 8) An assignee. 3) The consideration of a contract need not be adequate: The consideration of a contract shall have some value & it is not necessary that the value should be sufficient OR adequate in return of the promise. Inadequacy of consideration cannot make the contract void. Eg: A agrees to sell his car worth Rs. 2Lac to B for a consideration of Rs. 50 K In this case though the consideration received by A is obviously insufficient OR inadequate. A will be bound to sell his car to B if he has given his free consent to the agreement. 4) Consideration may be an act to do OR not to do an act ( abstinence ) it may be in cash or in kind : Eg: a) A agrees to sell his car to B for Rs. 2 Lac. The consideration received by A is consideration in cash. b) A declares a reward in the newspapers for finding his son. The consideration received by A is consideration in terms of the act of finding his son. c) A agrees to give his car to B in return of a plot of his land. This is consideration in kind. d) A agrees to pay money to B provided B does not sell his property. This is a consideration by way of a promise not to do an act. 5) Consideration may be past, present OR future: a) Where the consideration is given before the promisor performs his part of the promise. It is termed as past consideration. Eg: The consideration for finding ones son for a reward would be a past consideration. b) When the consideration is given after the promise is fulfilled, it is future consideration. Eg: The offer of a contractor to receive payment {consideration} after the job is done is a future consideration. c) Present consideration is that which is given simultaneously at the time of the fulfillment of the promise. Eg: A agrees to sell his car to B for Rs. 2 Lac. In this case as soon as the money is given to A he hands over the car to B. 6) Consideration must be real: By real we mean that which can actually be performed. Consideration cannot be an act that is physically OR legally impossible.

7 A consideration that cannot be physically OR legally performed will be an illusory consideration. Such considerations are not allowed as the Indian Contract act specifies that the consideration of a contract in order to be enforceable must be real, which can actually be performed. Eg: i) A enters into a contract with B whereby he agrees to walk on the surface of a deep river if B gives him Rs. 10,000/-. Here the consideration that may be received by B that is the act of walking over the surface of a deep river for a promise of Rs.10,000/- is not a real consideration as the same cannot be physically performed. ii) A agrees to withdraw a case of robbery filed against B if B pays him the loss suffered by A. In this case the consideration of withdrawing the case is an illusory consideration as it is not possible to be performed. 7) Consideration must be lawful: Consideration is unlawful when a) It is forbidden by law: Eg: A agrees to withdraw a case for murder against B. b) It defeats any provision of law : Eg: A contract of bigamy {2 marriages} defeats the provision of Hindu law therefore such a contract b/w the two Hindus will be void as the same is for an unlawful consideration. c) It imparts {involves} injustice to any person OR his property : Eg: A agrees to set the house of C on fire on payment of Rs. 50,000/- from B. d) When it is fraudulent: Eg: A agrees to enter into an agreement with B whereby he agrees to get lease of a land actually owned by C even though he is not entitled to do so. e) When it is immoral OR opposed to public policy: An agreement, which interferes with the marital status relationship of a person, would be for an immoral consideration. An agreement for getting a job through influence in a public office would be an agreement, the consideration of which is opposed to public policy. From the above we can see that consideration is the basis of a contract. Without a consideration there can be no contract. Out of bare promise no cause of action arises. Though the rule that no consideration no contract applies to all contracts there are certain exceptions to the rule. 1) Agreements that are arising out of natural love & affection & which are duly registered: For an agreement to be a contract enforceable by law without any consideration it should be seen that offer is out of love & affection. When the agreement cannot be seen to be made

8 out of natural love & affection then the general rule no consideration, no contract shall apply. Eg: a) A promise to give a car to B out of natural love & affection. This agreement is put into writing & registered. This agreement even though without consideration will be enforceable by law as it was obviously made out of natural love & affection. b) A offers to give his wife B a flat on the condition that C stays separately. A refuses to give the flat. C filed a case for specific performance wherein C stated that the contract was b/w husband & wife & & was made out of natural love & affection. Hence it should be valid even though there was no consideration. In this case the court held that the consideration of the promise to live separately was contrary to the principles of natural love & affection & hence the contract was void. 2) Promise to pay a time barred debt: A time barred debt is a debt that cannot be recovered by the creditor if he has not taken steps to recover the same from the debtor for a consideration. In this case of debts a creditor should claim them within a period of 3 years from the date on which it becomes due. If the creditor takes no action for recovery of debt within a period of 3 years the debt will be termed as a time barred debt & creditor looses his claim over the same. If a debtor promises to pay a time barred debt to the creditors this promise even though made without consideration will be a valid contract. However this promise in order to be a contract must be made by the person originally liable to pay & not any other person. 3) Promise to pay for voluntary services: When a person promises to pay something for services voluntarily rendered by another he shall be bound to do so. However it should be noted that the services rendered were voluntary & that while the services were rendered the promisor was in existence & the person who render the service must be a person competent to contract. Eg: B has saved the son of A who was caught in the fire. Afterwards A promises the reward to B worth Rs. 50,000/-. In this case the act of B saving his son was voluntary. However after such an act is complete, if A has made a promise to reward B even though the promise is without any consideration A will be bound to keep his promise 4) Creation of an agency: When a person appoints another as his agent even if the same is done without any consideration the same is a valid contract as the benefits out of the acts of the agent will be automatically be derived by the principal. Free consent: The consent of a party to a contract is not free when it is has been obtained by :A) Coercion B) Undue Influence

9 C) Fraud D) Misrepresentation E) Mistake An agreement where there is no free consent is a voidable agreement i.e. the person whose consent is not free can get the contract declared as void. Valid contract is that contract which has all the essentials of a contract & which is enforceable by law. Void contract is that which is not enforceable by law. Voidable contract is that contract which may be declared void at the instance of one of the parties. Eg: Contract without free consent A) Coercion:Coercion is the committing OR threatening to commit any act forbidden by Indian Penal code OR the unlawful detention OR threatening to detain any property, to the prejudice of any person, with the intention of causing any person to enter into an agreement. Coercion means the committing OR threatening to commit an act which is against law Or detaining or threatening to detain property which is against the interest of another person & which has been done to force the another to enter into a contract. B) Undue Influence:A contract is said to be induced by undue influence where the relation subsisting b/w the parties are such that one of the parties is in a position to dominate the will of the other & uses this position to obtain an unfair advantage over the other. Essentials of undue influence: a) One of the parties to the contract is in a position to dominate the will of the other: It should be seen that the relations b/w the parties where one is in a position to dominate the will of the other is subsisting OR is present at the time the consent has been given. If the relation does not subsist at that time i.e. where the relations was such before the consent has been given OR after the consent has been given then it will not amount to undue influence. A person is in a position to dominate over the will of the other where: i) He holds a real OR apparent authority over the other. ii) Where he stands in fiduciary over the other i.e. a position of trust, faith & confidence. iii) Where he makes a contract with a person whose mental capacity is temporarily OR permanently affected by the reasons of age, illness & mental OR physical distress. b) The use of this position to obtain an unfair advantage over the other i.e. the above mentioned relation must have been used by the party to get an advantage which he could not have got in the absence of such a relation. When a contract has been signed under undue influence the contract is voidable at the option of the person whose consent has been obtained under undue influence. C) Fraud:-

10 While entering into a contract where an act is done with an intention to deceive the other party OR to induce the other party to enter into such a contract such an act would amount to fraud. Fraud is committed when: i) A person makes a suggestion of a fact to be true when in reality the fact suggested is not true & where the person suggesting the fact does not believe it to be true : When a person enters in a contract believing the suggestion is true then fraud is committed. ii) When a person actively conceals the fact which is to his knowledge : Whenever a person knows a certain fact that is subject matter of the contract & he deliberately does not disclose the fact to the other party then a fraud will be deemed to have been committed. iii) A promise made by a person without any intention of fulfilling it : Whenever a person promises to perform an act with an intention, before making a promise, of not performing the act fraud is committed. Eg: A buys goods from B with an intention of not paying B at all. It should however be noted that where the intention of not performing the act is absent it will not amount to fraud. iv) Silence: In certain cases even silence amounts to fraud i.e. when a person who has a duty to disclose the facts keeps silent about the same & if the other party enters into an agreement because of the silence i.e. the other party would not have agreed if the facts were disclosed such acts of silence would be equivalent to speech & therefore would be fraud. If certain facts are not disclosed by keeping silence & if such silence would not effect the willingness of the other party then there shall be no fraud. Similarly the silence should be in respect of the subject matter of the contract. vi) Any act done with an intention to cheat the other party: When a contract has been signed under fraud the contract is voidable at the option of the person whose consent has been obtained under fraud. Such party can also claim compensation. D) Misrepresentation:Misrepresentation means a wrong statement of the fact material to the contract. It may be of the following types: i) An unwarranted positive statement: A person suggests a fact to be true when it is not true & the person suggesting the fact believes it to be true. Whenever a person makes a statement pertaining to the subject matter of the agreement believing it to be true when in fact the statement is not true. If the other party enters into a contract believing the statement to be true it would amount to misrepresentation & the consent of the other party would be deemed to have been obtained by misrepresentation. ii) By breach of a contract:

11 When there is a duty of a person to disclose certain facts & a person commits breach by not disclosing the facts & where such a breach is without any intention to cheat it amounts to misrepresentation. When a contract has been signed under misrepresentation the contract is voidable at the option of the person whose consent has been obtained under misrepresentation. However, he cannot claim any compensation. E) Mistake:It means that the parties to an agreement are under an erroneous belief as to the subject matter of an agreement. When an agreement is entered into such an erroneous belief the agreement is void. However it should be noted that the mistake should be in respect of the fact of the agreement. i.e. in respect of the identity of the parties to the contract OR identity of the subject matter of contract. Eg: A & B entered into contract whereby B agrees to purchase A s horse for Rs. 50,000/-. Both A & B are not aware at the time of entering into contract that the horse had already died. This could be a contract concerned under a mistake of facts & therefore would be void. A therefore cannot force B to purchase the horse. A mistake of law is not considered as a mistake because ignorance of law cannot be an excuse, as every citizen is supposed to know the laws prevailing in the country. A mistake of foreign law is considered to be a mistake of fact as per Indian Contract Act.

Competency of the parties: According to the Indian Contract Act every person who is not a minor, who is not in the state of an unsound mind OR a person who is not disqualified from contracting by law can enter into contract, such persons are competent to contract. A minors contract: According to provisions of Indian Contract Act a minor is incompetent to contract, therefore a contract entered into by a minor is void. According to law prevailing in our country any person below age of 18 is a minor. In case a lawful guardian has been appointed a person below the age of 21 is considered a minor. 1) A minor cannot mortgage his property, his contract is void ab initio: A, a minor mortgaged his house in favour of B a money lender & received Rs. 8,000/- as initial loan from a total loan amount Rs. 30,000/-. B filed a suit against A for recovery of the money OR declaration of that mortgage was valid. The courts held that as a minor is incompetent to contract the mortgage was not valid & the money already advanced could not be rendered to B as a minors contract is void ab initio i.e. the promise to return the money does not arise.

12 2) A minor cannot be a partner of a firm. However he may derive benefit from a partnership firm. Minor deriving benefits from a partnership firm can become a partner within 6 months of his attaining majority. 3) The principle of estoppel is not applicable to a minor: i.e. if a minor does not disclose his incompetency to the other party & enters into a contract even then he cannot be held liable & will not be bound by the contract. 4) Ratification: A minor cannot make ratification after attaining majority as a contract entered into by a minor is void ab initio & therefore the question of ratifying the contract shall not arise. 5) Basic necessities supplied to a minor can be recovered by a person from the property of a minor. However the minor himself shall not be liable for the same. 6) A Minor cannot be declared insolvent. 7) A minor cannot become a member of a registered company. 8) A minor can act as an agent: When a minor acts as an agent the principal shall be liable for all the acts of a minor. However the principal cannot hold the minor liable for any breach of conditions of an agency. 9) A person standing surety for a minor: Whenever a person who may be competent to contract acts as a surety as a payment of debts of minor he shall not be liable to pay the debts if the minor fails to pay the amount as according to the courts the liability a surety arises subsequently. It is secondary liability & when the principal debtor {minor} himself is not liable the surety can be forced to pay the debtor. 10) A minor may be a promisee: According to the courts a minor though is incompetent to contract can be a promisee. A promisory note OR a negotiable instrument drawn in favour of a minor is a valid document. 11) Whenever a person competent to contract promises to pay with a minor in favour of any third person the minor shall not be liable to pay. The other person competent to contract will be held liable. Eg: A {competent to contract} & B {minor} jointly promise to pay Rs. 50,000/- for goods received to C. In this case through one of the party to contract will be void the contract will be valid. However the minor, B will not be liable to pay C hence A will have to make the entire payment of Rs. 50,000/- to C. 12) A minor has a right to hold property OR interest on property : A minor can hold a property transferred in favour OR for the benefit of a minor. Contract by a person of unsound mind: The Contract Act defines a person to be of a sound mind when he is capable of understanding the contract & of forming a rational judgment as to its effect upon his interest. A persons may be permanently of an unsound mind i.e. insane person, an idiot. A person may be temporarily of an unsound mind. i.e.a lunatic. The Indian Contract Act says that a person who is of an unsound mind is incompetent to contract therefore any person whose mental capacity has been derranged either temporarily OR permanently to such an extent that he cannot understand as to what he is

13 doing OR he cannot form a rational judgement on any matter such a person would be incompetent to contract. a) An idiot, mental dwarf. b) A lunatic {mental disease causing regular OR irregular derangement}. c) Insane person {permanent mental derangement}. d) Drunkenness {clouding of mental capacity due to intoxication}. A lunatic may be of an unsound mind usually & may come to his senses i.e. becomes of a sound mind occasionally & vice versa. A contract entered into by a person having an unsound mind is a void contract. However in the case of a lunatic who is usually of an unsound mind the presumption is that he was of an unsound mind when he entered into the contract and the third party will have to prove that he was of a sound mind at the time of the contract if he wants to enforce the contract. For a lunatic who is usually of a sound mind the presumption will be that he was of a sound mind when he entered into the contract & he will have to prove that he was of an unsound mind if he wants to get the contract declared void. Contract by a corporation: A corporation is an artificial person created by law having a legal existence & capable of suing & being sued. A corporation cannot enter into contracts, which are purely of a personal nature. It can enter into contracts through its agents. However a corporation that has been entered into restricts the contractual powers of a corporation & which is not allowed by the rules governing it would be a void contract. Contract by an insolvent: An insolvent cannot enter into a contract. Only the official assignee who is in charge of the assets of the insolvent can enter into a contract on behalf of the insolvent. Contract by convicts: A person undergoing imprisonment is incompetent to contract. However he may contract if he is under a licence called as a ticket OR leave. The law of limitation is kept in abeyance for the time he is in prison. Contingent contracts: Section 31 of the Indian Contract Act defines a contingent contract is a contract to do OR not to do something if some event collateral to such contract does OR does not happen. Whenever a party enters into a contract with another & where the consideration is dependent upon a future uncertain event that is directly related to the contract such a contract would amount to a contingent contract. Eg: A agrees to pay B Rs. 10,000/- if B marries C. Characteristics of a contingent contract: 1) A contingent contract depends upon the happening OR not happening of some event in future. 2) The happening OR not happening of the event must be uncertain. 3) The event must be collateral to the contract i.e.it must be incidental to the contract. Eg:

14 A agrees to purchase certain goods from B provided the same are approved by C. Rules regarding contingent contracts: 1) The uncertain event must happen [Section 32] : Eg: A, contracts with B, to buy his horse if he survives C. In this case the contract is dependent upon a future event of A surviving C. If A dies before C the uncertain event cannot happen & therefore the contract will be void. 2) The non happening of a future uncertain event [Section 33]: Eg: A agrees to pay B a certain sum of money if the ship carrying his goods does not arrive within 3 months. For the contract to be enforced the ship must not arrive at the port within 3 months i.e. where the contract is dependent upon the non happening of an uncertain event the event must not happen. 3) When an event is deemed to be impossible [Section 34]: Whenever a person does an act which renders it impossible for an event to happen the contract will come to an end. Eg: A agrees to pay Rs. 10,000/- to B if B marries C. B married D. The conduct of B has rendered the happening of the event impossible & therefore the contract comes to an end. 4) The happening of an event within a fixed time [Section 35(1)]: When a contract is contingent upon the happening of an event within a fixed time it shall be valid if the event happens within the fixed time. But if the event does not happen within the fixed time the contract will be void. 5) The not happening of an event within a fixed time [Section 35(2)]: When the contract is contingent upon the not happening of an event within a fixed time it will be valid & can be enforceable only after the expiry of the fixed time that the event cannot happen. Eg: A agrees to pay Rs. 5,000/- to B if the ship carrying his goods does not arrive within 6 months. This contract is enforceable after 6 months OR if the ship has sunk i.e. it is certain that the ship cannot arrive within 6 months. 6) Agreements contingent on impossible events [Section 36]: Contingent contracts to do OR not to do an act if an impossible event happens are void. Whether the impossibility of the event is known OR not to the parties at the time of an event. Eg: A agrees to pay Rs. 10,000/- to B if B marries C. At the time of the contract C was already dead.

15 Therefore this contract is said to be contingent on the happening of an impossible event & shall be a void contract whether A OR B were aware of Cs death OR that will have no effect upon the validity of the contract.

Distinguish between Contingent contract & Wagering contract: Sr. No. 1 2 3 Wagering contract Wagering contracts are void as per Section 30 of the Indian Contract Act. In a Wagering contract there is a reciprocal promise. The event in the case of a Wagering contract is generally beyond the powers of the parties. In case of a Wagering contract winning OR losing an amount is the only interest of the parties & they may not be interested in the subject matter of the event. In the case of a Wagering contract it is solely the future event which determines the contract. Eg : A has made furniture to be sold to B under a condition that B shall pay Rs. 5,000/- if the furniture are approved by C. But if they are not approved A shall not charge any thing for the furniture. This is a Wagering contract because the future event i.e. Cs approval will determine the consideration of the contract. Contingent contract Contingent contracts are valid contracts. In a Contingent contract there is no reciprocal promise. In case of a Contingent contract it may be within the powers of one of the parties. In the case of a Contingent contract winning OR losing is not the prime interest of the parties, in fact, the parties may be interested in the subject matter of the event. In the case of a Contingent contract the future event is merely collateral OR incidental.

Eg : A makes furniture to be sold to B for Rs. 5,000/- if the furniture are approved by C. This is a Contingent contract which is entered into b/w A & B subject to approval of C.

The time & place of performance: 1) When no time is specified: [Section 46] Whereby a contract a promisor is to perform his promise without application by the promise & no specific time for performance is mentioned the contract must be performed within a reasonable time. Reasonable time depends on the special circumstances of every case & the facts & intentions of the parties while making the contract. Reasonable time is in each particular case a question of fact. 2) When time is specified:

16 [Section 47] When a promise is to be performed on a certain date & the promisor has undertaken to perform it without an application by the promise the promisor may perform it at any time during the usual hours of business on such a day & at such a place where the promise is ought to be performed. [Section 48] When a promise is to be performed on a particular date & the promisor has not undertaken to perform without an application by the promise it is the duty of the promise to apply for performance at a fixed place & time. [Section 49] When the promise is to be performed without the application of the promise & there is no fixed time OR place it is the duty of the promisor to appoint a reasonable place & time for performance. 3) Time is the essence of the contract: If the intention of the parties at the time of making the contract was that time should be the essence of the contract then the promisor who has promised to perform at a specified time must perform his promise within the specified time. If he fails to do so the contract becomes voidable at the option of the promise. 4) If it is not the intention of the parties that time should be the essence of the contract: The contract does not become voidable by the failure of the promisor to perform at OR before the specified time but the promise is entitled to compensation from the promisor for any lost occasion to him by such failure. 5) Whether time is the essence of the contract OR not depends on the terms of the contract & the intentions of the parties: The real intention has to be ascertained from the substance of the agreement it may differ depending upon the facts of each case. In case of a voidable contract on account of promisors failure to perform his promise at the fixed time & the promisee accepts the performance of such promise at any time other than the time agreed upon the promisee cannot claim compensation for any lost occasion. He will be entitled to compensation only if he gives a notice of his intention to claim compensation to the promisor.

Discharge of a contract: Discharge means termination of a contract. By discharge the rights & obligations of the parties come to an end. A contract may be discharged in the following ways: 1) By performance [Section 37]: If both the parties to the contract have performed what they had agreed to do the contract is discharged. A party is released from the contract where the performance of the contract is excused under the provisions of this law OR any other law. 2) By death: Where the contract is of a personal nature OR where the personal skill OR ability of the promisor is involved the death of the promisor shall discharge the contract. 3) By refusing tender of performance [Section 38]:

17 Offer of performance to the promisee shall have the same effect as a performance. Hence if a party offers to perform his promise & the offer is not accepted by the other party the promisor is not responsible for non-performance & is discharged from the obligations. 4) By breach of the contract [Section 39]: When a party to a contract has refused to perform OR has disabled himself from performing his promise the promisee may put an end to the contract. However the promisee has a right to resist it. 5) By impossibility of performance [Section 56]: Cases where the performance of a contract becomes impossible are : a) Death OR personal incapacity of the promisor b) Outbreak of war c) Non-existence of a particular state OR thing which forms the basis of the contract.

Breach of a contract: Whenever the promisor refuses to perform OR fails to perform the promise it is said to be committing a breach of contract. Anticipatory breach of a contract: An anticipatory breach of a contract is said to take place when the promisor repudiates the contract even before the date of the performance of the contract. This may be possible where the promisor communicates to the promisee before the actual date of performance of the contract that he does not desire to perform his part of the contract. In such a case the promisee may treat the repudiation as an immediate breach of the contract & sue the promisor for damages. He may also put an end to the contract. The promisee has an option to treat the communication of the intention of the promisor as inoperative & wait for the time of performance & then hold the promisor responsible for non-performance. The disadvantage for the promisee is that the contract is kept alive for the benefit of the promisor that would enable the promisor to fulfill the promise if so advised even after repudiating the same. In case a promisee keeps a contract alive by treating the communication inoperative the result would be a) The promisor gets a second chance to choose to perform the contract at the agreed fixed time & the promisee is bound to accept the same. b) If the contract is alive & some event happens which may discharge the contract by some operation of law the promisor may take advantage of the changed circumstances.

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THE COMPANIES ACT A Company is an incorporated association which is an artificial person created by law, having a separate entity with a perpetual succession & a common seal. Salient features of a Company: 1) Independent corporate existence: On being incorporated a Company becomes a body corporate different from its members. It is a legal person who has its own rights & liabilities. This can be explained with the help of the following: E.g.: Soloman V/S Soloman & Company Limited. Facts: Mr. Soloman was a person manufacturing leather goods & having a proprietary business. He decided to form a Company that comprised of Mr. Soloman, Mrs. Soloman & their 5 children. Mr. Soloman entered into a contract with Soloman & Company Limited whereby he sold his proprietary business to the Company for 40,000 pounds. In return he got shares worth 20,000 pounds & debentures worth 10,000 pounds. After sometime the Company went into liquidation. Its total assets were 6,000 pounds & total liabilities were 17,000 pounds {10,000 pounds as Secured Creditors to Mr. Soloman & 7,000 pounds towards other Unsecured Creditors}. The Company paid the entire amount of 6,000 pounds to Mr. Soloman, as he was a Secured Creditor. The Unsecured Creditors filed a suit against the Company stating that Mr. Soloman & Soloman & Company Limited were one & the same person therefore Mr. Soloman should be personally liable for the acts of the Company. Held : Mr. Soloman was not liable for the acts of the Company as the Company being distinct from its members both the Company & Mr. Soloman was considered as separate individuals in the eyes of law. 2) A Company owns property in its own name: A Company can enter into a contract in its own name & hence can buy OR sell property as a legal person. 3) Liability of the members: Liability of the members of a Company is limited to the extent of value of shares held by them. If certain shares are partly paid & the Company goes into liquidation the members are liable only to the extent of the unpaid amount. Liability of members may also be limited to the extent of the guarantee given by them. There may also be Companies with unlimited liability.

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4) Transferable shares: Shares of a Company can be easily transferred i.e. a shareholder can sell OR transfer his shares to anyone & recover the amount paid by him. This does not affect the capital structure of a Company. 5) Perpetual succession: Perpetual means continuous OR without break. Once a Company is formed it lives independent of its members i.e. members may come & go but the Company continues to live until & unless it is wound up. 6) Common seal: The seal of a Company is its signature. A Company being an artificial person cannot sign. Hence whenever a contract has to be entered into by a Company the Directors sign the contract & affix the seal of the Company besides their signatures. Such a contract is deemed to have been entered into by the Company & is therefore binding upon it. 7) Suing : A Company can sue & be sued in its own name. Advantage of Corporate personality : Law protects the members of a Company because even though they act on behalf of the Company it is the Company that is held liable. This protection given to members is termed as Corporate Veil. However when members take undue advantage of the Corporate Veil for carrying on illegal activity OR for gaining personal profits, law then lifts the Corporate Veil, under these circumstances members are held personally liable for the acts of the Company. Corporate Veil may be lifted under the following circumstances:a) When the Company assumes an enemy character : E.g.: Daimler Company Limited V/S Continental Tyre & Rubber Company. Facts: Daimler Company Limited was a Company incorporated in England & hence an English Company. The Company had several Debtors in U.K. During World War II England & Germany became enemies. The Company filed a suit against its Debtors. The question before the Court was whether the Company was an English Company OR an Enemy Company [German Company] as if it was a German Company the Debtors would not be liable.

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It was necessary to lift the Corporate Veil to ascertain the true identity of the Company. Held : It was found that all the members of the Company were Germans & they had direct control over the Company. The Company was declared as an Enemy Company & the Debtors were not held liable. b) When the Company is formed for avoiding tax : If the sole purpose for forming the Company is to avoid tax the Directors are held personally liable for avoiding tax. Eg : Commissioner of Income Tax V/S Mr. D. M. Petit. Facts : Mr. Petit was a wealthy person liable for super tax. He formed 4 Companies & became the agent of these Companies. Whatever income he received was divided into 4 parts & deposited in the account of these Companies as their income. The Company in turn advanced the money as loan to Mr. Petit. The Income Tax authorities filed a case against Mr. Petit for avoiding tax. According to Mr. Petit the Companies were liable for avoiding tax. Held : Mr. Petit had formed the Companies solely for the purpose of avoiding tax, as the Companies did not carry on any other business. The Corporate Veil was therefore lifted & Mr. Petit was held liable for avoiding tax. c) When the Company is formed to avoid terms of contract : Eg : Gilford Motor Company [GMC] V/S Mr. Homme. Facts : Mr. Homme was appointed by GMC. At the time of appointment he entered into a contract with GMC that he would not induce the customers of the Company while working for it OR even there after. After some time Mr. Homme resigned & formed his own Company. & became the agent of these Companies. He induced the customers of GMC as an agent of his Company. GMC filed a suit against him for breach of contract. According to Mr. Homme it was not he but the Company that had induced the customers therefore he was not guilty. Held : Mr. Homme had formed the Company solely for the purpose of avoiding the terms of contract between GMC & him. Mr. Homme was therefore held liable for breach of contract. d) When the Company acts as an agent of the members :

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As per The Companies Act the Company is the principal & the Directors its agent. According to The Principle Of Agency the principal is liable for the acts of the agent. If under certain circumstances it were found that the Company has been formed to act as an agent of the Directors OR members then the Directors OR the members as the principal would be personally liable for the acts of the Company. The benefit of the Corporate Veil is not available under these circumstances. e) Statutory liabilities of the members : This means the liability imposed by a statute OR an Act. Eg : For a Public Company there must be a minimum of 7 members. When a Public Company carries on business with 6 members for a period of more than 6 months it has committed a breach of the provisions of The Companies Act. In such a case the Directors are personally liable for the acts of the Company. Types of Companies A Company is classified into different types on the following basis :Based on The Mode Of Incorporation: a) Chartered Company : They are those, which are created by the Royal Charter. Eg : East India Company, Bank Of England, etc. b) Statutory Company : They are those, which are created by a special Act passed by the Central Government OR State Government. Eg : Reserve Bank Of India, Indian Airlines, etc. c) Registered Company : They are those, which are registered with the Registrar Of Companies [ROC] under The Companies Act. II Based on The Liability Of Members : a) Companies Limited By Shares : In this type of a Company there is a share capital, which has a nominal value. A shareholder is bound to pay the said amount towards the liabilities of the Company. The liability of such a shareholder is therefore limited to the extent of the value of the shares held by him. b) Companies Limited By Guarantee : In this case the members undertake to contribute up to a certain limit towards the assets of the Company in the event of liquidation. The liability of such members is limited to the extent of the guarantee. I

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c) Companies With Unlimited Liability : In such a Company the liability of the members are unlimited. III Based on Interest : a) Public Company : It is a Company, which is not a Private Company. Sec 3(i)(iv) states that all Companies other than Private Companies are called Public Companies. b) Private Company : It is a Company, which in its Articles Of Association has the following restrictions :(i) Restriction on the right of members to transfer the shares if any. (ii) Restriction of membership to a maximum of 50 & minimum of 2. (iii) Prohibition on any invitation to the public to subscribe for its shares & debentures. IV Based on Control a) Government Company : It is a Company in which not less than 51% of the total paid up capital is held by the Central Government OR State Government OR partly by the Central Government & partly by one OR more State Governments. b) Foreign Company : It is a Company incorporated outside India & having a place of business in India. c) Holding Company : It is that Company which has a control over a Subsidiary Company through any one of the several methods. d) Subsidiary Company : A Company is deemed to be a Subsidiary Company under the following conditions :a. The other Company controls the majority composition of the Board Of Directors [BOD] with the sole intention of having control over the management. b. Where the other Company holds a majority of its shares. c. The Holding Companys Subsidiary has its own Subsidiary. e) One Man Company : Where a single individual holds almost all the shares of a Company it is termed as a One Man Company. Eg : Soloman & Company Limited.

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Certificate Of Incorporation [COI] : It is issued by the ROC on an application submitted by the members of the Company. For the purpose of incorporation of a Company the members are required to make an appointment with the Registrar along with the following documents :(i) Memorandum Of Association [M/A] that should be signed by at least 7 persons incase of a Public Company & at least 2 persons incase of a Private Company. (ii) Article Of Association [A/A] should be submitted incase of Companies with Unlimited Liabilities, Public Companies Limited By Guarantee & Private Companies Limited By Shares. (iii) A letter of approval from the Registrar stating that the name of the Company has been approved. (iv) A declaration that all the requirements of a Company are complied with & the same has to be signed by an Advocate, Chartered Accountant OR a person named as a Director. (v) A list of persons who have given their names to be the Director of the Company. On receipt of the above application along with the documents the Registrar after scrutinizing & being satisfied that the same is in order issues a COI. Once the COI is issued the Company exists as an individual. The COI is a conclusive proof that all the requirements of the Company have been complied with. All incorporation contracts are not binding on the Company. Distinguish between Partnership Firm & Company : Sr. No. 1 Partnership Firm A Partnership Firm is merely an agreement of persons. It is not a legal entity. The liability of the partners is unlimited i.e. a partner is liable not only to the extent of his share in the Partnership Firm but also to the extent of his personal property. A partner cannot transfer OR assign his shares without the consent of all other partners. Company A Company is a legal entity.

The liability of the members are limited to the extent of the value of the share OR guarantee given by them OR as stipulated by the M/A.

A member can transfer his shares subject to the provision of the A/A of the Company.

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4 5 6

All partners are mutual agents. Registration of a Partnership Firm is not compulsory. The management of a Partnership Firm vests on all the partners except the sleeping partner. A creditor of a Partnership Firm is also a creditor of an individual partner. A Partnership Firm has very few statutory obligations. Accounts of a Partnership Firm need not be audited. The property of a Partnership Firm belongs collectively to all partners. Death OR insolvency of a partner results in dissolution of a Partnership Firm. A partner can dispose of a property of the Partnership Firm. A partner cannot enter into a contract with a Partnership Firm of which he is a partner. When restrictions are imposed on the authority of partners they are of no avail against 3rd parties who have no knowledge of the restriction. The number of partners must not exceed 10 incase of a Partnership Firm carrying on banking business & 20 incase of a Partnership Firm carrying on any other business.

A member is not an agent of the other. Registration of a Company is compulsory. The management of a Company vests on the Board Of Directors who are elected periodically by the shareholders. A creditor of a Company is not a creditor of individual members. The Companies Act strictly regulates a Company. Accounts of a Company have to be audited. The property of a Company is not the property of the shareholders. Death OR insolvency of a member does not result in dissolution of a Company. A shareholder cannot dispose of the property of the Company. A shareholder can enter into a contract with a Company of which he is a member. Restriction on a Company OR authority of Directors are valid restrictions against 3rd parties as they are contained in the M/A & A/A which are public documents. A Private Company can have a minimum of 2 members & a maximum of 50 members. A Public Company can have a minimum of 7 members. There is no limit on the number of maximum members.

8 9 10 11

12 13

14

15

Memorandum Of Association [M/A] :

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It is a public document that has to be submitted along with the application for Incorporation of a Company. By a public document we mean that any member of the public is entitled to inspect this document from the office of the Registrar. The M/A contains the following clauses :I Name Clause : This clause states the name of the Company. A Company being a legal person has a name by which it is identified. A Company can have any name provided it is not undesirable. By undesirable we mean that it must not be similar to the name of any other Company. If the Company is a Private Company & the liability of its members is limited the words Private Limited must appear in the name of the Company. If the Company is a Public Company with limited liability the words Limited must be written in the name of the Company. The name of the Company must be printed on every letterhead of the Company & must be painted at the registered office address of the Company. Alteration of Name Clause : a) The members have the right to change the Companys name at any time by passing a special resolution. A copy of the same with the altered name must be sent to the Central Government for approval. On receipt of the approval in writing the members can change the name of the Company. b) When a Private Company becomes a Public Company OR a Public Company becomes a Private Company the word Private must be either deleted OR added respectively from the name. This can be done without the approval of the Central Government. c) When the name of a Company already existing becomes undesirable it may change its name by passing an ordinary resolution. A copy of the same must be sent to the Central Government. The Central Government must approve the name within 12 months. Only after the approval the Company may change its name. II Registered Office Address Clause ( Domicile clause ) : This clause mentions the registered office address of the Company i.e. the place from where the Company will carry on its business. Every letterhead of the Company must have this address printed on it. The registered office address must be filed with the Registrar within 30 days of incorporation OR before the Company commences its business. Alteration of Registered Office Address Clause : a) When the registered office address is to be changed to a different place within the same city it can be done at any time. However the information about the same must be sent to the Registrar within 30 days.

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b) When the registered office address is to be changed from one city to another within the same state it can be done by passing a special resolution. However a copy of such a resolution must be sent to the registrar within 30 days. c) When the registered office address is to be changed from one state to another it may be done only for the reasons specified in the Substantive Limit & in the manner prescribed in the Procedural Limit. Substantive Limit [Reasons for alteration] : 1) To attain the main purpose of the Company by new & improved means. 2) To carry out the business more economically & efficiently. 3) To enlarge OR change its local area of operation. 4) To carry on some business which may be conveniently combined with the existing business. 5) To amalgamate with some other Company. 6) To sell OR dispose of the whole OR part of the undertaking of the Company. Procedural Limit : If the alteration is proposed for any one of the above reasons it may be done in the following manner :A special resolution must be passed for the alteration. A copy of the same along with the approval for the alteration should be sent to the Company Law Board. The Company Law Board verifies whether sufficient notice of the proposed alteration has been given to all interested members & debenture holders. It must further confirm whether the Directors have satisfied the claims of the members against the alterations. If the claims are not satisfied the Company Law Board may order the Directors to purchase the interest of such persons. After this the Company Law Board may confirm the alteration. The Company must within 3 months of such confirmation send a copy of the altered M/A to the Registrar who in turn may issue a new Certificate Of Incorporation. If the Company fails to fulfill the formalities the order of confirmation would lapse & the Company would not be entitled to alter its address. III Object Clause This clause specifies the objects of the Company. It is divided into 2 parts :a) Main Object Clause : This clause must mention the objects that are pursued by the Company on incorporation as well as any other object that may have to be carried out for attaining the main object. b) Other Object Clause : This part contains those objects, which the Company may carry out in future. The Object Clause defines the boundary of the Company within which the Directors must work.

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Any Act done beyond the scope of the Object Clause is called as an Ultra Vires Act. Such an Act is not binding upon the Company. The Object Clause is important because the Shareholders & the Creditors invest in the Company only after seeing the objects of the Company. IV Capital Clause In this clause the Company has to mention the total capital it would be authorized to raise by the Balance Sheet. If the Company is Limited By Share it should specify the total number of shares as well as the value of the share. V Liability Clause In this clause the liability of the members should be specified. VI Association / Subscribtion Clause : In this clause the subscribers give a declaration that they intend to form an association in accordance with the M/A.

Doctrine of Ultra Vires : The Object Clause states the purpose for which a Company is incorporated. Any act beyond the scope of the Object Clause is an Ultra Vires Act & is therefore not binding upon the Company. Eg : Ashbury Railway Carriage & Hire Company V/S Riche Facts : The Object Clause of the Company contained the following objects :1) To manufacture & sell railway carriages. 2) To act as mechanical engineers OR general contractors. The Company entered into a contract with Mr. Riche in which the Company agreed to finance the construction of railway lines. At the time of performance the Company refused to finance on the ground that financing was an Ultra Vires act. Mr. Riche filed a case against the Company on the grounds that the Object Clause mentioned that the Company could act as general contractors that would include a contract to finance. Held : The Contract was Ultra Vires & the Company was not bound to finance. The court observed that the term general contractors should be understood by considering the other objects in the Object Clause. In the present case the term general contractors could not include a contract to finance. The Doctrine of Ultra Vires protects the Company from outsiders. Effects of Ultra Vires Act :

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1) The Directors are personally liable to outsiders as they have the knowledge of the Object Clause & hence know that the contract is Ultra Vires. 2) If the property of the Company has been given to an outsider the Company is entitled to recover the same. The outsider may recover the amount paid by him to the Company. 3) If the Companys money has been paid to an outsider the Company is entitled to recover the same. 4) If the Company has rendered some services under an Ultra Vires act the Company may recover the charges for the same.

Doctrine of Constructive Notice : The A/A & M/A are public documents open for inspection to the members of the public. A copy of these are kept with the Registrar Of Companies Therefore any person dealing with the Company is expected to refer to these documents before entering into any contract with the Company. Constructive Notice means that law should presume that any outsider dealing with the Company has knowledge of the public documents. Not only should he be aware of the contents but should have also understood the contents properly. This shall be presumed even if the outsider has no knowledge about these documents. The Doctrine of Constructive Notice also protects the Company from outsiders.

Doctrine of Indoor Management : The Doctrine of Ultra Virus & Constructive Notice protects the Company against outsiders whereas the Doctrine of Indoor Management protects an outsider against the Company. An outsider dealing with any Company is expected to inspect the public documents before entering into any contract with the Company. However he is not expected to investigate into the internal management of the Company. The Doctrine of Indoor Management therefore says that if there is any irregularity in the internal management of the Company an outsider shall not be affected by it because internal management is what happens within the closed doors of the Company & as an outsider has no access to it the Company is liable for all such irregularities. Eg : Royal British Bank V/S Mr. Turquand Facts : According to the A/A the Director could borrow money provided they were authorized to do so by an ordinary resolution passed by the shareholders. One of the Directors of the bank approached Mr. Turquand to borrow money.

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Mr. Turquand inspected the public documents of the Company & realized that the Directors could borrow money if an ordinary resolution was passed. An ordinary resolution is not a public document therefore Mr. Turquand assumed that if the Director had approached him the ordinary resolution must have been passed. He advanced the money to the bank. However at the time of repayment the shareholders objected on the grounds that no resolution was passed therefore the act was without authority. Held : Mr. Turquand had inspected the public documents & in no way could find out whether the ordinary resolution was passed OR not as the same is not a public document. Mr. Turquands rights were protected & the Company was held liable to repay the money even though the Director had acted without authority. Exception : No protection is given to an outsider under the following circumstances :1) Where the outsider knows about the irregularity in the internal management. 2) Where the outsider had some suspicion of some irregularity & contracts with the Company without investigating into it. 3) Where the outsider deals with the Company without going through the public documents. 4) Where the contract between the Company & the outsider is itself void.

Articles Of Association : It is a contract between the Company & its members. It contains the rules & regulations for the internal management of the Company. It is a public document. Each rule in the A/A must be mentioned in a separate paragraph, which must be numbered. The schedule of The Companies Act contains model forms of the A/A. If the members desire they may select any one of these forms OR they may have their own set of rules & regulations. However the A/A must not contradict the provisions of The Companies Act OR the M/A of the Company. The following Companies must have an A/A :1) Unlimited Companies 2) Companies Limited By Guarantee 3) Private Companies Limited By Shares Alteration of the A/A : Passing a special resolution subject to the following conditions can alter the A/A : 1) The altered A/A must not contradict the provisions of The Companies Act.

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2) The alteration must not increase the liability of the shareholders. If the liability of the shareholders is to be increased it must be done with the written consent of the shareholders. 3) It must not increase the remuneration of the Directors. However this can be done with the previous permission of the Government. 4) The A/A must be altered with retrospective effect. Binding effect of the A/A : The A/A is a contract between the Company & its members therefore 1) The members are bound to the Company by the A/A i.e. if a member commits a breach the Company can enforce the A/A on him. 2) The Company is bound to its members by the A/A. 3) The A/A is not a contract between the members i.e. a member cannot enforce the A/A on another member however he may do so through the Company. 4) The A/A cannot be enforced against an outsider nor can an outsider enforce the A/A on the Company.

Prospectus : A Prospectus means any document described OR issued as a Prospectus. It includes any notice, circular, advertisement OR any other document inviting deposit from the public OR inviting offers for subscription OR purchase of shares & debentures of the Company. Rules governing a Prospectus: 1) A Prospectus must be dated. 2) It must be registered. 3) Every person named as a Director OR proposed Director must sign it. 4) It must state on its face that a copy of the Prospectus has been delivered to the Registrar for registration. 5) The Prospectus must be issued within 90 days of its registration. 6) The Company & every person who is responsible for issuing a Prospectus without registration shall be punishable with a fine extending up to Rs. 5,000/7) A Prospectus must accompany the following documents :a) The consent of the experts if their reports are to be published in the Prospectus. b) A copy of every contract relating to the appointment & remuneration of the managerial personnel. c) A copy of every material contract unless it is entered into in the ordinary course of business OR 2 years before the date of the Prospectus.

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d) A written statement relating to the adjustments if any, by the auditors OR accountants of the Company in their reports relating to P&L, B/S, Rate of dividend, etc. e) A written consent of the auditors, legal advisors, bankers OR brokers of the Company to act in that capacity. Contents of the Prospectus : Part I a) The object of the Company. b) Name, address & the occupation of the signatories to the M/A & the number of shares subscribed by them. c) The number of qualification shares fixed for the Director. d) The amount of minimum subscription. e) The time, date & place of opening of subscribers list. f) The amount to be paid on application & allotment of shares. g) Name, address & occupation of the vendors through whom the property of the Company has been purchased & the amount payable in cash. Part II Reports to be published with the Prospectus a) Report of the Creditors as to the P&L, assets & liabilities of the Company. b) Rate of dividend paid by the Company in respect of each class of share for each of the 5 financial years immediately preceding the issue of prospectus. c) Report of the auditor stating separately the P&L of the Companies subsidiaries. Membership of the Company Any person whose name has been entered in the Register of members & who holds shares in the Company is the member of that Company. Membership involves a contract & gives them rights & liabilities. Hence every person competent to contract can become a member of the Company. A Company being a legal entity can enter into contracts & therefore becomes a member of another Company provided it has been authorized to do so by the A/A. A minor OR a person of an unsound mind cannot become a member even through a representative OR a trustee. Modes of acquiring membership of a Company : 1) By subscription The subscribers to the M/A are deemed to have agreed to become members of the Company. They become members as soon as the Company is incorporated even though they may not hold share/s OR their names may not appear in the Register of members. These members are termed as 1st members of the Company & must subscribe for the shares directly from the Company. 2) By allotment

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Any person can acquire this when the Company invites for application for allotment of shares. Any person applying in the prescribed form has a right to get his name entered in the Register of members after allotment. The application for membership is an offer that may be accepted by the Company by allotment. The offer can therefore be revoked before allotment. Incase of allotment the allotee becomes a member not at the time of allotment but only after his name has been entered in the Register. 3) By transfer Shares of a Company are termed as movable property & can be transferred [brought OR sold for a consideration] as per the Articles of Association. Any person buying such share from a member can get his name entered in the Register in place of the seller. The Board Of Directors are empowered by The Companies Act to refuse such a transfer under certain conditions. However a person aggrieved by such refusal may appeal to the Central Government OR file a suit before the court. 4) By transmission When a member of a Company dies his shares are devolved upon his heirs & legal representatives. These persons are therefore entitled to get their names entered in the Register in place of the deceased member. Similarly when a member becomes insolvent his assets vests on his official assignee. The official assignee therefore becomes a member in place of the insolvent member. This mode of acquisition of membership is termed as membership by transmission. The heirs & legal representatives have an option to accept OR decline such membership. But once they respond to the calls OR accept dividend they become full-fledged members. These members have a right to get the shares transferred in favor of the 3rd person without getting the same transferred in their own names. 5) By estoppel A person who knowingly allows his name to remain on the Register for an unreasonable time will be estopped from contending that he is not a member in spite of the fact that there may be no agreement to that effect. This is true in either case where the name has been wrongly entered OR where the name has been wrongly allowed to remain in the Register without being struck off. However this is applicable only when the person is aware of the mistakes & does not take steps to correct the same. Modes of ceasation of membership : 1) By transfer of share

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2) By forfeiture of share 3) By insolvency 4) By death 5) By redemption of redeemable share 6) By compulsory sale of share by the Company 7) By valid surrender of share 8) By successfully rescinding the contract of membership 9) By winding up of the Company Rights of members : I Statutory rights (i) A right of priority to have shares offered incase of increase of capital. (ii) Right to receive notice of meetings, attend & vote at the meetings. (iii) Right to transfer shares. (iv) Right to receive share certificates. (v) Right to receive annual report of the Company. (vi) Right to apply to the Central Government to call for the A.G.M. if the Board Of Directors fails to do so. (vii) Right to apply to the Government for calling an extra ordinary G.M. (viii) Right to inspect the Register of members. (ix) Right to apply to the Government for investigating into the affairs of the Company. (x) Right to apply to the High Court for relief in case of oppression & mismanagement of the Company. (xi) Right to apply to the High Court for winding up. II Documentary rights They are those rights of a member, which arise through the M/A & A/A. III Proprietary rights (i) Right to be registered as a member. (ii) Right to participate in distribution of dividends. (iii) Right to immunity from personal liability. (iv) Right for distribution of assets in case of liquidation. IV Remedial rights (i) Right to inspect the Companies record. (ii) Right to file a suit incase of mismanagement. Liability of members : (i) To pay to calls if made validly by the Company. (ii) To observe the provisions of the A/A.

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Register of members : Every Company must maintain at its registered office a Register of members containing the following information :1) Name, address & occupation of the member. 2) Shares held & the amount paid by each member. 3) The date on which each member becomes a member. 4) Where the shares are converted into stock the amount of stock held by each member. The Register of members can be inspected by any member free of cost OR by an outsider on payment of nominal charges. The Company can close the Register of members for a maximum period of 45 days in a year but only after giving 7 days notice to that effect. The Companies Act provides that the Register of members shall be prima-facie evidence of the matters stated in it i.e. the information in the Register unless proved to be incorrect would be deemed to be true. No notice of any trust is taken OR entered in the Register, which means that where the name of the person appears in the Register who holds shares on behalf of some other person, the person whose name appears in the Register & not the real owner will be deemed to be the member. The real owner cannot claim dividend from the Company nor can the Company make calls to the real owner. The Companies Act imposes a duty on every person holding shares as a trustee to inform about his holding to the Public trustee. Such a person cannot attend the meetings of a Company. A person would have to inform the Public trustee only in case of a written trust & if he holds shares worth more than Rs. 1,00,000/-. No trustee can hold shares of more than Rs. 5,00,000/- OR more than 25% of the paid up capital of the Company whichever is less. Any person aggrieved by any error in the Register may get the same rectified by 1) Filing a declaratory suit. 2) By filing a suit for rectification 3) By filing an appeal to the Government within 2 months of the knowledge of the error. Directors : A Company is an artificial person. It has to act through some human agency like a Director. A Director is a person who should :1) Have an effective control & power over the business of the Company. 2) Represent the Company before an outsider.

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3) Manage the day to day affairs of the Company. 4) Be authorized to take important decisions relating to the Companies business. The Directors are collectively termed as BOD [Board Of Directors]. Role of Directors : 1) Director as a managing partner A partner who manages the business of a Partnership Firm is called a managing partner. A Director could be compared to the managing partner as he manages the business of the Company & also has a share in its profits by way of dividend on his share holdings. However a Director does not enjoy implied authority as a managing partner nor is he personally liable for the acts of the Company. 2) Director as an agent A Company being an artificial person acts through the Director. The Director therefore acts for & on behalf of the Company as its agent. Under the Principle of Agency a notice to an agent is sufficient notice upon the principal. Similarly a notice upon a Director is sufficient notice upon the Company. 3) Director as a trustee A trustee holds an office of trust & faith. Similarly a Director holds an office of trust & faith. It is only because of this reason that the shareholders have full faith in them & hence appoint them & give the entire assets of the Company under their control. However a Director differs from a trustee in the sense that a trustee is the legal owner of the property & can deal with the same in his own name. The Director is neither the owner of the Companys property nor can he deal with it in his own name. 4) Director as an employee The Companies Act states that a Director may hold an office OR place of profit in the Company as a salaried employee therefore a Director who is generally not an employee of the Company may have an additional post as an employee of the Company. 5) Director as an organ of the Company A Director is compared to an organ of the body of the Company. Just as the body is responsible for the acts of its organ the Company is responsible for the acts of the Director. Appointment of Directors : 1) Appointment of 1st Directors The A/A may contain a list of members who are chosen to be the 1st Directors. These persons become Directors as soon as the Company is incorporated. They shall remain in office till the 1st A.G.M. when they shall

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2)

3)

4)

5)

retire. If the A/A does not contain such a list the persons subscribing to the A/A would be deemed to be the 1st Directors. Appointment by members at the A.G.M. Incase of a Public Company OR Private Company which is a subsidiary of a a Public Company only 1/3rd of the total number of Directors can have a permanent position. The remaining 2/3rd retire by rotation. The senior most in the office shall retire 1st. If all are equally senior 1/3rd will retire by mutual consent. If there is no agreement then 1/3rd shall retire by lots. Once the Directors have retired there is a vacancy created. The members may decide at the same A.G.M. either to fill OR not this vacancy. If no decision is arrived at the meeting is adjourned to the same day in the next week. This is called a resembled meeting. If even at this meeting no decision is taken the Director who had retired at that A.G.M. will be deemed to be automatically re-appointed unless :a) The Director has been removed by the meeting. b) The Director has expressed in writing his unwillingness to be reappointed. c) If the Director has disqualified himself. d) If the Director has been disqualified by the meeting. Appointment at the A.G.M by the shareholders by an ordinary resolution Directors are appointed at the A.G.M. by the shareholders by passing an ordinary resolution. Each candidate has to be voted separately which means voting of 2 OR more Directors at the same time is not allowed. However if the members present give their unanimous consent En Masse OR En Block voting may be held. Appointment by proportionate representation A Company may at times be divisible into distinct groups. In such a case it will be impossible for the minority group to elect Directors of their choice by an ordinary resolution. Under such circumstances the A/A of the Company may allow proportionate representation to the minority group in the BOD i.e. the minority group would be allowed to appoint Directors on the board in accordance with their percentage holding. Appointment by BOD BOD if authorized by the A/A may appoint Directors in the following cases :a) The BOD may appoint additional Directors subject to the minimum limit prescribed in the A/A. These additional Directors shall remain in office till the next A.G.M. b) When the Directors appointed by the shareholders do not complete their term the BOD may fill up the vacancy created by appointing Directors who are termed as Casual Directors.

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These Directors may remain in office till the original Directors who have vacated the office would have held office. 6) Appointment by the Central Government Where an application is made by not less than 100 members OR members having at least 10% of the voting rights whichever is less, to the Central Government stating therein that there is a mismanagement OR oppression in the Company the Central Government if satisfied may appoint Directors to the Company.