Law and Business Section

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“Ignorance of law excuses no man: Not that all men know the law, but because it is an excuse every man will plead, and no man can tell how to refute him.” — John Seldon STRUCTURE
1.1 1.2 1.3 1.4 1.5 Law and Society. Meaning of law. Branches of law. What is business law? Sources of business law in India.

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1.1 Law and Society
Notes Law pervades almost every part of human life. Without law there will be chaos and confusion in society. No games, be it cricket, football or hockey can be played without rules to govern the players. Traffic rules are important to regulate traffic. Knowledge of law is, therefore, necessary for all persons who live in a society. Moreover, there is a familiar maxim ‘ignorantia juris non excusat’ (ignorance of law is no excuse).

1.2

What is Law?

The Oxford English Dictionary defines the word ‘Law’ as the rule made by authority for the proper regulation of a community or society or for correct conduct in life. The term law has been defined by some of the legal scholars in the following words: ”A law is a rule of conduct imposed and enforced by the sovereign.” —Austin “Law is the body of principles recognised and applied by the state in the administration of justice.” —Salmond “Law in its most general and comprehensive sense signifies a rule of action and is applied indiscriminately to all kinds of actions whether animate or inanimate, rational or irrational.” —Blackstone “Law is rule of external human actions enforced by Sovereign Political authority.” —Holland Hence ‘law’ is a set of rules laying down rights and obligations, which the state enforces. It includes rules and principles, which regulate our relations with other individuals and with the state.

1.3

Branches of Law

With the growth of civilisation, human being’s social and economic behaviour has assumed many facets. It is therefore essential that multi-dimensional human activities should be controlled through different set of rules and principles. Almost all civilised societies, therefore, provide and enforce different set of rules and guiding principles for different kinds of social, economical, and political objectives. Hence, there are several branches of law, such as International Law, Constitutional Law, Criminal Law, Civil Law, Business or Mercantile Law.

1.4

What is Business Law?

The terms ‘Business’, ‘Commercial’, and ‘Mercantile’, in relation to law, are used in the same sense. ‘Business Law’ is that branch of law, which comprises laws concerning trade, industry and commerce. Business law refers to those rules and regulations, which govern the formation and execution of business transactions made by various persons in the society. These provisions comprise the legal environment of business. Business law is intended to infuse the much needed ‘certainty’ in commercial dealings. Business law includes laws relating to contract, sale of goods, negotiable instruments, partnership, company and many other economic laws having a bearing on trade, industry, and commerce.

1.5

Sources of Business Law in India

The main sources of business law in India are shown in the table and briefly discussed thereafter:

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Sources of Business Law in India Notes

English Law

Judicial Decisions or Case Law

Customs and Usages

Indian Statutes

English Common Law

Equity

Law Merchant or Maritime Usage

Statutes Law

1.5.1 English Law
Indian business law is modelled on the lines of English mercantile law, as India was under British rule before its independence. The differences in the laws of India and England are primarily on account of their different business environment, customs, and trade practices. The sources of business law in India are generally the English laws which, in turn, have their roots in the following: a) English Common Law: It refers to a system of law based upon English customs, usages, and traditions, which were developed over centuries by the English Courts. These are unwritten or the non-statutory laws. These are found in the reported decisions of the courts of law. Equity: It refers to that branch of the English Law, which was developed separately from the common law. It is based on the principle of ‘fairness’, and concepts of justice developed by the judges whose decisions became precedents. Law Merchant or Maritime Usage: It refers to the usages or customs of merchants and traders that have been ratified by the courts of law. The object is to protect the interest of trade. The courts in these cases assume that the parties have dealt with each other on the footing of customs or usages prevailing generally. This law, thus, gets incorporated into the common law and the courts honour it. Statute Law: The statute law refers to the law laid down in the Acts of Parliament. It is superior to and overrides any rules of the common law, equity or law merchant. The courts of law interpret the meaning of such enactments and apply them.

b)

c)

d)

1.5.2 Judicial Decisions or Case Law
The judicial decisions, usually referred to as precedents, are binding on all courts having jurisdiction lower to that of the court, which gave the judgement. This is also called judge made law.

Check Your Progress
1. Define ‘Law’ 2. What is Business Law? 3. What are the different Branches of Law? 4. From where does the Indian Business Law is derived from?

1.5.3 Customs and Usages
Customs or usages of a particular trade also guide the courts in deciding disputes arising out of mercantile transactions. Such a custom or usage must be widely known, certain and reasonable, and must not be opposed to any legislative enactment. But, where a statute specifically provides that the rules of law contained therein are subject to any well-recognised custom or usages of trade, the latter may override the statute law.

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1.5.4 Indian Statutes
Notes The constitution of India confers power to enact law on its parliament and legislatures of states. When a bill is passed by the parliament/state legislatures and assented to by the President or Governor of a state, it becomes an ‘Act’ or ‘Statute’. The bulk of Indian Mercantile Law is statute law. The Indian Contract Act, 1872, The Negotiable Instruments Act, 1881, The Sale of Goods Act, 1930, The Indian Partnership Act, 1932, The Companies Act, 1956 are instances of the statute law.

1.5.5 Business Law and Managers
Knowledge of relevant aspects of law is necessary for proper functioning of any business. Managers may face a variety of situations that would involve legal issues. A broad understanding of business law or legal aspects of business is necessary for managers. Knowledge of business law enables them to arrive at correct decisions, and this is one of the essential functions of managers. Thus, law is a major factor in decision making. Therefore, it is necessary that all managers have a working knowledge of the important business laws and the legal system.

Summary
Law permeates every part of human activity. No civilised society can exist without a legal order. Ignorance of law is no excuse for any human being. Law is a rule of conduct imposed and enforced by authority. There are various branches of law like International Law, Constitutional Law, Criminal Law, Civil Law, Business Law or Mercantile Law. The terms Business, Commercial or Mercantile Law are used in the same sense. Business law refers to rules and regulations concerning Trade, Industry, and Commerce. The main sources of business law in India are English law, Judicial decisions (or Case law), Customs and Usages, and Indian statutes. Knowledge ofbusiness law is necessary so that various managerial decisions, which managers are required to take in their dayto-day activities, are within the boundaries of law.

Review Questions
True or False
State with reasons whether the following statements are True or False: 1. 2. 3. 4. 5. 5. What do you understand by statute law? How law and business are related? 6. 7. 8. 9. 10. Law is the body of Principles enforced by Judiciary. Business Law in India is primarily an adaptation of the English Law. Business Law is applicable to businessmen only. Business Law is one of the branches of law. Business Law relates to trade only. Customs and Usages are an important source of Business Law. Statutes are the only source of Business Law. There is no difference between a Bill and an Act. Managers can function effectively without any knowledge of law. Managers can come to proper decisions when they have working knowledge of law.

Check Your Progress

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What is the scope of ‘Business’ or ‘ Mercantile’ law? What does the term ‘Business Law’ include? How does English Law affect Business Law in India? Notes Short Questions 1. False. 4. 2. 5.’ Give your views on this statement. indicating respective paragraphs for reference.5.’ Comment. What is the need for managers to know about Law? What is Business Law? How it is relevant for managers? Answers to “True or False” 1.3 4) 1. True Answers to “Check Your Progress” Following are the answers to “Check Your Progress”. 2. ‘Law and business are closely related disciplines.2 2) 1. False. 1) 1. False. 5. 8. True.Test Questions 1. 4. 6.4 6) 1.4 3) 1. ‘Ignorance of law is no excuse. 4. Define ‘Law’.5 Self-Learning Material 7 . 3. What is Law? What is teh need for the knowledge of law? Elaborate different sources of law. True. 3. True. False.5 5) 1. True. False. 10. 2.5. 3. 5. 7. Discuss the different sources of business law in India. 9.

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16 Quasi contract. Basis and extent of the law of contract. 2.14 Void agreement. 2.Law of Contract Section Notes 2 “No cause of action arises from a bare promise. Meaning of a contract.10 Consideration. Proposal (offer) and Acceptance.11 Capacity of parties.9 Introduction to the law of contract.7 2. Classification of contracts. 2. 2. 2.” — Legal Maxim STRUCTURE 2. 2. 2.6 2.12 Free consent. Communication of proposal.20 Indemnity and guarantee.2 2.8 2. 2. acceptance and revocation.19 Remedies for breach of contract.17 Performance of contract. What is an agreement? What is enforceability of an agreement? Essential elements of a valid contract.1 2.15 Contingent contract.13 Legality of object and consideration.18 Discharge of contract.4 2. 2.22 Agency Self-Learning Material 9 . 2. 2.5 2.3 2. 2.21 Bailment and Pledge. 2.

insurance. the law of contract furnishes the basis of the other branches of Business Law. monopolies. The enactments relating to sale of goods. and the remedies available to the aggrieved party in case of breach of contract. hereinafter referred to as the Act. According to the Act. or when he buys milk. restrictive trade practices. and intellectual property are all founded upon the general principles of contract law. industry or commerce. Besides. the law of contract was made laying down rules for performance and discharge of a contract. — Sir Frederick Pollock — Salmond “A contract is an agreement enforceable at law made between two or more persons. it would be impossible to carry on any trade. transfer of property. In business transactions.1 Introduction Notes The law of contracts is the basis upon which the super structure of all business is built. A person seldom realises that when he gives clothes for drycleaning. If parties were free to go back on their promises without incurring any liability.3 Meaning of Contract The word ‘contract’ is derived from the Latin ‘Contractum’ meaning drawing together. The Act is not exhaustive. and that what has been promised to him shall be performed”. 2. Some authors have defined contract in the following words: “Every agreement and promise enforceable at law is a contract”. It does not deal with all the branches of the law of contract. Explaining the object of law of contract. Most of the time we do so without realising what we are doing from the view point of law. and Its enforceability (legal obligation) Contract = An agreement + its enforceability Now the question arises. it can be shown as under: 2. It affects every person in one way or the other. — Sir William Anson An analysis of these definitions would show that a contract must have the following two elements: (a) (b) An agreement. bread or biscuits. sale of goods. Hence. “Every promise and every set of promises forming the consideration for 10 Self-Learning Material . he is entering into a contract. normally. 1872. negotiable instruments. 2. as all of us enter into some kind of contract every day. partnership. or when he goes to the auditorium to see a movie.2. All contracts are based on agreements. “An Agreement enforceable by law is a contract”1. 1872.4 What is an Agreement? According to the Act. which are either express or implied. etc. by which rights are acquired by one or more to acts or forbearances on the part of the other or others”. “An agreement creating and defining obligations between the parties”.2 Basis and Extent of The Law of Contract In India. There are separate Acts which deal with contracts relating to negotiable instruments. Everyone of us enters into a number of contracts almost everyday. It extends to whole of India except the State of J&K and came into force on the first day of September. what is an agreement? and what is enforceability of an agreement? In the form of an equation. first promises are made followed by performance. That is why the study of the law of contract precedes the study of all other laws relating to trade and industry. Sir William Anson observes that “The law of contract determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. the law of contract is contained in the Indian Contract Act. It is intended to ensure that what a man has been led to expect shall come to pass.

000/-. are not expressly declared to be void. the usual presumption is that the parties do not intend to create legal relations. it will be clear that all contracts are agreements. and where necessary. In case of social or domestic agreements. i. nor is it the whole law of obligations. This offer after acceptance becomes promise and this promise is treated as an agreement between Ram and Shyam. Why the ‘law of contract’ precedes the study of any branch of law? Is the ICA. In commercial or business agreements the usual presumption is that the parties intend to create legal relations. but all agreements are not contract. satisfy the requirements of any law as to writing or registration. Example . 2. The Act (sections 10. 29 and 56) provides that all agreements are contracts if they are made by the free consent of the parties. is an agreement. with a lawful object. 1 lakh.”2 Now the question is. In the form of an equation it can be shown as under: Agreement = Proposal (or Offer) + Acceptance of Proposal (or Offer) An analysis of the definition of the term agreement shows the following two characteristics of agreement: (a) (b) Plurality of Person: There must be two or more persons to make an agreement. The essential elements of a valid contract are the following: a) c) e) f) Proposal (offer) and Acceptance Lawful Considerations Free Consent Lawful Object b) Intention to Create Legal Relations d) Capacity of Parties g) Writing and Registration h) Certainty i) j) Possibility of Performance Agreement not expressly declared void Self-Learning Material 11 . If Vidur fails to turn up for dinner. Shyam accepts the offer.” 2. Notes Check Your Progress 1. Salmond has rightly observed “The Law of Contracts is not the whole law of agreements. competent to contract. 1872 enforceable throughout India? Define a ‘Contract’. 2. Kreta accepts the offer. Example . a duty enforceable by law.Ram offers to sell his car to Shyam for Rs. What is a Promise? According to the Act. To be enforceable by law.e.Madhur invites his friend Vidur to a dinner and Vidur accepts the invitation. Consensus-ad-idem: Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time.5 What is an Enforceability of Agreement? An agreement is enforceable by law if it creates some Legal Obligation. Thus an agreement consists of a proposal (offer) by one party and its acceptance by the other.00.Vikreta offers to sell his car to Kreta for Rs.6 Essential Elements of A Valid Contract We have seen that a contract is an agreement enforceable by law. Madhur cannot go to the Court to claim his loss. 3. the parties to an agreement must be bound to perform their promises. “A proposal when accepted becomes a promise”3. an agreement must possess the essential elements of a valid contract.each other. From this. It is the law of those agreements which create obligations and those obligations which have their source in agreements. In other words. 2. Such an agreement is a contract because it creates legal obligation. for a lawful consideration. Example .

(This has been elaborated in paragraph 2. Held. present or future. there is no contract between them.. It may be an act or abstinence (abstaining from doing something) or promise to do or not to do something.6. an intention to create legal relations is presumed. 2. is usually not enforceable by law.3 Lawful Consideration An agreement must be supported by lawful considertion. It may be past. Illustration: There was an agreement between R Company and C Company by means of which the former was appointed as the agent of the latter. i. agreements such as these were outside the realm of contract altogether. thus resulting in an agreement. In order to be competent to contract the parties must be of the age of majority and of sound mind and must not be disqualified from contracting by any law to which they are subject. One clause in the agreement was: This agreement is not entered into.6. i..2 Intention to Create Legal Relations There must be an Intention among the parties that the agreement should be attached by legal consequences and create legal obligations or legal relationship.6. Consideration need not necessarily be in cash or kind.6 This has been discussed in paragraph 2. If there is no such intention on the part of the parties. The word ‘lawful’ before offer and acceptance signifies that proposal and acceptance must satisfy the requirements of the law of contract. 23 and 25}. Consideration’ means an advantage or benefit moving from one party to the other. one party making the proposal and the other party accepting it. Held.10) 2.5 2. which means that it must be shown that the parties did not intend to be legally bound. The terms of the proposal must be definite and the acceptance of the proposal must be absolute and unconditional. it means ‘something in return’. A promise to do something. 2(d). getting nothing in return. The agreement is legally enforceable only when both the parties give something and get something in return.2. There must be two parties to an agreement.e. as a formal or legal agreement. not forbidden by law. Agreements of a social or domestic nature do not contemplate legal relationship. and shall not be subject to legal jurisdiction in the law courts. In simple words. It is the essence of a bargain. But this presumption is rebuttable. Consideration must be lawful. there was no binding contract as there was no intention to create legal relationship.4 In commercial and business agreements. 12 Self-Learning Material . Later the parties separated and the husband failed to pay the amount. The acceptance must also be according to the mode prescribed and must be communicated to the proposer. As such they are not contracts.4 Capacity of Parties The parties to an agreement must be competent to contract. The wife sued for the allowance.6. otherwise it cannot be enforced by a court of law. But it must be real and lawful {Secs.1 Proposal and Acceptance Notes There must be a ‘lawful proposal’ and a ‘lawful acceptance’ of that proposal.e.11. Illustration: A husband promised to pay his wife a household allowance of $30 every month.

X agrees with Y to enclose some areas between two parallel lines and Y agrees to pay Rs. The parties are said to be of the same mind when they agree about the subject-matter of the contract in the same sense and at the same time.6. however. If it is vague and it is not possible to ascertain its meaning. As regards the legal effects.6 Lawful Object The object of an agreement must be lawful. or arbitration agreement must be in writing. (See paragraph 2.7 Writing and Registration A contract may be oral or in writing. it cannot be enforced. Similarly. 2. (iii) Fraud.9 Possibility of Performance An agreement to do an impossible act is void (Sec. 56).Amar agrees to sell Bharat “hundred tons of oil”. agreement in restraint of legal proceedings and agreement by way of wager have been expressly declared void.10 Agreement not Expressly Declared Void The agreement must not have been expressly declared to be void. Notes Check Your Progress 4. when a landlord knowingly lets a house to a prostitute to carry on prostitution. In some cases. This agreement is void because it is an agreement to do an impossible act. besides being a written one. What are the essential elements of a valid contract? What do you understand by ‘Possibility of Performance”? Are orally made contracts enforceable by law? When the consent is said to be ‘free’? 2. the law requires that an agreement to pay time barred debts.7 Consent is said to be free when it is not caused by (i) Coercion.8 (See paragraph 2. 2. Example . the law makes it compulsory for all agreements relating to transfer of immovable property to be registered. 2. a contract. the required statutory formalities must be complied with. there is no difference between a contract in writing and a contract made by word of mouth. or (v) Mistake. The object is considered lawful unless it is forbidden by law or is fraudulent or involves or implies injury to the person or property of another or is immoral or is opposed to public policy. in the interest of the parties that the contract should be in writing.14) Self-Learning Material 13 .5 Free Consent It is essential to the creation of every contract that there must be a free and genuine consent of the parties to the agreement. has to be registered.12). Example . agreement in restraint of trade. (ii) Undue influence.6.6. he cannot recover the rent through a court of law. This agreement is void on the ground of uncertainty because it is not clear what kind of oil is intended to be sold.to X. Example Agreement in restraint of marriage. There are some other formalities also which have to be complied with in order to make an agreement legally enforceable. 6. It is.10 Example.2.9 Thus. under the Act11. In some other cases.8 Certainty In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain.13). 5. 2.6. 1000/. the document in which the contract is incorporated is to be stamped. (iv) Misrepresentation. Thus where there is a statutory requirement that a contract should be made in writing or in the presence of witnesses or registered.6. The consent of the parties is said to be free when they are of the same mind on all the material terms of the contract. 7. (See paragraph 2.6.

14 A contract is voidable when one of the parties to the contract has not exercised his free consent.12 are enforceable in a court of law. No rights accrue thereunder. All voidable contracts are those which are induced by coercion.7. Voidable Contract: An agreement which is enforceable by law at the option of one or more of the parties thereto. i. Example .7.16) c) 2. Illegal Contracts: It is contrary to law and hence void ab initio.A boards a bus. undue influence.e. it is an executed contract. fraud or misrepresentation. Executory Contract: Where neither party to the contract has performed his share of the obligation. the contract is executory.2 On the Basis of Mode of Creation a) b) Express Contract: When the terms of a contract are reduced in writing or are agreed upon by spoken words at the time of its formation. is a voidable contract.1 On the Basis of Enforceability a) b) Valid Contracts: Contracts which satisfy all the essential elements of a valid contract. Quasi Contract: Constructive or Quasi contracts arise out of obligations enjoyed by one person from the voluntary acts of the other which are intended to be performed only on the happening of some future uncertain event. Unenforceable Contracts: An unenforceable contract is a valid contract in law.3 On the Basis of the Extent of Execution a) Executed Contract: Where both the parties have performed their obligations. Void Contract: A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.13 A void contract is a nullity from its inception. It is implied from his conduct that A has entered into an implied promise to purchase a ticket. (See paragraph 2.15) b) c) 14 Self-Learning Material . or because of some technical defect therefore it cannot be enforced in a Court of Law.(See paragraph 2.7. One of the essential elements of a formation of a contract is free consent. the promise is said to be implied. c) d) e) 2. Even when one party to the contract has performed his share of the obligation. the contract is express. Such an implied promise leads to an implied contract. When the proposal or acceptance of any promise is made otherwise than in words. though the other party is still under an outstanding obligation to perform his part of the promise.2.7 Notes Classification of Contracts Contacts may be classified as follows: 2. Implied Contract: The terms of a contract are inferred from the conduct or dealings between the parties. both the parties have yet to perform their promises. but due to the fact that it is incapable of proof. Contingent Contract: A contingent contract is one in which a promise is conditional and the contract shall be performed only on the happening of some future uncertain event. the contract is executed. but not at the option of the other or others.

“When one person signifies to another his willingness to do or to abstain from doing anything.2. A says to B that he will sell hs car to him for Rs. a person should offer to do something.1 Meaning of Proposal ‘Proposal’ of the Act is synonymous with the term ‘offer’ of the English Law.3 Legal Rules Regarding a Valid Proposal A valid proposal must be in conformity with the following rules: a) Express or Implied: A proposal may be made either by words or by conduct. b) Terms Certain & Not Loose or Vague: If the terms of a proposal are vague or indefinite. X owns three different cars. with a view to obtaining the assent or acceptance of that another to that act or abstinence.8. he is said to make a ‘proposal’. with a view to obtaining the assent of that other to such act or abstinence.T. is an ‘express proposal’ and the one which is inferred from the conduct of a person or the circumstances of the case is called an ‘Implied Proposal’. The person who makes such an offer or proposal is called the ‘Offerer’ or ‘Proposer’. This offer must be sufficiently communicated to the person for whom he intends to do something with a view to obtaining his assent to it.8. A proposal which is expressed by spoken or written words. a) b) c) The expression of willingness to do or to abstain from doing something. A proposal is then said to be made. 2.8. ii.”15 The first step towards creating a contract is that one person shall signify or make a proposal to the other. Illustration: i. 2.8 Proposal (Offer) and Acceptance Notes 2. This must be made with a view to obtaining the assent of the other person. This is an implied proposal by the DTC. 80. The proposal is not definite.000. The Delhi Transport Corporation (D. T offered to take a house on lease for three years at $ 285 per annum if the house was “put into thorough repair and drawing rooms handsomely decorated Self-Learning Material 15 . The words ‘proposal’ and ‘offer’ are used inter-changeably. In order to constitute a contract. X says to Y “I will sell you a car”. This expression must be to another person. Illustration: i. the person to whom the proposal or offer is made is called the ‘Proposee’ or ‘Offeree’ and the person accepting it is called the ‘Promisee’ or ‘Acceptor’.2 Essentials of a Proposal The definition of the word proposal given in the Act reveals the following three essentials of a ‘proposal’. ii. its acceptance cannot create any contractual relationship.C) runs Omni buses on different routes to carry passengers at the scheduled fares. This is an express proposal.

Later. d) e) Illustration: The leading case on the subject of ‘general offer’ is that of Carlill vs. As Lord Lindlay puts it. Can be Made Subject to Any Terms and Conditions: A proposer may attach any terms and conditions to the proposal he makes. They are instead an invitation to the public to make a proposal. e. unless he had knowledge of it. in ignorance of each others offers. the proposal was too vague to result in a contractual relation. or circulars sent to potential customers do not constitute a proposal. His suit was dismissed on the ground that he could not accept the offer. had traced the boy and informed the defendant. the Carbolic Smoke Ball Co. “A state of mind not communicated cannot be regarded as dealings between man and man. h) i) 16 Self-Learning Material . on the faith of the advertisment.g. advertisements in a newspaper for sale of an article.” Held. quotations. on reading the notice of reward. The proposee will have to accept all the terms and conditions of the proposal. after having used their Smoke Balls three times daily for two weeks. with prices marked on them. catalogues. bought and used the Balls according to the directions but she. After the servant had left. according to the printed directions. Carbolic Smoke Ball Co. Such a proposal can be accepted only by the person or persons to whom it is made. Similarly. The company was held liable. If the proposee does not reply. invitation to a dinner which has no intention to create legal relationship. issued an advertisement in which the Company offered to pay £100 to any person who contracts influenza. Likewise. They do not constitute acceptance of one’s offer by the other and as such there is no completed agreement. Two Identical Cross-offers do not Make a Contract: When two parties make identical offers to each other. on the grounds of justice. He may even prescribe the mode of acceptance. the servant claimed it. On the other hand. there is no contract.17 f) Communicated to the Proposee: A proposal is effective only when it is communicated to the proposee. Mrs. in search of the boy. Carlill. the defendant announced a reward of Rs. the offers are ‘crossoffers’. May be ‘Specific’ or ‘General’: A proposal is ‘specific’ when it is made to a definite person or persons. the proposal would be presumed to have been accepted. The servant.” This is applicable to both specific as well as general offers. subsequently suffered from influenza. before seeing the announcement.16 To give Rise to Legal Consequences and be Capable of Creating Legal Relations: A proposal will not become a promise even after it has been accepted unless it was made with a view to create legal relations. In the above case. a declaration by a person that he intends to do something gives no right of action to another. proposal is ‘general’ when it is made to the world at large or public in general and may be accepted by any person who fulfills the requisite conditions. She sued the company for the promised reward. because no obligation to reply can be imposed on him. the plaintiff. nevertheless. 501 to anybody giving information relating to the boy.18 g) Should not Contain a Term the Non-compliance of Which Would Amount to Acceptance: A proposer cannot say that if acceptance is not communicated up to a certain date. Illustration: The defendant’s nephew absconded from home. An Invitation to Proposal is not a Proposal: Display of goods by a shopkeeper in his window. He sent his servant. is not an offer but merely an invitation to the public to make a proposal to buy the goods at the market price.Notes c) according to the present style.

What are the essential elements of a ‘proposal’? 9. and the person accepting the proposal is called the Promisee. Acceptance with variations is a counterproposal and there is no contract until this counter proposal is accepted by the original proposer. An acceptance need not always be expressed in words. Notes 2. It may also be expressed by post or by telegram. b) Self-Learning Material 17 .19 A proposal lapses by not being accepted in the mode prescribed. 2.22 A proposal lapses by subsequent illegality or destruction of subject matter.5 Acceptance A contract as already observed.000. emerges from the acceptance of an offer. Illustration: A offers to sell his house for Rs. A proposal lapses by the death or insanity of the proposer or the proposee before acceptance. it should be unqualified.Mode of Accept ance: Acceptance may be made either by words or by conduct. insist that his proposal shall be accepted in the prescribed manner. but if he fails to do so. the acceptance of any consideration for reciprocal promise which may be offered with a proposal is an ‘acceptance’ of the proposal (Sec.8. The proposer has the right to prescribe the manner in which the proposal can be accepted but not the manner in which it may be refused. Performance of the conditions of a proposal is an acceptance of the proposal. 2.21 Revocation by non-fulfillment of a condition precedent to acceptance.2. To constitute a valid acceptance. A proposal lapses by recovation by the proposer before acceptance. the proposer may. This is acceptance. or if no mode is prescribed. consenting on the same thing in the same sense.20 A proposal lapses by rejection by the proposee. 8).24 Performance of the conditions of a proposal.50. In order that there must be a binding contract.8.8. variations and reservations is no acceptance at all.4 Lapse and Revocation of Proposal A proposal lapses and becomes invalid in the following circumstances: a) b) c) d) e) f) g) An offer lapses after stipulated or reasonable time.23 The person making the proposal is called the Promisor.000 to B. Acceptance Must be Expressed in Some Usual and Reasonable Manner . within a rea sonable time after the acceptance is communicted to him. Conditions imposed by the offerer that the proposal shall be accepted only on payment of deposit or earnest money or on executing a certain document will lapse the proposal.50. 2. he accepts the acceptance. Check Your Progress 8. Usual and reasonable manner would mean the parties intended to perform the contract in the ordinary course of trade or business. in some usual and reasonable manner. Discuss the significance of communication in proposal.6 Essentials of a Valid Accptance Sections 7 and 8 of the Act lays down following rules to convert a proposal into a promise: a) Acceptance Must be Absolute and Unqualified: Acceptance of a proposal with conditions. Acceptance is defined when the person to whom a proposal is made signifies his assent thereto the proposal is said to be accepted. and not otherwise. A proposal when accepted becomes a promise. B accepts the offer to purchase the house for Rs. if such a condition is not accepted by the offeree. there must be absolute and unconditional acceptance of the terms of a proposal. This means that the parties to the contract must be consenses-ad-idem that is. If the proposer prescribes the manner in which the proposal is to be accepted and the acceptance is not made in such manner.

e) f) Illustration: A who travels by a ship sustains injury on account of the negligence of the crew.’ The general offer is closed as soon as it is accepted by a definite person. Mere uncommunicated or mental acceptance is not enough. Intentions must be communicated. d) Acceptance Must be Communicated to the Proposer: It should be signified and communicated to the proposer himself. In the case of proposal and acceptance by telephone conversation. Acceptance of the Proposal: Acceptance of the proposal is the acceptance of all the terms even though the proposee is ignorant of some of the terms of the proposal. writing or other act.g. the acceptance must be given before the proposal is revoked or lapses by reason of proposee’s knowledge of death or insanity of the proposer.c) Notes Mental Acceptance is not Sufficient in Law: Silence cannot amount to acceptance. acceptance must be given within a reasonable time. Acceptance to be complete must be communicated by words or conduct by an offeree to the proposer. if any. Even if the proposee does not read the terms and conditions. There must be some external manifestation (overt act) of that intent by speech. the clause limiting the liability of the Shipping Company was obscured by the words stamped across in red ink.26 Acceptance Must be by a Certain Person: A proposal may be made to an unascertained number or to the world at large but no contract can arise until it has been accepted by a certain person who first gives information either by words or by conduct. h) 18 Self-Learning Material . The Shipping Company raised a plea that the terms and conditions were printed overleaf and the liability of the company was limited in various ways. then the company would not have been held liable. g) Acceptance of the Proposal Need not Always be Expressed in Words: Performance of the conditions of a proposal is an acceptance of the proposal. This is no contract. but does not tell anything to C of his intention. Illustration: A tells B that he intends to buy C’s office. a ticket issued by the Railways with the terms and conditions printed over leaf. Acceptance Must be Given Within Reasonable Time and Before the Proposal Lapses and/ or is Revoked: To be legally effective acceptance must be given within the specified time limit. 25 Where the insurance company accepts the cheque as per the terms of the proposal towards the premium. e. It was held that there was no contract. it will be assumed that the proposee has accepted the terms and conditions of travel. However. Acceptance and intimation of acceptance are both necessary to result in a binding contract. no contract is created. A was entitled to recover damages. Such an offer is called a ‘general offer. the document remained in the drawer. and if no time is stipulated. encashment of cheque is a sufficient acceptance of the proposal. Again. If the terms and conditions had not been so obliterated. contract is made at a place where acceptance is received. provided the terms and condi tions are legible and if reasonable notice thereof is given. except where the terms are not apparent on the face and no resonable cautionis taken to draw attention of the acceptor. The company did not take reasonable care to make the conditions legible and therefore. A draft agreement relating to the supply of coal was sent to the manager of a Railway Company for his acceptance. If the acceptance is not communicated to the proposer. The Manager wrote the words ‘approved’ on the agreement but by oversight.

when the letter of acceptance is received by the proposer. 2. as against the person to whom it is made.000 to anyone who gives information of his lost son: B gives the information but is ignorant of the reward. The legal provisions relating to the communication of proposal.e. B gives the information.10. i. Acceptance and Revocation The communication of proposal and acceptance must complete so as to bind the concerned parties because as soon as the communication is complete the parties loose the right of withdrawal or revocation. when it comes to his knowledge. acceptance and revocation are as under: a) Communication of an Proposal: The communication of proposal is complete when it comes to the knowledge of the person to whom it is made.9 Communication of Proposal. 10.e. when the letter of revocation is posted.000. Notes Illustration: A advertises a reward of Rs.10 Consideration 2. 10.e. The communication of acceptance is complete: i.000 to one who gives information of his lost son.e. it is no Acceptance of the Proposal: Act done in ignorance of the proposal is no acceptance. he claims the reward. there can be no consent or assent. so as to be out of the power of the acceptor. Communication of an Acceptance: The communication of acceptance is complete at dif ferent times for the proposer and acceptor. i.1 Meaning of Consideration Consideration is one of the essential elements of a valid contract. 2.Illustration: A gives an advertisement in the newspaper offering Rs. When a person promises to do Self-Learning Material 19 . and ii. c) Communication of a Revocation: The term ‘revocation’ means ‘taking back’ or ‘withdrawal’.e. as against the acceptor. when it is put into a course of transmission to the person to whom it is made. i. It was held that B is not entitled to the reward as he gave the information without being aware of the offer. so as to be out of the power of the person revoking. as against the proposer. i) If the Act is done in Ignorance of the Proposal. when it is put in a course of transmission to him. as against the person who makes it. After some time. The communication of revocation is complete: i. because to anuncommunicated offer. but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards. i. when the letter containing the proposal reaches the proposee. d) Time During Which an Offer or Acceptance can be Revoked: A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer. when the letter of revocation is received by him. B is entiled to the reward of Rs. when it comes to the knowledge of the proposer i. when the letter of acceptance is duly posted. 10. b) ii.

consideration is the price for which the promise of the other party is bought. Consideration must be legal. Are there any exceptions to the rule .e.28 Consideration may be past. It was held that Z was entitled to maintain suit because a consideration need not necessarily move from the promisee.Notes something. it may move from any other person (i. How can a proposal be revoked? 11.” Blackstone defines consideration as “the recompense given by the party contracting to the other. Thus the essential condition for the enforceability of the contract is consideration.”27 llustration: A agrees to sell his house to B for Rs. The word ‘consideration’ implies something in return for the promise or the price of promise or quid pro quo.000. 5. 5. or promises to do or to abstain from doing.Amar sees Bhushan’s house on fire and helps in extinguishing it.‘No Consideration No Contract’? 12. If it is done at the instance of the third party or without the desire of the promisor it is not consideration. something.00. B’s promise to pay Rs. the contract is. as long as there is a consideration for a promise. The Act defines consideration as “when at the desire of the promisor. Amar cannot demand payment for his services because Bhushan never asked him to come for help. the promisee or any other person has done or abstained from doing. The rule is expressed by the Latin maxim “ex nudo-pacto non-oritur actio”. Hence it is unenforceable by the promisee.e. is the price for which the promise of the other is bought and the promise thus given for value is enforceable. i. For example . provided he is a party to the contract. generally. he must get ‘something’ in return.” Therefore. Similarly. 5. Consideration May Move from the Promisee or any other Person: The consideration need not move from the promisee alone but may proceed from any third person. Consideration Must be ‘Something of Value’ (The consideration need not be adequate to the promise but it must be of some value in the eye of the law). or does or abstains from doing. The basis of consideration is that of reciprocity.00. not valid. b) Check Your Progress 10.X by a deed of gift transferred certain property to her daughter Y with a direction that Y should pay Z an annuity. or abstaining from doing something (positive or negative act) or a promise to do something. such as a promise to make a gift or charity for no return is not supported by consideration. If he does not get ‘something’ in return. “an act or forbearance of one party of the promise thereof. According to Sir Frederick Pollock. Example . Here A’s promise to sell his house is for B’s consideration to pay Rs. This ‘something’ is known as consideration. When the consideration is said to be valid? c) d) e) f) 20 Self-Learning Material . present or future. This means that even a stranger to the consideration can sue on a contract. “out of a bare promise no cause of action can arise.000. A promisee would be able to enforce the promise only if he has given or promised to give or unless the promisor has obtained or has been promised something in exchange of it. Later Y refused to pay annuity on the plea that no consideration had moved from Z. it is immaterial who has furnished it. a gratuitous promise.10. In other words. This is also called as ‘Doctrine of Constructive Consideration’. such act or abstinence or promise is called a consideration for the promise.” 2. Consideration may be doing something. Y executed a deed in writing in favour of Z and agreed thereby to pay the annuity. Thus. X in the present case).000 is for A’s consideration to sell his house to B.2 Essentials of a Valid Consideration The essentials of consideration are as follows: a) Consideration Must Move at the Desire of the Promisor: The act or abstinence forming the Consideration must be done at the desire or request of the promisor.00.

b) c) Agreement to Compensate for past Voluntary Service: Example .29 Remission by the Promisee.11. though gratuitous.11. Accordingly every person who has completed the age of 18 years becomes a major.2 Who is a Minor? As per the Indian law.3 Position of Agreements by Minor The law regarding minor’s agreements may be summed up as under: a) An Agreement by a Minor is Absolutely Void and Inoperative as Against Him: Law protects the rights of the minors. Only when a person is under the guardian ship of court of wards or under a person appointed under the Guardians and Wards Act. according to the law to which he is subject. 100/-. who is under 18 years of age is a minor. would be enforceable. i. But there are a few exceptions to this rule. who: a) b) c) is of the age of majority.32 a person domiciled in India. of Performance of the Promise: For compromising a due debt. no consideration is necessary. Agreement to Pay a Time Barred Debt: Where there is an agreement. to the extent of liability incurred. 2. iv. the promisee takes definite steps in furtherance of the object and undertakes a liability. the agreement is valid even though it is not supported by any consideration.A finds B’s purse and gives it to B. iii. Registered as per law. agreeing to accept less than what is due. if on the faith of the promised subscription.11.e. This is a Contract. to pay wholly or in part a debt barred by the law of limitation. is of sound mind. Made on account of natural love and affection.11 Capacity of Parties 2. not exceeding the promised amount of subscription. and is not disqualified from contracting by any law to which he is subject.1 Who is Competent to Contract? According to the Act31 every person is competent to contract.10. because their mental faculties are not mature -they donot possess Self-Learning Material 21 . Expressed in writing. made in writing and signed by the debtor or his authorised agent.2. Notes d) e) f) g) 2.30 Contribution to Charity: A promise to contribute to charity. then he attains majority on completion of 21 years of age. B promises to give A Rs. These exceptions are as follows: a) Agreement Made on Account of Natural Love and Affection: An agreement made without consideration is enforceable if. Completed Gift: A completed gift does not require consideration in order to be valid.3 No Consideration No Contract The general rule is that “an agreement made without consideration is void”. 2. Between parties standing in a near relation to each other. Contract of Agency: No consideration is necessary to create an agency. ii. it is i.

no other minor’s agreement can be ordered for a specific performance. the adult is liable under the contract. has no existence in the eyes of law. the minor has no liability but the contract as a whole can be enforced against the adult. Beneficial Agreements are Valid Contracts: Any agreement which is of some benefit to the minor and under which he is required to bear no obligation. Specific Performance: Specific performance means the actual carrying out of the contract as agreed. and articles of association of the company do not prohibit minor to hold shares. But he can be admitted as a partner for the benefits of partnership (only for sharing of profits and not losses). A minor’s agreement being a nullity and void ab-initio. Position of Minor’s Parents: The parents of a minor are not liable for agreements made by a minor. where he had earlier misrepresented himself as a major to the other party. and the minor is not. The parents can be held liable only when the child is contracting as an agent for the parents. being incompetent to contract. It cannot be ratified by the minor on attaining the age of majority. In the leading case of Mohori Bibi vs. even in those cases. cannot be a shareholder of the company. Surety for a Minor: When an adult stands surety for a minor. a minor can be a beneficiary. In other words. Minor Shareholder: A minor. by his guardian is binding on the minor and can be specifically enforced by or against the minor. The Rule of Estoppel does not Apply to a Minor: A minor is not estopped from pleading minority in a suit against him. 68). Dharam das Ghose. Minor’s Liability for Necessaries: Minor’s property is liable for reimbursing the person who has supplied necessaries to a minor (Sec. under the Specific Relief Act. a minor may be asked to restore any benefit which he may have received from other party. However. Other than this. c) d) e) f) g) h) i) j) k) l) m) n) 22 Self-Learning Material . No Ratification on Attaining the Age of Majority: Ratification means the subsequent adoption and acceptance of an act or agreement. The mortgagee filed a suit for the recovery of his mortgage money and for sale of the property in case of default.33 a minor executed a mortgage for Rs. whether the agreement is for the purchase of necessaries or not. b) No Restitution Except in Certain Cases: A minor cannot be ordered to make compensation for a benefit obtained under a void agreement. Minor Agent: A minor can be an agent. 196334.and received Rs.35 He binds his principal by his acts but is not liable to him in any manner for losses suffered by the principal. is valid.Notes the capacity to judge what is good or bad for them. Contract by Minor and Adult Jointly: Where a minor and an adult jointly enter into an agreement with another person. Minor and Insolvency: A minor cannot be declared insolvent as he is not competent to contract. It was held that an agreement by a minor was absolutely void as against him and therefore the mortgagee could not recover the mortgage money nor could he have the minor’s property sold under his mortgage. Minor Partner: A minor being incompetent to contract cannot be a partner in a partnership firm. 20000/. 8000/from the mortgagee. A company can also refuse to register transfer of shares in favour of a minor unless the shares are fully paid. Only a contract entered on behalf of a minor.

no personal liability attaches to them. Convict: A convict is one who is found guilty by a court and is undergoing sentence of imprisonment. Notes 2. Agreements Entered into by Persons of Unsound Mind are Void: However. b) c) d) e) Self-Learning Material 23 .”36 2. Idiocy is permanent whereas lunacy denotes periodical insanity with lucid intervals. he is incompetent to contract and also to sue on contract made before conviction. that country’s citizen becomes an alien enemy and cannot enter into contract. Company or Corporation: A company/corporation is an artificial person created by law.7 Persons Disqualified by Law The third type of incompetent persons are those who are ‘disqualified from contracting by any law to which they are subject’.11.11. Persons of unsound mind are liable for necessities supplied to them or to anyone whom they are legally bound to support. he is adjudged insolvent and his property stands vested in the Official Receiver or Official Assignee appointed by the court. A person who is usually of unsound mind but occasionally of sound mind may make a contract when he is of sound mind. An agreement of an idiot is void.e.4 Persons of Unsound Mind For a valid contract. i.2. During the period of his imprisonment. Such a person cannot enter into contracts relating to his property.11. It cannot enter into contract outside the powers. Drunken/Intoxicated Persons: A drunken or intoxicated person suffers from temporary incapacity to contract.5 What is a ‘Sound Mind’? The Act provides “A person is said to be of sound mind for the purpose of making a contract. It is only their estate (property) which is liable. When there is a war between India and another country. Insolvents: When a person’s debts exceed his assets. it is necessary that each party to it must have a ‘sound mind’. there is one exception. at the time when he is so drunk or intoxicated that he is incapable of forming a rational judgement.11. The position of a drunken or intoxicated person is similar to that of a lunatic. They are: a) Alien Enemies: An alien (citizen of a foreign state) is a person who is not a citizen of India. conferred upon it by its Memorandum of Association (object clause) or by the provisions of its Special Act. But even in such cases. A person who is usually of sound mind but occasionally of unsound mind may not make a contract when he is of unsound mind.37 b) c) d) 2. He suffers from intermittent intervals of sanity and insanity. Foreign Sovereigns and Ambassadors: They can enter into contracts and enforce those contracts in our courts but they cannot be sued in our courts without the sanction of the Central Government unless they choose to submit themselves to the jurisdiction of our courts. he is capable of understanding it and of forming a rational judgement as to its effects upon his interests.6 Position of Agreement with Persons of Unsound Mind a) Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other personal experience. He can enter into contracts during the period when he is of sound mind. Idiots: An idiot is a person who has completely lost his mental powers. if at the time when he makes it.

3 Effect of Absence of Free Consent When there is consent but it is not free (caused by coercion.12.2. When can a minor be said to be competent to contract? 14. undue influence.12.5 Essentials of Co-ercion To constitute coercion the following are the essential features: a) b) c) Coercion may proceed from any person and it is not necessary that it must be exercised by a party to the contract.12.4 Coercion Coercion means compelling a person to enter into a contract under a pressure or a threat.A Hindu widow was forced to adopt a boy under threat that her husband’s dead body would not be allowed to be removed if she does not adopt the boy. or Mistake. at the option of the party whose consent was so caused. (Ranganayakamma V. or Undue Influence. She adopted the boy. the agreement is void. fraud or misrepresentation). It may also include those cases where the party is subjected to mental agony.2 Free Consent Consent is said to be free when it is not caused by: a) b) c) d) e) Coercion. 2. 2.12. or Misrepresentation.1 Meaning of Consent Check Your Progress 13. Here.6 Undue Influence The Act defines the term ‘Undue Influence’ as follows: 24 Self-Learning Material . or Fraud.39 2. Coercion may be an act causing physical hardship or unlawful detention of property belonging to another. The Act defines ‘Coercion’ as follows: “Coercion is the committing or threatening to commit.38 2.12. Alwar Setti). 2. any act forbidden by the Indian Penal Code.”40 Example . or the unlawful detaining or threatening to detain.12 Free Consent Notes 2. When consent is caused by ‘bilateral mistake’ as to a matter of fact essential to the agreement. Which persons are disqualified by law to be competent to contract? Consent means an act of assenting to an offer. with the intention of causing any person to enter into an agreement. Two or more persons are said to consent when they agree upon the same thing in the same sense.12. the contract is voidable. to the prejudice of any person whatever. Widow’s consent has been obtained by co-ercion because preventing the dead body from being removed for cremation is an offence under section 297 of the Indian Penal Code. It may be directed against any person and not necessarily against the other contracting party. any property.

and uses that position to obtain an unfair advantage over the other. Confidence is reposed but betrayed.“A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other. It is mainly of physical character. In this. by one who does not believe it to be true.8 Fraud According to the Act. Nature 3. the relationship between doctor and patient. the relationship between father and son. “Fraud means and includes any of the following acts committed by the party to a contract.”43 2. a) b) c) If he holds a real or apparent authoring over the other (e. 2. Self-Learning Material 25 . or by his agents.g.9 Essential Elements Essential elements of fraud are as follows: a) b) c) d) e) The fraud must be committed by a party to a contract or by anyone with his connivance or by his agent.12. Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age. of that which is not true. Basis Coercion Consent is obtained by threat of an offence.42 Notes 2. old illiterate persons). Consent is given in good belief. or with his convinance. Character It is most subtle in Character.7 Distinction Between Coercion and Undue Influence Distinction Points of Distinction 1. illness or mental or bodily distress (e. but under moral influence. If he stands in a fiduciary relation to the other (e. There must be a false representation and it must be made with the knowledge of its falsehood. The party acting on the representation must have suffered loss.12. spiritual guru and disciple. lawyer and client). The fraud must have actually deceived the other party.g. 2. Any other act fitted to deceive. or master and servant). A promise made without any intention of performing it. It is of violent character. The representation must relate to a fact. It is moral character.”41 The Act further lays down that a person is deemed to be in a position to dominate the will of another.12. Undue Influence Consent is obtained by the dominating will of the other. and Any such act or ommission as the law specially declares to be fraudulent. the person is forced to give his consent. or to induce him to enter into the contract: a) b) c) d) e) The suggestion as a fact. with intent to deceive another party there to or his agent.g. The active concealment of a fact by one having knowledge or belief of the fact.

26 Self-Learning Material . without an intent to deceive. Effects of breach Misrepresentation There is no intention to deceive. Actually Acted: The other party must have acted on the faith of the representation. or anyone claming under him.12. 5.2. The person making the statement believes it to be true.12. The person making the statement does not believe it to be true. Causing. Effect of discovering the truth The contract cannot be avoided if the party whose consent was so caused. a mere opinion. Representation as to Fact: The representation must relate to a fact. Intention to deceive 2. Object: The representation must be made with a view to inducing the other party to enter into contract but without the intention of deceiving the other party. of that which is not true. False Representation: These must be a false representation and it must be made without knowledge of its falsehood. A false innocent statement without any intention to deceive is misrepresentation.12 Distinction between Misrepresentation and Fraud Distinction Points of Distinction 1. This plea can not be raised in case of fraud. Any breach of duty which. however innocently. Fraud There is intention to deceive. by misleading another to his prejudice or to the prejudice of anyone claiming under him. gains an advantage to the person committing it. in a manner not warranted by the information to the person making it. Besides making the contract voidable at the option of the party injured.12. a party to an agreement. Belief of the person making statement 4. False Statement 3.11 Essential Elements Essential Elements of misrepresentation are as follows: a) b) c) d) e) By a Party to a Contract: The representation must be made by a party to a contract or by anyone with his connivance or by his agent. tomake a mistake as to the substance of the thing which is the subject of the agreement. as follows: “Misrepresentation” means and includes a) b) The positive assertion.10 Misrepresentation Notes The Act. except in cases when silence amounts to fraud. A fasle statement deliberately made to deceive is fraud. though he believes it to be true.”44 c) 2. 2. defines the term ‘misrepresentation’. it gives right to an independent action in tort. a statement of expression or intention does not amount to misrepresentation. It makes contract voidable at the option of the party injured. In other words. had the means of discovering the truth with ordinary diligence.

Mistake is an erroneous belief concerning something.e.48 2.2.13 Legality of Object and Consideration The object and the consideration of an agreement must be lawful.Unilateral A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to matter of fact.15 Mistake of Foreign Law Is treated as mistake of fact.18 Remedies Available Where a contract is caused by a mistake which is void.17 Mistake of Fact .45 2.12.46 2.12.16 Mistake of Fact .e. i.14 Mistake of Indian Law Does not vitiate a contract because everyone is supposed to know the law of his country.12.12. According to the Act. prohibited) by Self-Learning Material 27 . otherwise the agreement is void.47 A person to whom money has been paid or anything delivered by mistake must repay or return it. the agreement is void. the consideration or the object of an agreement is unlawful in the following cases: a) If it is Forbidden by Law: An act. The maxim ‘ignorance of law is no excuse’ applies.Bilateral Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement. 2. action or thing is said to be forbidden (i. the remedies available are: a) b) Any person who has received any advantage under the agreement is bound to restore it. the contract is void if both the parties are under a mistake as to a foreign law because one cannot be expected to know the law of other country.12. 2. The types of mistake are shown below : Notes Type of Mistake Mistake of Fact Mistake of Law Of Indian Law As to Subject Matter Of Foreign Law Bilateral Unilateral As to Possibility Performance Identity of Persons Nature of Contract 2.13 Mistake The Act does not define the term ‘mistake’.12.

50.A. This agreement is void as it defeats the provisions of Limitation Act. When ever an agreement is harmful to the public welfare or any established interest of society. Example . X agreed to marry her as soon as she obtained a divorce. the agreement is void.An agreement to put certain property to fire is unlawful and void. if Permitted it would Defeat the Provisions of any Law: Such an agreement is void.14 Void Agreement “An agreement not enforcable by law is said to be void”50. For example -Rangeela. It was held that X could not recover back the amount because the agreement was void as its object was immoral.2 A agrees to pay B. it would be void as being against public policy. a major in the Army.10) Agreements the meaning of which is uncertain. If it is Fraudulent: An agreement whose object or consideration is to defraud others.e. B and C enter into an agreement of the division among them of gains acquired by them by fraud. (paragraph 2.14. Example .1 Void Agreement Already Discussed The following type of void agreements have already been discussed: a) b) c) d) e) f) Agreements by or with a person incompetent to contract. 1 lakh to Y a married woman to obtain a divorce from her husband. (paragraph 2. Thus a void agreement does not give rise to any legal consequences and is void ab-initio.12.49 d) e) Example . For example . three years). If the Court Regards it as ‘Immoral or Opposed to Public Policy: If the object or considera tion of an agreement is immoral or opposed to public policy.9) 28 Self-Learning Material . For example . a Hindu already married and his wife alive. entered into a marriage agreement with Kumari an unmarried girl.6. (paragraph 2.1 X gave Rs. This agreement is void because the second marriage is forbidden by Hindu Law. Rs.15) Agreements made without consideration. in unlawful and hence void.6.000 if he will assist his brother to desert the army. as its object is unlawful. it is void. 1 lakh from Kuber and agreed not to raise any objection as to the limitation and that Kuber may recover the amount even after the expiry of limitation period (i. (paragraph 2. If it is of such a Nature that. 2.8) Agreements of which the consideration or object is unlawful. (paragraph 2. 2. The agreement is void. The object of the agreement is opposed to public policy and hence void. Any agreement which interferes with marital relations of persons is regarded as immoral.Nirdhan borrowed Rs. being an unlawful agreement.11) Agreements made under a bilateral mistake of fact material to the agreement. Why insurance is not a wagering agreement? c) law when it is punishable under any enactment.Notes b) Track Your Learning 15. If it Involves or Implies Injury to a Person or Property of Another: If the object or consid eration of an agreement is injury to the person or property of another.13) Agreements to do impossible acts. (paragraph 2.

or a certain person. not in their hands. Such a clause is void because it limits the period of limitation to two years which is less than the period of limitation (i. void”52. is void. trade combinations or negative stipulations in service agreements where in some reasonable restrictions on trade are permitted in law. Such agreement is a wagering agreement and thus void. No party should have a proprietary interest in the event. For example . v. Agreements in Restraint of Trade: The constitution of India guarantees the freedom of trade and commerce to every citizen. trade or business of any kind. Example . Notes b) c) i.e. d) Wagering Agreements: The word ‘wager’ means ‘a bet’. Each party must stand to win or loose.A clause in a contract provides that no action should be brought after two years. Agreements Limiting the Period of Limitation: An agreement which limits the time within which an action may be brought so as to make it shorter than that prescribed by the law of limitation. The essentials of wagering agreements are: ii. According to the Act. There is an insurable interest in an insurance contract while there is no such interest in a wagering contract.Preeti agrees with Sambandh for good consideration that she will not marry Kurup.A clause in a contract provided that no action should be brought upon it in case of breach.000 to Y if it rained on a particular day. For example .e. 1. It is void agreement.X promises to pay Rs. The event must be an uncertain. Exceptions . iii. There must be a promise to pay money.2.2 Expressly Declared Void Agreements One of the essential elements of a valid contract is that it must not be one which is ‘expressly declared’ to be void under the Act. Example . Promise must be conditional on event happening or not. “Every agreement in restraint of the marriage of any person. or for a fixed period is void.51 The restraint may be general or partial.54 i. by one person to another on the happening or non-happening of a future uncertain event. An agreement agreeing not to marry at all. is to that extent. ii. There are some exceptions to this rule like sale of goodwill. According to the Act. i. the following agreements amount to restraint of legal proceedings and are thus void to that extent: Agreements Restricting Enforcement of Rights: An agreement by which any party is restricted absolutely from enforcing his legal rights under or in respect of any contract is void to that extent.000 to X if it did not. other than a minor. and Y promises to pay Rs. three years) prescribed by the law of limitation. Self-Learning Material 29 . iv. Such a clause is void because it restricts both the parties from enforcing their legal rights. is void”. A wagering agreement is an agreement between two persons under which money or money’s worth is payable.Agreements or clause referring the dispute to arbitration or subject to one court’s jurisdiction are valid. A promise to marry a particular person.14. “Every agreement by which any one is restrained from exercising a lawful profession. partner’s agreements. An insurance contract which seems to have a trace of speculation is not a wagering contract. does not imply any restrain of marriage and is a valid contract. Agreements in Restraint of Legal Proceedings: According to the Act53. or a class of persons. The following agreements have been expressly declared to be void: a) Agreements in Restraint of Marriage: Every individual enjoys the freedom to marry. 1.

1. Neither party has any interest in the happening or nonhappening of an event. Types of contract These are contracts of indemnity except life insurance contracts which are contingent contracts. Insurable Interest 2.3 Rules Regarding Contingent Contracts a) Enforcement of Contracts Contingent on Happening of a Future Uncertain Event:56 Contingent contracts to do or not to do anything if an uncertain future event happens can be enforced only when the event happens.000 annual premium.e. Contracts of insurance and contracts of indemnity and guarantee are other examples of contingent contracts. These are void agreements as they are opposed to public policy.55 Example . Collateral Event: The event must be collateral (i. Interest of the Parties Insurance Agreement There is an insurable interest Both parties are interested in the subject matter.15. Wagering Agreements There is no insurable interest.2. 2. if B’s factory is burnt. 2.14. 3.A contracts to indemnify B upto Rs.2 Essentials of Contingent Contract The essential features of a contingent contract are as follows: a) b) c) Dependence on a Future Event: The performance of a contingent contract depends upon the happening or non happening of some future event. Validity These are valid contracts.000 in consideration of B paying Rs.1 Meaning “A contingent contract is a contract to do or not to do something. This is a contingent contract. 2.3 Distinction Between Insurance and Wagering Agreements Notes Distinction Points of Distinction 1. Illustration: A makes a contract with B to buy B’s house if A survives C.15.15 Contingent Contract 2. 30 Self-Learning Material . These are conditional contracts. 4.15. if some event collateral to such contract does or does not happen”. incidental) to the contract. 20. This contract cannot be enforced by law unless and until C dies in A’s life time. Uncertain Event: The event must be uncertain.

or is burnt within the year.b) Enforcement of Contracts on the Non-happening of a Future Uncertain Event:57 Contingent contracts to do or not to do anything if an uncertain future event does not happen can be enforced only when the happening of the event becomes impossible. f) Agreements Contingent on Impossible Events: 61 Contingent agreements to do or not to do anything if an impossible event happens. or shall not happen within the time fixed. The contract may be enforced if the ship does not return within the year. e) Enforcement of Contingent Contracts on Specified Event not Happening Within a Fixed Time: 60 Contingent contracts to do or not to do anything if a specified uncertain event does not hapen within a fixed time. and becomes void if the ship is burnt within the year. Illustration: A promises to pay B a sum of money if a certain ship does not return within a year. Illustration: A promises to pay B a sum of money if a certain ship returns within a year. or otherwise than under future contingencies. are void. Illustration: A agrees to pay B Rs. C married D. at the expiration of the time fixed. the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time.C was dead at the time of the agreement.000 if B will marry A’s daughter. The agreement is void. Illustration: A agrees to pay B a sum of money if B marries C. may be enforced when such event has not happened. such event does not happen or if before the time fixed. 1. The contract can be enforced when the ship sinks. C. The contract may be enforced if the ship returns within the year. The marriage of B to C must now be considered impossible although it is possible that D may die and that C may afterwards marry B. c) Contracts Contingent on Future Conduct of a Living Person:58 If the future event on which a contract is contingent is the way in which a person will act at an unspecified time. d) Contracts Contingent on a Specified Event Happening Within a Fixed Time: 59 Contracts contingent to do or not to do anything if a specified uncertain event happens within a fixed time would become void if. The ship is sunk. such event becomes impossible. Notes Illustration: A agrees to pay B a sum of money if a certain ship does not return. Self-Learning Material 31 . and not before.

2. Such obligations are called quasi-contracts or implied contracts because the outcome of such obligations resemble those created by a contract.16.A supplies the wife and children of B. incapable of entering into a contract. Sole Condition 3. Determination of an uncertain event is not the sole condition of the contingent contract. 2.5(d)] Example . The future event is the sole determining factor of the contract. which means no person shall be allowed to unjustly enrich himself at the expense of another. a lunatic. A contingent contract is not void It is agreement by mutual promises each of them conditional on the happening or not happening of an unknown event. insurance contracts. There must be determination of an uncertain event as the sole condition of the contract. The parties are not intersted in the occurance or non-occurrence of the event.11.”62 [Refer to paragraphs 2. A is entitled to be reimbursed from B’s property. Void agreement 4.16 Quasi-Contract 2.1 Meaning of Quasi-Contract A Quasi-Contract is not a contract at all because the essential elements for the formation of a contract are absent. For examples. 32 Self-Learning Material . or anyone whom he is legally bound to support. Future event 2. all wagers are contingent but all contingent contracts are not wagers. It is an obligation imposed by law upon a person for the benefit of another even in the absence of a contract. Mutual promise as a basis Contingent Contracts Wagering Contracts It is not necessary that there should be mutual promises. the person who has furnished such supplies is entitled to be re-imbursed from the property of such incapable person. contracts of indemnity and guarantee. Interest of the parties These are contracts of indemnity except life insurance contracts which are contingent contracts.16. All contingent contracts are not wagers. 5. Wagering contract is void.4 Distinction Between a Contingent Contract and Wagering Contract Notes Distinction Points of Distinction 1. with necessaries suitable to their condition in life. The future event is merely collateral or incidental to the contract.15.11. is supplied by another person with necessaries suited to his condition in life.e.2 Kinds of Quasi-Contracts The various kinds of quasi contract (or quasi-contractual obligations) are given below: a) Claim for Necessaries Supplied to a Person Incapable of Contracting or on his Account: “If a person.3(f) and 2. moral justice or ethics). It is based on the principle of equity (i.2. fairness.

3 Distinction Between a Contract and Quasi Contract Distinction Points of Distinction 1. must repay or return it”. It is an implied contract. Notes c) d) e) 2.66 For example . and such other person enjoys the benefit thereof. or to restore. is subject to the same responsibility as a bailee”. A quasi contract resembles a contract. and B. in order to save the tenancy from forefeiture. 2.by fulfilling all Self-Learning Material 33 . or offer to perform.17 Performance of Contracts 2. B treats the goods as his own.X a guest found a diamond ring on a birthday party of Y.A and B jointly owe Rs. It is a full-fledged contract and is binding. Liability of Person to Whom Money is Paid.16.63 For example . 1000 over again to C. the thing so done or delivered”. or Thing Delivered by Mistake or Under Co-ercion: “A person to whom money has been paid.b) Reimbursement of Person Paying Money due by Another. Quasi Contract Quasi contract is an obligation resembling that created by a contract. not intending to do so gratuitously. although there is no contract between the two. Responsibility of Finder of Goods: “A person who finds goods belonging to another and takes them into his custody. Essential Elements 4. If he does not able to find the owner he can retain the ring as bailee. The contract has certain essential elements. Obligation of Person Enjoying Benefit of Non-gratuitous Act: “Where a person lawfully does anything for another person. a tradesman. Purpose Contract Contract results from the will of the parties expressed with a view to create an obligation. the latter is bound to make compensation to the former in respect of. and who therefore pays it. sub-tenant pays the arrears of rent due by the tenant to the landlord. The subtenant is entitled to recover from the tenant.17.67 It means that the performance may be either actual . leaves goods at B’s house by mistake. or of any other law”. He has performed his duty to find the owner. The Act lays down “The parties to a contract must either perform. but its results resemble those created by a contract. It is not a full fledged contract. 1000 to C.65 For example . is entitled to be re-imbursed by the other”.64 For example-A. There is no agreement at all.1 Meaning of Performance Performance of contract means fulfilling of the terms of the contract by the respective parties to the contract. in Payment of Which he is Interested: “A person who is interested in the payment of money which another is bound by law to pay. A alone pays the amount to C. not knowing this fact. or delivers anything to him. unless performance is dispensed with or excused under the provisions of this Act. Essentials for formation of a contract are absent. pays Rs. C is bound to repay the amount to B. Agreement 3. their respective promises.A. A contract is an agreement. Nature 2. B is bound to pay A for them. the amount paid by him to the landlord. or anything delivered by mistake or under co-ercion. X told Y and other guests about it.

iii. For example. 2. A’s representatives are bound to deliver the goods to B and B is bound to pay Rs. c) In case of Joint promisor . Attempted . Illustration: a) A promises to deliver goods to B on a certain day on payment of Rs.by his legal representatives. which can be: i.68 2. Such offer to perform one’s obligation under a contract is called tender. an insolvent is excused from performing his part of the contract by law. 2.000 to A’s representatives. Actual .18 Discharge of Contract 2. By the promisor personally. Promises bind the legal representatives of the promisors in case of death of such promisors before performance.18. The second part of the definition lays down that the parties are excused from performance under the provisions of this Act or any other law. A promises to paint a picture for B by a certain day.by the promisors jointly or third person on behalf of the promisors or their legal representatives. When the rights and obligations arising out of a contract are extinguished. In case of non-personal contract i. A dies before that day.3 Who Should Perform the Promise? a) b) In case of personal contract by the promisor personally. 1. but the performance is not complete unless the offer of performance is accepted by the promisee.2 Mode of Discharge A contract may be discharged in any of the following ways: a) Discharge by Performance: A contract can be discharged by performance. ii.17. unless a contrary intention appears from the contract. 1.17. at a certain price.When the promisor has made an offer of performance to the 34 Self-Learning Material . b) 2.18.2 Who Can Demand Performance? It is only the promisee who can demand performance of the promise.When the parties to the contract perform their promises in accordance with the terms of the contract.Notes obligations by the parties under the contract or attempted where an offer to perform one’s obligations has been made by the promisor. The liability of the legal representative is limited to the extent of the value of the property inherited from the deceased. ii. By a third person on behalf of the promisor. A dies before the day. In the event of the death of promisor . The contract cannot be enforced either by A’s representatives or by B.1 Meaning Discharge of a contract means discontinuation of the contractual relations between the parties.000. the contract is said to be discharged or terminated. The general rule is that “a person cannot acquire rights under a contract to which he is not a party”.

Death or personal incapacity of promisor. Change of law.It occurs when the party declares his intention of not performing the contract before the performance is due. Anticipatory breach of contract . iv.It can occur either on due date of performance or during the course of performance. Alteration discharges the original contract and creates a new contract. Partial impossibility or failure of one of the objects. Actual breach of contract . v. ii. Rescission69 . 2.Waiver means intentional relinquishment of a right under the contract.g. Novation 69 .promisee but the offer has not been accepted by the promisee. v. period of limitation for exercising right to recover a debt is 3 years. Notes ii. Non-existence or non-occurrence of a particular state of things (failure of ultimate purpose). Alteration 69 . b) Discharge by Mutual Consent or Agreement: Since a contract is created by mutual agreement. A breach of contract may occur in the following two ways: i. 1963 has prescribed the different periods for different contracts . iii.Alteration means a change in the terms of a contract with the mutual consent. v.Novation means the substitution of a new contract for the original contract either between the same parties or between different parties. By unauthorised material alteration.Default of a third person. . Difficulty of performance or less profitable. Strikes. Self-Learning Material 35 Discharge by Subsequent or Supervening Impossibility or Illegality: 1. iv. iii. Discharge by mutual agreement can be done in any of the following ways: i. d) Discharge by Lapse of Time . Remission 70 . iv. Commercial impossibility. iii. Cases not covered by supervening impossibility i. By merger. f) Discharge by Breach of Contract . Discharge by Operation of Law: i.A contract is discharged if it is not performed or enforced within a specified period.Outbreak of war. called period of limitation. By insolvency. ii. lockouts and civil disturbances. ii.Recission means cancellation of the contract by any party or all the parties to a contract. e) ii. iv.Remission is the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made. The Limitation Act.A contract is said to be discharged by breach of contract if any party to the contract refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. Destruction of subject matter. By death of the promisor. Cases where the doctrine of supervening impossibility applies i. it can also be discharged by mutual agreement. c) Waiver . e. iii.

For example -C an owner of a magazine engaged P to write a book to be published by instalments in his magazine. c) Suit for Specific Performance: means demanding the court’s direction to the defaulting party to carry out the promise according to the terms of the contract. As stated earlier [Refer to paragraph 2.e. In this suit.19.X agreed to sell an old painting to Y for Rs.e. damages which are in the nature of punishment). In what ways can a contract be discharged? 18. What is Quantum meruit? 20. v. For example -W agreed to sing at L’s theatre only during the contract period. the promisee may put an end to the contract. Check Your Progress 17. Y may file a suit against X for the specific performance of the contract. the party not at fault) is relieved from performing his obligation and gets a right to proceed against the party at fault. claim is made to compensate for the work already done. 2.2 Remedies of Breach of Contract A remedy is the courses of action which are available to an aggrieved party for the enforcement of a right under a contract. Suit for Damages: Damages are monetary compensation allowed for loss suffered by the aggrieved party due to breach of contract.2.1 Meaning of Breach of Contract A breach of contract occurs if any party refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. It was held that P could claim payment for the part already published.e. In case of breach. damages arising naturally from the breach). Ordinary or General or Compensatory Damages: (i. Exemplary. It was held that W could be restrained by injunction from singing for Z. W made contract with Z to sing at another theatre and refused to perform the contract with L. During the contract period.18.e. Punitive or Vindictive Damages: (i. Here. Incase of breach of a contract. Damages may be of five kinds: i. damages in contemplation of the parties at the time of contract). iii. the aggrieved party (i. iv.19 Remedies for Breach of Contract Notes 2. What kinds of damages are covered under breach of contract? d) e) 36 Self-Learning Material . the publication of the magazine was stopped.meruit means as much as is earned.19. b) ii. the aggrieved party is discharged from all the obligations under the contract and is entitled to claim compensation for the damage which he has sustained because of the non-performance of the contract. After a few instalments were published. Special Damages: (i. For example . Liquidated Damages: means a sum fixed up in advance. Nominal Damages: (i.e. Suit for Quantum Meruit: Quantum . awarded only for the name sake). 50000.2(f)] a breach of contract may either be anticipatory or actual. which is a fair and genuine pre-estimate of the probable loss that is likely to result from the breach. In such a case. The various remedies available are: a) Rescission of Contract71: Rescission means a right not to perform obligations. Suit for Injunction: means demanding court’s stay order Injunction means an order of the court which prohibits a person to do a particular act. Subsequently X refused to sell the painting. What remedies are there to a breach of contract? 19.

C is the creditor in the above said example. and the person whose loss is to be made good is called the ‘Indemnified or Indemnity holder’ (promisee). Principal Debtor: The person in respect of whose default the guarantee is given is called the principal debtor. The contract is one of Indemnity.2A Meaning “A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default”.72 For example . is called a contract of indemnity”. A surety is freed from his obligation under a contract of guarantee under any of the following circumstances: Self-Learning Material 37 .20. Creditor: The person to whom the guarantee is given is called the ‘creditor’. i.2B Parties to a Contract of Guarantee There are three parties to a contract of gaurantee.20.20 Indemnity and Guarantee Notes 2. A says to the shopkeeper.1A Meaning The term ‘Indemnity’ means to make good the loss or to compensate the party who has suffered some loss.2C Kinds of Guarantee Guarantee may be classified under the following two categories: a) Specific Guarantee: A guarantee which extends to a single debt or specific transaction is called a ‘specific guarantee’. “Let B have the goods. This is a contract of guarantee. The liability of the surety comes to an end when the guaranteed debt is duly discharged or the promise is duly discharged.20. Continuing Guarantee: A guarantee which extends to a series of transactions is called a ‘continuing guarantee’.2. and if the does not pay.73 For example . ii. In the above example B is the principal debtor. b) 2. 2.20. I will see you paid”.1B Parties The person who promises to make good the loss is called the ‘Indemnifier’ (promisor).A and B go into a shop.1 Contract of Indemnity 2.2 Contract of Guarantee 2. “A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself. Surety: The person who gives the guarantee is called the ‘surety’ A is the surety in the above said example.20.20. or by the conduct of any other person. A surety’s liability continues until the revocation of the guarantee. C. 2. 2.A and B go into a shop. B says to the shopkeeper “Let A have the goods.20. 2.2D Discharge of Surety from Liability A surety is said to be discharged when his liability as surety comes to an end. I will”.20. iii.

or omits to do any act.a) Notes b) Notice of Revocation: A specific guarantee cannot be revoked once it is acted upon. Three contracts . the second between creditor and the surety. Invalidation of the Contract of Guarantee: (In between the creditor and the surety) A surety is also discharged from liability when the contract of guarantee (in between the creditor and the surety) is invalid. Arrangement by Creditor with Principal Debtor without Surety’s Consent78: A contract between the creditor and principal debtor. parts with security given to him. and the eventual remedy of the surety himself against the principal debtor is thereby impaired. Guarantee There are three parties the creditor. or promises to give time to. unless there is a contract to the contrary. and the third between the surety and the principal debtor. by the creditor or with creditor’s knowledge or assent81. by which the principal debtor is released. 38 Self-Learning Material . discharges the surety as to transactions subsequent to the variance”.3 Distinction Between a Contract of Indemnity and a Contract of Guarantee Distinction Points of Distinction 1. Number of contracts Indemnity There are two parties -the indemnifier and the indemnity holder. Creditor’s Act or Omission Impairing Surety’s Eventual Remedy79: If a creditor does any act which is inconsistent with the rights of the surety. the surety is discharged from liability to the extent of the value of security. in the terms of the contract between the principal debtor and the creditor. the surety is discharged. Object or purpose 3. unless the surety assents to such contract. Number of parties 2. But a continuing guarantee may at any time. by which creditor makes a composition with. Failure of co-surety to join a surety also makes the guarantee invalid.74 Death of Surety75: In case of a continuing guarantee the death of a surety also discharges him from liability as regards transactions after his death. discharges the surety.82 c) d) e) f) g) h) 2. be revoked by the surety as to future transactions by giving notice to the creditor.20. the principal debtor and the surety. the legal consequence of which is the discharge of the principal debtor. A contract of guarantee is invalid where such a contract has been obtained by means of misrepresentation or fraud or keeping silence as to material part of the transaction. For the security of a debt or good conduct of an employee. or by any act of omissions of the creditor. or not to sue the principal debtor. Only one contract between the indemnifier and the indemnified. Variance in Terms of Contract76: “Any variance made without the surety’s consent.one between the principle debtor and creditor. Loss of Security80 :If the creditor loses (by negligence or carelessness) or without the consent of the surety. which is his duty to the surety requires him to do. For the reimbursement of loss. Release or Discharge of Principal Debtor77: The surety is discharged by any contract between the creditor and the principal debtor.

6. The goods are delivered for some purpose. The person to whom the goods are delivered is called the ‘bailee’. if there is an assignment in his favour. “A bailment is the delivery of goods by one person to another for some purpose. can proceed against the principal debtor in his own right. He can do so only. when the purpose is accomplished. Request by the debtor The indemnifier acts independently without any request of the indemnity holder or the third party.e. 2. Right to sue The indemnifier cannot sue the third party for loss in his own name.e. upon a contract that they shall. after he discharges the debt owing to the creditor. Bailment on the basis of reward may be: a) Gratuitous: Neither the bailor nor the bailee is entitled to any remuneration i.Distinction Points of Distinction 4.2 Essential Features of Bailment A bailment has the following characteristic features: a) b) c) It is the delivery of movable goods.The goods which form the subject matter of a bailment must be returned to the bailor or otherwise disposed of according to the directions of the bailor.21. Guarantee The liability of the surety is secondary.83 The person delivering the goods is called the ‘bailor’.21 Bailment and Pledge 2. 2. It is necessary that the surety should give the guarantee at the request of the debtor. In most cases.21. there is no existing debt or duty. because there is no privity of contract. after the accomplishment of purpose or after the expiry of period of bailment. The benefit may be exclusive to the bailor or bailee or mutual. 2. Return of specific goods . the performance of which is guaranteed by the surety. Existing debt or duty 7. The surety. loan of Self-Learning Material 39 .3 Kinds of Bailment Bailment may be classified from the point of view of benefit or reward. Nature of liability Indemnity The liability of the indemnifier is primary in nature. i. According to the Act.1 Meaning of Bailment The word ‘Bailment’ is derived from the French word ‘baillier’ which means to deliver. Notes 5. There is an existing debt or duty. be returned or otherwise disposed of according to the direction of the person delivering them”. the surety is liable only on default of the principal debtor.21.

21. To return the goods.7 Rights of Bailee Check Your Progress 21. To indemnify bailee. 2. car let out on hire. To receive back the goods. To repay necessary expenses in case of gratuitous bailment.21. Not to set up any adverse title. 2. What is ‘pledge’? His rights are as follows: a) b) c) d) Enforcement of bailor’s duties. to bailor without title. ‘General lien’ means the right to retain all the goods of the other party until all the claims of the holder against the party are satisfied. 2. In a contract of ‘License’. whereas in the bailment the ownership in goods is not transferred. 2. Sale and License In ‘Sale’ the ownership is transferred to the buyer.21. Who is a surety? 22. Does the contact of guarantee hold good in case of death of surety and loss of security? 23. ‘Particular lien’ means the right to retain that particular property in respect of which the charge is due.general or particular. To deliver goods to one of several joint bailors. Lien . the goods are not delivered to the licensor. one party is permitted to place his goods in the premises belonging to other person.Notes book to a friend. in good faith.5 Duties of Bailee His duties are as follows: a) b) c) d) e) f) To take reasonable care of goods delivered to him. To repay any extra ordinary expenses in case of non-gratuitous bailment. depositing of goods for safe custody. e.21. It is for the exclusive benefit of the bailor or bailee.8 Rights of Bailor His rights are as follows: 40 Self-Learning Material . To deliver goods. Not to make unauthorised use of goods entrusted to him.4 Bailment.is of two types . Pawn or Pledge: Goods delivered to another as a security for money borrowed is called Pledge. To return accretions to the goods.21. Not to mix goods bailed with his own goods. Bailee has particular lien unless the contract provides otherwise. 2. goods given for repairs or tailoring for charges. remuneration or for some consideration. b) c) Non Gratuitous: Here the goods are given for reward.6 Duties of Bailor His duties are as follows: a) b) c) d) e) To disclose faults / defects in goods bailed. while in bailment the goods are delivered to the bailee for safe custody.g. Thus in a contract of license.

for repairs. No such right of sale to the bailee. Y is the agent and the contract between the two is ‘agency’.21. Right of sale 3. 2. In other words the acts of the agent are.85 The contract which creates the relationship of ‘principal’ and ‘agent’ is called an ‘agency’.2 Definitions of Agent and Principal “An agent is a person employed to do any act for another or to represent another in dealings with third persons.a) b) c) Enforcement of bailee’s duties. To terminate bailment if the bailee uses the goods wrongfully.84 Pledge is therefor a kind of bailment. 2. The person for whom such act is done.22.1 General It is not always possible for a person to do everything himself. the acts of the principal. i. Notes 2.3 General Rules of Agency There are two important general rules regarding agency. X is the principal. Self-Learning Material 41 b) . safe custody etc.22. can as well get it done by any other person.22.22 Agency 2. 2. e. Purpose Pledge It is a bailement for a specific purpose. 2. is called the principal”. hence it becomes necessary to delegate some of the acts to be performed by another person. The pledge has no right of using the goods pledged.21. he does by himself. The bailor in this case is called the ‘pawner’. to provide a security for a loan. i.e. 2. To demand return of goods at any time in case of gratuitous bailment. subject to some exceptions. For example . on default after giving notice to the pledgor. for all legal purposes.9 Pledge or Pawn “The bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’. or who is represented. The pledge has a right of sale.10 Distinction between Pledge and Bailement Distinction Points of Distinction 1.e. What a person does by another. Such other person is called an agent. viz: a) What one person can himself lawfully do. Right of using the goods No such restriction exists for the bailee if the nature of transaction so requires. This rule is of course. in case of acts required to be performed personally like marriage.X appoints Y to buy ten bags of wheat on his behalf. Bailment Goods may be bailed for any purpose .g. The bailee is called the ‘pawnee’.

and It is impossible to obtain the consent of the principal. In what ways. b) Check Your Progress 24.88 2.22.5 Who May be an Agent? The Act lays down that “as between the principal and third persons any person may become an agent”. and later on pays for them. The truck met with an accident.X allows Y.89 Implied agency includes the following: i. Y misappropriates the money and purchases goods on credit from Z.86 2. Such agency arises when a person by his past affirmative and positive conduct leads third person to believe that person doing some act on his behalf is doing with authority.2. For example . b. but in such a case the principal shall be liable. A minor or a person of unsound mind cannot employ an agent.7 Creation of Agency An agency may be created in any one of the following ways: a) Agency by Express Agreement: An agency by express agreement is created when by spoken or written words an express authority is given to an agent. Agency by Implied Agreement: Implied agency arises when agency is inferred from the circumstances of the case. The person who induces as such is estopped or prevented from denying the truth of agency. Z is bound by this contract and in a suit between Z and Y. In such a case. There is an actual and definite necessity for acting on behalf of the principal. or from the relationship between parties. or from the conduct of the parties on a particular occasion. Agency by Necessity: Agency by necessity arises under the following two conditions: a. Thus even a minor or a person of unsound mind can be appointed as agent.X who owns a shop.87 2.22. For example . an agency can be terminated? c) ii. iii. The vegetables being perishable were sold by the transporter. Agency by Holding Out: This is a type of agency by estopped. Agency by Ratification: Where acts are done by one person on behalf of another. This sale is binding on X. What is a ‘lien’? 25. Define an agent. Agency by Estopped: Agency by estopped arises where a person by his words or conduct induces third persons to believe that a certain person is his agent. Z cannot be permitted to say that X was not his agent. Z can recover the price of goods from X because X had held out before Z that Y is his agent. 26. In this case the transporter became an agent by necessity.X consigned some vegetables from Delhi to Mumbai by a truck.90 For example . Z does not contradict this statement. the latter may elect to ratify (adopt and accept) or to disown 42 Self-Learning Material .6 No Consideration is Necessary “No consideration is necessary to create an agency”. but with out his knowledge or authority.4 Who May Employ an Agent? Notes Any person who is competent to contract may employ an agent.X tells Y in the presence and hearing of Z that he (X) is Z’s agent. his servant to purchase goods for him on credit from Z. one day X pays cash to Y to purchase goods. appoints Y to manage his shop by executing a power of attorney in Y’s favour. Does agency need consideration? 27. For example . Later on Y enters into a contract with X believing that X is Z’s agent. even though X was not actually his agent.22.22.

Self-Learning Material 43 . 2.92 2. Stoppage of goods in transit. in case of difficulty. Not to make any profit out of his agency except his remuneration. without authority. To carry out the work with reasonable skill and diligence.22. B’s conduct implies a ratification of the purchases made for him by A.out of any sums received on account of the principal. For example . If he ratifies them. Retainer .10 Duties of Agent An agent has the following duties towards the principal: a) b) c) d) e) f) g) h) To follow principal’s directions or customs. Agent has a particular lien unless the contract provides otherwise. To communicate.12 Duties of Principal The duties of principal are indirectly the rights of an agent.22.such acts. Such person is an agent of the principal. After wards B sells them to C on his own account. Notes 2.22.to retain goods. On termination of agency by principal’s death or insanity to protect and preserve the interests entrusted to him. To be indemnified against consequences of lawful acts. To compensation for injuries sustained by him due to principal’s neglect or want of skill. 2. the same effect will follow as if they had been performed by his authority. buys goods for B. 2. the original agent in the business of the agency”. To render accounts. Lien .8 Meaning of Sub Agent “A sub-agent is a person employed by. Not to deal on his own account in the business.22.(Section 196) Ratification may be express or implied in the conduct of person on whose behalf the acts are done. Such agency is said to arise by operation of law. To be indemnified against consequences of acts done in good faith. every partner becomes the agent of other partners. For example .on formation of a partnership.11 Right of Agent An agent has the following rights against the principal: a) b) c) d) e) f) g) To receive remuneration. Not to delegate authority.A. d) Agency by Operation of Law: Agency by operation of law is said to arise where the law treats one person as an agent of another.9 Meaning of Substituted Agent An agent names or appoints a substituted agent at the request of the principal and thereafter drops out altogether from the scene.91 Thus a person employed by an agent is called sub-agent. and acting under the control of.22.

possibility of performance 9. Voidable .Enforceable at the option of one party only.e. Executed . Classification of Contract: Contract can be classified as below: Valid . 2. lawful object 7.Contrary to law Unenforceable . 44 Self-Learning Material .Due to lack of proof or some technical defect cannot be enforced in a Court of law. in order to be a contract. and 10. Void . An agreement.13 Rights of Principal Notes The rights of principal are indirectly the duties of an agent. parties competent to contract 5. certainty 8.14 Termination of Agency Termination of Agency By Operation of Law Completion of Business of agency Expiry of time Death of Principal or Agent Renunciation by the Agent Insolvency of the Principal Destruction of the subject matter Principal or Agent becoming alien enemy Dissolution of Company By Act of Parties Agreement Revocation by the Principal Summary Contract A contract is an agreement made between two parties and enforceable by law. an agreement i.22. not expressly declared void. Two or more parties who enter into an agreement must agree upon the subject matter in the same sense and at the same time.22. free consent 6.enforceable by law. Lawful consideration 4.e.Not enforceable by law. in writing or registered / stamped where there is such a requirement by law. i. Illegal .Performed by both the parties or by one party. consensus ad idem. an intention to create legal relations 3. proposal and acceptance 2. must give rise to legal consequences and remedies in the Law Court in case of its breach. Essentials of a Contract: There must be 1.2. An agreement consists of a proposal by one party and its acceptance by the other party.

Essentials of a Valid Acceptance: 1. by not being accepted in the mode prescribed.as against the proposer when it is put in a course of transmission to him. It must be legal 6. and as against the person to whom it is made. Must be absolute and Unqualified 2. Acceptance must be communicated to the proposer 5. and 9. present or future 4.Contract is performed only on happening of some future uncertain event. Consideration is doing something or abstaining from doing something. Expressed in some usual and reasonable manner 3. or promises to do or abstain from doing.Performance by both the parties is yet to take place. The terms must be certain and not loose or vague 3. Consideration may be past. Essentials of a Valid Consideration: 1. If the act is done in ignorance of the proposal. The communication of a revocation is complete as against the person who makes it. May be ‘specific’ or ‘general’ 6. Remission by the promisee. Can be made subject to any terms and conditions. Consideration must move at the desire of the promisor 2.One party has performed but the other party has yet to perform. When at the desire of the promisor. The proposal is said to be accepted when the person to whom the proposal is made signifies his assent thereto. A proposal must be made by express words spoken or written or implied when it is inferred from the conduct of the proposer or from the circumstances of the case 2. No consideration is required in case of 1. by rejection. and by destruction of the subject matter. Two identical cross-offers donot make a contract. Agreement to pay a time barred debt 4. with a view to obtaining the assent of that other to such act or abstinence he is said to make a proposal. such act or abstinence or promise is called a consideration for the promise. It is revoked by non fulfillment of a condition precedent to acceptance. Legal Rules Regarding a Valid Proposal: 1. Agreement to compensate for past voluntary service 3. Meaning of Proposal: When one person signifies to another his willingness to do or to abstain from dong anything. Must be communicated to the proposee 7. the non-compliance of which would amount to acceptance 8. This is also called conditional contract. the promisee or any other person has done or abstained from doing. Contribution to charity.Executory . Capacity of Parties: Every person is competent to contract who is of the age of majority according Self-Learning Material 45 Notes . Mental acceptance is not sufficient 4. Quasi-Contract . Partly Executed. so as to be out of the power of the person revoking. Completed gift 5. Contract of agency 6. Revocation and Lapse of Proposal: A proposal lapses under circumstances like after stipulated or reasonable time. and as against the acceptor when it comes to the knowledge of the proposer. when it comes to his knowledge. It must be distinguished from invitation to proposal 5. Acceptance: A contract emerges from the acceptance of a proposal. Consideration . Acceptance must be given within reasonable time and before the proposal lapses and / or is revoked 6. it is no acceptance. when ti is put into a course of transmission to the person to whom it is made. An agreement made on account of natural love and affection 2. or does or abstain from doing. by death or insanity of either party. It must be made by the person to whom the proposal is made. partly executory . It can be implied 8. and 7. so as to be out of the power of the acceptor. General offer way be accepted by anyone 9. something. Must give rise to legal consequences and be capable of creating legal relations 4. It may move from the promisee or any other person 3. Acceptance and Revocation: The Communication of a proposal is complete when it come to the knowledge of the person to whom it is made. No Consideration no Contract: An agreement made without consideration is void. It must be ‘something of value’ 5. Should not contain a term.Meaning: Consideration means something in return.an obligation created by law. by rejection. Contingent . before acceptance. It is acceptance of the terms and conditions of the proposal 7. The communication of an acceptance is complete . Communication of Proposal. of performance of the promise.

or 5. Convict 4. Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement. or the Unlawful detaining. the contract is not voidable. whatever. The rule of estoppel does not apply 6. Mistake of Fact. The maker intended the other party to act upon it 5. Contracts in order to be valid must be made by the free consent. or 2. unless the shares are fully paidup and the articles of association donot prohibit. or 3.1. not caring whether it is true or false. and who is of sound mind. Surety for a minor is liable 12. Specific performance can not be ordered for minor’s agreement 11. or 4. No ratification on attaining the age of majority 5. Minors property is liable for necessaries 1. It is fraudulent 4. The meaning of which is uncertain 5. to the prejudice of any person. Undue Influence: A Contract is said to be induced by “Undue Influence’ where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other. A Lunatic or a Drunken or Intoxicated person can enter itno a contract when he is of sound mind. In restraints 46 Self-Learning Material . It is forbidden by law 2. and uses that position to obtain an unfair advantage over the other. Agreements of an idiot are void. It is treated as a mistake of fact. Fraud: Fraud exists 1. or without belief in its truth. The court regards it as immoral or opposed to public policy. Made by incompetent persons 2. with the intention of causing any person to enter into agreement. Persons disqualified by law: Such persons are . Alien enemy 2. Minor can be admitted in partnership ony for profit 9.where only one of the parties is under a mistake as to a matter of fact. It also exists when there is a concealment of a material fact. The position of agreements by a minor is 1. Minor: A minor is one who has not completed the age of 18 years. That there is no restitution 3. if 1. Persons of Unsound Mind: Agreemetns entered in by person of unsound mind are void. or threatening to detain any property. Company beyond the objects contained in its memorandum of association 5 Insolvents. When a false representation has been made 2. Mistake of foreign law. Mistake. It does not vitiate a contract because ignorance of law is no excuse 2. Made without consideration 4. Minor can be admitted in partnership only for profit 9. Otherwise the agreement is void. A minor cannot be a shareholder of the company. Mistake of Law 2. Undue influence. Foreign sovereigns and ambassadors 3.Notes to the law to which he is subject. Coercion. With an intention to deceive. Mistake of Law: is again of two types 1. When Consent is not free. It involves or implies injury to a person or property of another 5. Free Consent: two or more persons are said to consent when they agree upon the same thing in the same sense. the agreement is void. To do impossible acts 7. Minor can be an agent 8. and is not disqualified from contracting by any law to which he is subject. It is of such a nature that if permitted it would defeat the provisions of any law 3. The consideration or object is unlawful 6. the contract is voidable at the option of the party whose consent was so caused. Recklessly. Mistake: It is an erroneous belief concerning something. Bilateral mistake. Agreement beneficial to a minor is valid 4. without any intent to deceive the other party. Mistake of Fact: It may be a 1. Coercion: Coercion is the committing or threatening to commit any act forbidden by the Indian Penal Code. Unilateral mistake . It is unlawful. and 4. 2. or 3. Misrepresentation: It is a misstatement of a material fact made innocently with an honest belief as to its truth or non-disclosure of a material fact. Misrepresentation. Consent is said to free when it is not casued by 1. Mistake is of two types 1. Mistake of Indian law. Minor cannot be declared insolvent 10. Agreements Expressly Declared Void: 1. Made under a bilateral mistake of fact 3. Persons of unsound mind are liable (only their property) for necessaries supplied to them or their legal dependants. Knowingly. Absolutely void and inoperative as against him 2. Fraud. Legality of Object and Consideration: The object and the consideration of an agreement must be lawful. In restraint of marriage 8.

Responsibility of finder of goods 5. when such person does anything which renders it impossible 4. Performance . is called a contract of Indemnity. and not before 3. In restraint of legal proceedings 10. Contract can be performed 1. Release or discharge of principal debtor 5. Rescission of contract 2. Agreements contingent on impossible events are void. exemplary. Breach of contract . principal debtor. Creditors act or omission imparing surety’s eventral remedy 7. The person whose loss is to be made good is called the indemnified or indemnity holder. Claim for necessaries supplied to a person incapable of contracting or on his account 2. Liability of person to whom money is paid or thing delivered by mistake or under Co-ercion. is considered impossible. rescission. or by the conduct of any other person. Mutual Consent or agreement. Death of surety 3. Performance of Contract: Performance of Contract means fulfulling of the terms of the contract by the respective parties to the Contract. alteration. Arrangement by creditor with principal debtor without surety’s consent 6. Quasi-Contract: It is an obligation imposed by law upon a person for the benefit of another even in the absence of a contract. Suit for damages . Giving a notice of revocation 2. The event must be collateral. The essentials of a contingent contract 1. Suit for injunction 5. Various modes of discharges of a contract are by 1. These are two kinds of guarantee namely specific or continuing. Suit for specific performance 4. and liquidated 3. Discharge of Contract: It means discontinuation of the contractual relations between the parties. and 8. special. In a non-personal contract by the promisor.of trade 9. Contracts contingent on future conduct of a living person. and 3. Suit for quantum merrit. The person who promises to make good the loss is called Indemnifier. Operation of law 6. In case of joint promisors by them jointly. remission or waiver 3. Enforcement of contracts on the non-happening of a future uncertain event can only be done only when the happening of the event becomes impossible. Contingent Contract: 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. Reimbursement of person paying money due by another. This can be done by novation. creditor and the surety. Only the promisee can demand performance of the promise. Notes Indemnity and Guarantee Indemnity: A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself. nominal. Wagering agreements. Uncertain. The Various Remedies of Breach of Contract: 1. In a personal contract by the promisor personally 2. by a third person on behalf of the promisor or by the legal representative if the promisor is dead. Variance in terms of contract 4.which can be ordinary or general. Its performance depends upon the happening or non-happening in future of some event 2.actual or implied 2. Contracts contingent on a specified event happening within a fixed time. Re-imbursement of person enjoying benefit of non-gratuitous act 4. Loss of security. Remedies for Breach of Contract: A breach of contract occurs if any party refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. Subsequent or supervening impossibility or illegality 4. A surety is descharged from liability by 1. Kinds of Quasi-Contract: 1.can be anticipatory or actual. There are three parties to a contract of guarantee. in payment of which he is interested 3. Self-Learning Material 47 . Invalidation of contract of guarantee. Guarantee: A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. Lapse of time 5. Enforcement of contracts contingent on happening of a future uncertain event can only be done only when the event happens 2. would become void if at the expiration of the time fixed such event does not happen or becomes impossible 5. Rules Regarding Contingent Contract: 1. and 3.

Not to deal on his own account in the business 6. Operation of law. or by holding out or by necessity 3. Sub-agent is a person employed by an agent. The rights of agent are 1. The contract which creates the relationship of principal and agent is called an agency. Pledge or Pawn The bailment of goods as security for payment of a debt or performance of a promise is called pledge. Implied agreement -which may be by estoppel. and 3. To return the goods 5. Retainer 3. Enforcement of bailor’s duties 2. The person to whom the goods are delivered is called the bailee. To be indemnified against consequences of lawful acts 5. To terminate bailment if the bailee uses the goods wrongfully. The duties of bailee are 1. Agency An agent is a person employed to do any act for another or to represent another in dealings with third persons. Not to delegate authority. Not to set up any adverse title. To render accounts 4. and 4. 48 Self-Learning Material . Creation of Agency: Can be done by 1. is called the principal. To return accretions to the goods. Not to make unauthorised use of goods entrustd to him 3. and 6. To communicate. Not to make any profit out of his agency except his remmuneration 1.which include agreement. To deliver goods to one of several joint bailors 3. and 2. To indemnify bailee. The duties of bailor are 1. The Right of bailee are 1. To repay any extra ordinary expenses in case of non-gratuitous bailment 4. upon a contract that they shall. To carry out the work with reasonable skill and diligence 3. The Duties of agent are 1. The Right of bailor are 1. To compensation for injuries sustained by him due to principal’s neglect or want of skill. An agency can be terminated by 1. gratuitous. Lien which may be general or particular. principal or agent becoming an alien enemy. To demand return of goods at any time in case of gratuitous bailment. To deliver goods. in case of difficulty 5. To repay necessary expenses in case of gratuitous bailement 3. expiry of time. Express agreement. or who is represented. revocation by the principal or by the agent. Substituted agent is one who is appointed at request of the principal and then the agent drops out altogether from the scene. insolvency of the principal. Stoppage of goods in transit. destruction of the subject matter. in good faith. There are three kinds of bailment. The Duties of principal are indirectly the rights of an agent and the Rights of principal are indirectly the duties of an agent. To take reasonable case of goods delivered to him 2. No consideration is necessary to create an agency. when the purpose is accomplished. Lein 4. The person for whom such act is done. Pledge is a kind of bailment. non-gratuitous or Pawn (Pledge). Operation of law which would cover completion of business of agency. and dissolution of company. be returned or otherwise desposed by according to the direction of the person delivering them. On termination of agency by principal’s death or insanity to protect and preserve the interests entrusted to him. To disclose faults / defects in goods bailed 2. to bailor without title. To follow principal’s directions or customs 2. and 8. To be indemnified against consequences of acts done in good faith 6. and 1. A minor or a person of unsound mind can be appointed as agent. death or insanity of principal or agent.Bailment and Pledge Notes Bailment: A bailment is the delivery of goods by one person to another for some purpose. Principal must be a person competent to contract. Not to mix good bailed with his own goods 4. Enforcement of bailee’s duties 2. Ratification 4. 2. Act of parties . but in such a case the principal shall be liable. and to receive back the goods. The person delivering the goods is called the bailor. To receive remuneration 2.

8. 14. 11. a minor who has advanced the money. 8. 6. The event in a contingent contract must be essential to the contract. A contract with a minor is voidable at the option of the minor. A contract is usually treated as voidable when the consent of a party has not been free. 3. 9. the promisee can demand the performance from anyone or more of joint promisors. Practical Problems Attempt the following problems giving reasons: 1. A stranger to consideration can sue. When Mitr reaches Madhur’s home. Law of contract is the whole law of agreements and the whole law of obligations. Placing of ornaments in a bank locker is a contract of bailment. 4. an agent. Chandra was already married to Deepak at the time of agreement. Actual breach of a contract may take place during the performance of the contract. A continuing guarantee can be revoked as to the past transaction by giving notice to the creditor. . The principal had to give a release deed as demanded. 7. Is this gift valid? Amir granted a loan to Garib a guardian of kumari who is of 14 years of age. 13. 6. Can Mitr claim damages from Madhur? Amar sold his business to Bharat but this fact was not known to an old customer Chander. Is this mortgage valid? Pratinidhi. 7. Mitr accepts the invitation and informs Madhur accordingly. In case of several joint promisors. Bharat supplied the goods to Chander. Is the agreement valid? Shaitan asks Kathore to beat Komal and promises to indemnify Kathore against the Self-Learning Material 49 2. Is there a valid contract? Dhaniram. 12. 10. he finds it locked and he has to stay in a five star hotel. Chander placed an order for certain goods to Amar by name. to enable Garib to celebrate Kumari’s marriage. 4. There is no near relation between Kuber and Sundari.Review Questions Notes True or False 1. Agreement in restraint of legal proceedings is altogether void. Can Amir recover his loan from Garib? Adhar agreed to pay Bhushan Rs. An act of co-ercion must necessarily proceed from a party to the contract. 5. 50000 to Sundari his neighbour’s wife by executing a registered gift deed without any consideration. 15. The principal may revoke agency for future acts only. 5. Is this release deed binding upon the principal? Kuber gifted Rs. refused to hand over the account books of the principal to the new agent appointed in his place unless the principal released him from all liabilities. Madhur of Mussourie invites Mitr of Mumbai to stay with him during summer vacation. 50000 if Bhushan marries Chandra. executed a mortgage in favour of Chotu. A contract of indemnity is not a contingent contract. Consideration for agency is necessary. 3. 2. A general offer can be accepted by anyone.

5. ii) a minor promisse. 10. 20. 19. 7. and ii) a counter-offer. voidable and illegal agreements. if any. 6. instructed Sevak his agent to put goods in Bhandari’s warehouse. “Insufficiency of consideration is immaterial: but an agreement without consideration is void. State briefly the law relating to competence of parties to a contract. Every evening she used to receive the unfinished jewellery and to put it into a box kept at Joharimal’s shop. acceptance and revocation. 3. b) “The law of contracts is not the whole law of agreements. Comment on the following: a) “All contracts are agreements. 50 Self-Learning Material . 12. but all agreements are not contracts”. nor is it the whole law of obligations”. 13. What do you understand by the term ‘acceptance’? What are the essentials of a valid acceptance? Discuss briefly the law relating to communication of proposal. the principal. Can Kathore claim Rs. “A stranger to a contract cannot sue. All the goods were destroyed by fire without any negligence on part of Sevak. Kathore beats Komal and is fined Rs. She kept the key of that box with herself.Notes consequences. Explain what is meant by i) lapse of an offer. State exceptions to the rule that an agreement without consideration is void. No Contract. 17. 1000. 2. 8.” Discuss the definition and explain the essentials of a valid contract. When is a valid proposal made? Distinguish it from an invitation to an offer. 9. 21. What do you mean by a consideration to a contract? Should there be adequate consideration to make a valid contract? “No consideration. 4. “An agreement enforceable by law is a Contract. and iii) a minor agent. What are necessaries? When is a minor liable on a contract for necessaries? Examine the legal position of i) a minor promisor. Define and explain consideration in a contract. to the rule. 11. 16. 15. Explain circumstances under which an offer lapses and becomes invalid. Test Questions 1.” Comment.” State exceptions. 18. Is Sevak liable to Mukhiya? 10.” Are there any exceptions to this rule? What do you understand by ‘capacity to contract’? What is the effect of agreements made by persons of unsound mind? Discuss in detail the provisions of law relating to minor’s agreements. 14. Swaranlata delivered her gold jewellery to Joharimal her husband who is a goldsmith for the purpose of making new one out of it. What is the object and nature of the law of contract? Illustrate the distinction between void. Define a proposal and state the essential of valid proposal. Is there a contract of bailment? Mukhiya. Give the various classification of contracts. Sevak puts half of the goods in Bhandari’s warehouse and the balance in another equally safe warehouse. 1000 from Shaitan? 9.

not an excuse for non-performance of a contract. What is misrepresentation? Distinguish it from fraud.’ Discuss. “An agreement in restraint of trade is void. Under what circumstances is the object or consideration of a contract deemed unlawful? Illustrate with example. the other party has a right to rescind it. 42.” Amplify and state the quasi contracts recognised under the Indian Contract Act. 40.” Comment. 35. 37. What are the several ways in which a contract is discharged? What are the remedies available to an aggrieved party in case of breach of contract? What are the rules laid down by the Indian Contract Act with regards to the assessment of damages on a breach of contract? “When a party to a contract refuses altogether to perform or is disabled from performing his part of it. “Two or more persons are said to consent when they agree upon the same thing in the same sense. Explain ‘breach of contract’ as a mode of discharge of contract. if any. 46. 29. Or ‘A mere silence as to the facts is not fraud. to place the injured party in the same position as if the contract had been performed.” Comment. 28. It is an obligation which the law creates. 34. 44. Discuss.” Explain this statement and give illustrations. 33. 25. What are wagering agreements and essentials of wagering agreement? Explain contingent contracts. Discuss ‘consent’. ‘A contract caused by mistake is void’. Enumerate the agreements expressly declared to be void under the Indian Contract Act. 1872. 41. 47. as a rule. 38. the law will endeavour. 45. What are the rules relating to contingent contracts? “A Quasi-contract is not a contract at all. “Insurance contracts are basically wagering agreements. 31. Discuss. 23. When consent is said to be ‘free consent’? Define undue influence and distinguish it from coercion. 39. 49 Self-Learning Material 51 . 26. If a contract is broken. so far as money can do it. Notes 30. 32. Quasi-contracts rest on the ground of equity that a person shall not be allowed to enrich himself unjustly at the expense of another. When can a party enforce such contracts? Distinguish between Contingent and Wagering Contracts. Is the party who has received some benefit under a void contract bound to restore it to the other party? Distinguish between wagering and Insurance agreements. 27. 48. “An agreement requires a meeting of the minds. 36. Define ‘misrepresentation’ and distinguish it from ‘fraud’.” Discuss.” Examine this statement mentioning exceptions. Explain the meaning or a contingent contract. What do you understand by performance of a contract? “Impossibility of performance is.22. 43. Define: Special Damages: Exemplary Damage: Nominal Damages: Liquidated Damages: Injunction. What are quasi-contracts? Enumerate the quasi-contracts dealt with under the Indian Contract Act.” Explain. 24.

Amir cannot recover his loan from Garib. 59. What do you understand by ‘contract of indemnity? Define contract of guarantee and distinguish it from contract of Indemnity? What is the extent of the liability of the surety? State the circumstances in which a surety is discharged from liability. Mitr cannot claim any damages from Madhur because the agreement between Madhur and Mitr is not enforceable by law. minor’s marriage in contravention of the child Marriage Restraint Act) is unlawful.e. 55. Kathore cannot claim Rs. Swaranlata (bailor) (Leading Case: Kalia Derumal Pillai v. 1000/. The release deed is not binding on the principal and he can avoid the contract on the ground of coercion. 54. 7. 2. Ratification of agency Practical Problems 1. 63. It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship. 10. Termination ii. 9. What is bailment? Is the bailor under any duty to disclose to the bailee any defects or faults in the goods bailed? What are the rights of bailor and bailee? Explain “Pledge” and “Bailment” and their distinction. Such agreement is void and hence not enforceable by law as marriage of Bhushan to Chandra is impossible at present. 6. account books) (Leading Case: Muthia v. 56. These was no contract at all between Bharat and Chander because chander’s offer was a specific offer to Amar and Amar alone could accept it. 3.50. ii) Agency by holding out. Sevak is liable for the loss of goods put in another warehouse because he has not acted according to the directions of Mukhiya.from Shaitan becuase the object of the agreement was unlawful. 60. 4. 57. “The position of a finder of goods is exacly that of a bailee in the case of a deposit.” Comment and discuss. A completed gift needs no consideration and need not be a result of natural love and affection or near relation. Visalakshmi). How is the agency constituted? Explain Principal’s rights and duties for the agent and what are the Agent’s rights and duties for the Principal? Write short notes on: i. The gift is valid. Define ‘agent’ and ‘principal’. Principal’s consent is not free as it has been obtained by unlawful detaining of the property (i. and iii) Agency by necessity. 52 Self-Learning Material . Is consideration needed in a contract of agency? What is a contract of agency? What are the essentials of relationship of agency? Write notes on i) Agency by estoppel. Srinivasa). Sevak is not liable for the loss of goods put in Bhandari’s warehouse because he acted according to the directions of Mukhiya. Raja Ram Mohan). (Leading Case: Srinivas V. (Leading Case: Boulton v Jones). 8. 5. The mortgage is valid and hence the money advanced to Dhaniram can be recovered because a minor can be a promissee (Leading Case: Raghave Charier v. Karuppan). 52. There was no contract of bailment because Joharilal (bailee) had re-delivered the jewellery bailed to. The agreement is void because an object (i. 62.e.K. 58. Notes 51. 61. 53.

False 14.4 11) 2. Balfour (1919) 2 K.R. False 13.19. False 6. True 4.22.14 References 1 4 Section 2(h) 2Section 2(e) 3Section2(b) 32 Balfour v.3 12) 2. 489 Section 6(2) Section 7 Section 6(1) Section 6(3) Section 2(b) Section 2(c) Section 8 Hindustan Co-operative Society v. 445 6Section 11 Section 13 Section 14 Section 23 Section 10. 571. 256 Lalman Shukla v. False 5.J. Portington.2 26) 2.22.6.11.5 8) 2.2 b 21) 2.14. False 9. (1925) A. Shyam Section2(d) Chinnaya v.2B iii 22) 2. paragraph 2 As laid down by Section 10 Section 2(j) 14Section 2(i) 15Section 2(a) Taylor v.9 6) 2.11. 128 Sections 24 to 30 Section 3 of the Indian Majority Act.2 9) 2. 5Rose and Frank Co. True 10. E.2 13) 2.10.20. I) 2.f 10) 2.2 19) 2.18.2e 20) 2.2 18) 2.g 23) 2.10.3 4) 2. 691 27 28 29 30 31 .C. Ramayya (1882) 4 Mad.9 24) 2. False 12.6 15) 2.2 3) 2.8. False 8.19.21.6 27) 2.21. True 11.1 2) 2.8.3 16) 2.20.6 5) 2.3. 1963 Section 184 Section 12 Section 68 Section 13 Section 14 Section 15 Section 16(1) Secion 16(2) Section 17 Section 18 Section 20 Section 22 Section 65 Section 72 Section 23 Section2(g) Section 26 Section 27 Section 28 Section 30 Section 31 Section 32 Section 33 Section 34 Section 33 Section 35 Self-Learning Material 53 7 8 9 10 11 12 13 16 17 Mrs Carlill v. Gauri Dutt (1913) All L.8.3 17) 2.2D b.6. indicating respective paragraphs for reference. Crompton Bros. False 2.Answers to “True & False” 1. True 3. True 7. (1885) All.7 7) 2. Carbolic Smoke Ball Co. (1893) I Q B.22.16. True Notes Answers to “Check Your Progress” Following are the answers to “Check Your Progress”.3 14) 2. 187533 (1903) 30 Cal. 539 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 Section 34 of the Specific Relief Act. False 15. v.19. 137 Section 185 Section 63 Section 11 18 19 20 21 22 23 24 25 26 Sunder AIR 1952 Cal.6.B.7 d 25) 2.

See Section 151 and 152 Section 72 Section 37 T. Venkataraman v.G. State of Madras AIR 1970 SC 508 Section 62 Section 39 Section 75 Section 124 Section 126 Section 130 Section 131 Section 133 Section 134 Section 135 Section 139 Section 141 Sections 142 and 143 Section 144 Section 148 Section 172 Section 182 Section 183 Section 184 Section 185 Section 187 Section 237 Section 191 Section 194 Notes 54 Self-Learning Material .61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 Section 36 Section 68 Section 69 Section 70 Section 71 .

3 3. 3. Agreement to sell and hire purchase agreement. How a contract of sale is made? Condition and warranty.13 Carriage by sea.9 Introduction to The Sale of Goods Act Meaning of contract of sale? Essential elements of sale.15 Auction sale.6 3. The doctrine of ‘caveat emptor’.4 3.5 3. 3. Sale and hire purchase.11 Performance of a contract of sale.7 3. 3.” —Roscoe Pound STRUCTURE 3. Sale and agreement to sell. 3.The Law of Sale of Goods Section Notes 3 The Law is experience developed by reason and applied continually to further experience.12 Delivery to carrier and wharfinger 3.10 Transfer of property.14 Unpaid seller.1 3. Self-Learning Material 55 .8 3.2 3. 3.

3. water.1 Two Parties There must be two distinct parties to a contract of sale of goods. there must be either a transfer of ownership of goods or an agreement to transfer the ownership of goods. trademarks.5 decree of a court of law are all regarded as goods. Thus. and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale”.3 Goods The subject matter of the contract of sale must be ‘goods’. If A owns certain goods. electricity.3 General property in goods means ‘ownership’ of goods.3.3. currency of the country) and not old coins. A knowledge of the main principles of the sale of goods is important to all and particularly to the managers. A person can not buy his own goods.3 Essential Elements of Contract of Sale This definition reveals the following essential elements of a contract of sale of goods.1 3. viz. gas. copyrights. 3. patent right. According to the Act. e. 1930 (hereinafter referred to as the Act). the consideration may be partly in money and partly in goods. 3. 1882.2 Transfer of Property Property means the general property in goods. Sale of immovable property is governed by the Transfer of Property Act. Price means the money consideration for the sale of goods. which came into force on 1st July.3. he has general property in goods. This Act extends to the whole of India except the state of Jammu and Kashmir. and not merely a special property. Special property in goods means possession of goods. Goodwill. The law relating to sale of goods is contained in the Sale of Goods Act.3. The general provisions of the Indian Contract Act.4 Price There must be a price.1 Introduction Notes The sale of goods is the most common of all commercial transactions. 1930.4 Thus every kind of movable property except actionable claims and money. B has special property in the goods. The ‘money’ here means the legal tender (i. “goods means every kind of moveable property other than actionable claims and money. growing crops.6 When the consideration is only goods. “A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. 3. continue to be applicable to the contract of sale of goods in so far as they are not inconsistent with the express provisions of the Act.2 Meaning of Contract of Sale According to the Act. a) b) The ‘actionable claims’ mean claims which can be enforced through the courts of law. a buyer and a seller. There may be a contract of sale between one part-owner and another’. and includes stock and shares. However. is regarded as goods. 1872. 56 Self-Learning Material .2 A contract of sale of goods may be absolute or conditional according to the desire of buyer and seller. If he pledges with B.g. a debt due from one person to another is an actionable claim. grass.e. it amounts to ‘barter’ and not sale. 3. 3.

where both the parties are yet to perform their mutual promises within agreed time. Self-Learning Material 57 . where one of the parties has already performed his part of the contract. Delivery may be given in future.4. In this. 2.2) Notes 3. personal right only against the person in default for fulfilling his part of agreement.1 Sale Where under a contract of sale the property in the goods is transferred from the seller to the buyer. Agreement to Sell Agreement to sell is an executory contract.4. A contract of sale of goods can be made by mere offer and acceptance by the seller or the buyer. i. Creation of right 3.3. there has resulted a contract of sale of goods by the conduct of the parties. Points of Distinction Nature of Contract Sale Sale is an executed contract.7 It refers to an absolute sale. Neither payment nor delivery is necessary at the time of making the contract of sale.4.e. It creates a Jus-in-personam.9 3. For example. Neither payment nor delivery is necessary at the time of making the contract of sale. There is immediate transfer of ownership and mostly of the subject matter.3 Distinction Between Sale and Agreement to Sell S. where articles are exhibited for sale and the customer picks up an item and the sales assistant packs it up. the contract is called a sale.8 It is an executory contract and refers to a conditional sale.6 No Formalities to be Observed The Act does not prescribe any particular form to constitute a valid contract of sale. i. No.3.3. It is an executed contract. i. 3.5 Includes Both a ‘Sale’ and ‘An Agreement to Sell’ The term ‘contract of sale’ is a generic term and includes both a ‘sale’ and an ‘agreement to sell’ (This is clear from the definition of the term as is given in paragraph 3.e. risk and property do not pass to the buyer immediately.4 Sale and Agreement to Sell 3. 1. right on the goods against the whole world. 3.e.2 An Agreement to Sell Where the transfer of property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled. the contract is called ‘an agreement to sell’. Sale creates a Jus-in-rem. outright sale. Passing of property The property in the goods passes to the buyer with the risk.

and reasale. 58 Self-Learning Material . Insolvency of seller if the buyer has already paid the price The buyer has to prove the amount he has paid and can only claim a rate-able dividend. stoppage in transit. Points of Distinction Remedies on breach of contract Sale The seller is entitled to sue for the price of the goods and also has a right of lien. Hire Purchase In hire purchase. and resale. 3. He cannot compel receiver to sell and deliver the goods. Notes 4. and resale. In hire purchase. property does not pass when agreement is made out but only passes when the option is finally exercised after complying with all the terms of agreement.5 Sale and Hire Purchase Contracts of sale resemble contracts of hire purchase as the real object of contract of hire purchase is the sale of goods ultimately. Insolvency of buyer before he pays for the goods 7. Agreement to Sell The seller has the right only to sue for damages for nonperformance of the contract.S. The loss will be borne by the buyer even if the possession of goods is with the seller. stoppage in transit. 1. The seller is entitled to sue for the price of the goods and also has a right of lien. 5. property in the goods is transferred to the buyer immediately at the time of contract. No. No. Risk of loss The loss will be borne by the seller since the ownership in the goods has not passed to the buyer. Right to resale The property is with the buyer and as such the seller (in possession of goods after sale) cannot resell the goods. The seller can dispose of the goods as he likes and the original buyer can sue him for breach of contract only. 6.1 Distinction Between Sale and Hire Purchase S. The buyer is entitled to sue for the price of the goods and also has a right of lien. stoppage in transit. 8. Points of Distinction Transfer of property in goods Sale In a sale. 3. property in the goods passes to the hirer upon payment of the instalment. The seller has the right only to sue for damages for nonperformance of the contract.5.

Implied conditions and warranties The buyer can take advantage of implied conditions and warranties under the Act. The buyer cannot terminate the contract and is bound to pay the price of the goods.S. may terminate the contract by returning the goods to its owner without paying remaining instalments. Trade Tax is not leviable until it turns into a sale. what is the consideration? 3. 5. Conveyance of goods may take subsequently 3. Rights of ownership The buyer can sell or pledge the goods. Law applicable It is regulated by Hire Purchase Act. The owner takes no such risk. 6. Trade tax is levied at the time of the contract. No. Nature of contract 3. The hirer. The hirer cannot so claim the benefits of implied conditions unless it becomes a sale. It is regulated by sale of Goods Act. Hire purchase agreement is bailment plus agreement to sell. the owner takes back the goods. 2. 1. Hire Purchase Notes The position of the hirer is that of a bailee till he pays the last instalment. Check Your Progress 1. Conveyance is immediately transferred while ownership remains with the seller. No. What is a Hirepurchase agreement? How it differs from sale? 4. In the law of sale of goods. Does possession of goods directly mean the ownership? 2. Self-Learning Material 59 .6 S. 1972. The buyer cannot exercise any ownership rights hence cannot sell or pledge these goods. 3. Contract of sale includes both sale and agreement to sell. Points of Distinction Position of the buyer Sale The position of the buyer is that of the owner of the goods. Power to terminate the contract 4. Distinction between Agreement to Sell and Hire Purchase Agreement Points of Distinction Nature of agreement Transfer of goods Agreement to Sell It is step to contract of sale Hire Purchase Agreement It becomes a sale only after the payment is made in full. 2. 1930. Risk of loss from the insolvency of the buyer Tax payable 5. The seller takes the risk of any loss resulting from the insolvency of the buyer. If the hirer fails to pay an instalment.

But all of them are not of equal importance.8 Conditions and Warranties 3. X was.3. entitled to reject the car and have refund of the price paid. 3.How is it made?10 A contract of sale may be made in writing or by word of mouth or partly in writing and partly by word of mouth or may be implied from the conduct or dealings of the parties. The contract of sale of goods may be for existing or future goods.8. 3. the price and the mode of its payment. The Act lays down to the same effect. therefore not entitled to reject the car but he was entitled to claim the damages. Some of these stipulations may be major terms which go to the very root of the contract (conditions). 3. In this case. A stipulation may be a condition though. the breach of which gives rise to a right to treat the contract as repudiated”. Example: X asked a car dealer to suggest him a car suitable for touring purposes.8. the delivery of goods and its time and place. There must be an offer to buy or sell goods for a price and acceptance of such offer by another. thus “whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. There may also be some stipulations which may be minor terms.8.2 Meaning of Condition “A condition is a stipulation essential to the main purpose of the contract. Contract of sale of goods must possess all the essentials of an ordinary contract. suitability of car for touring purpose was a condition of contract. which are not so vital that their breach may seem to be a breach of the contract as such (warranty). The contract may provide for immediate delivery of the goods or delivery by instalments or delivery at a future date. X was. But the car could run only 15 km per litre of petrol.7 Notes a) b) c) d) e) f) Contract of Sale .8. if any. The contract may provide for immediate payment of the price (money) or payment by instalment or payment may be postponed. called a warranty in the contract”.12 In addition.13 Example: X asked a car dealer to suggest him a good car and while suggesting the car. therefore. Accordingly. Thus a stipulation in a contract of goods may be a condition or warranty. the dealer said that it could run for 20 km per litre of petrol. he may maintain an action for damages for loss suffered. In this case the statement made by the seller was a warranty.1 Terms or Stipulations A contract of sale of goods contains various terms or stipulations regarding the quality of goods.11 3.14 60 Self-Learning Material . X purchased it but found it unsuitable for touring purpose.4 How to Determine Whether Stipulation is a Condition or Warranty? There is no hard and fast rule as to which stipulation is a condition and which one is a warranty. the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated”.3 Meaning of Warranty “A warranty is a stipulation collateral to the main purpose of the contract. The dealer suggested a ‘particular car’.

A breach of warranty cannot be treated as a breach of condition.8 Implied Conditions Unless otherwise agreed.7 Implied Conditions and Warranties Conditions and warranties are said to be implied when the law presumes their existence in the contract automatically though they have not been put into it in express words. 2. They are said to be express when at the will of the parties they are inserted in a contract. Breach of condition gives right to repudiate the contract and also to claim damages. 2062. After 6 months Z. X was entitled to recover the full price even though he had used the car for 6 months. is an express condition.” 17 The description may be in terms of the qualities or characteristics of the goods. guarantee for 5 years is an express warranty. Points of Distinction Stipulation Condition A condition is an essential stipulation to the main purpose of the contract.3. 3. the true owner of car demanded it from X. there is an implied condition that the goods shall correspond with the description. No. Here model no.8. he will have a right to sell the goods at the time when the property is to pass. Breach Breach of warranty gives right to claim damages only. 1. What is Caveat Emptor? 6. Breach of condition may be treated as breach of warranty. 2. and (ii) In the case of an agreement to sell. 3. In an advertisement for Khaitan fans. 3. Examples: 1. What is known as stipulation? 5.15 Example: X purchased a car from Y. Is warranty different from condition? Explain. X had to return it to its true owner.16 b) Conditions in a Sale by Description: “Where there is a contract for the sale of goods by description.8. Self-Learning Material 61 .8. Treatment 3.8.6 Express Conditions and Warranties Conditions and warranties may be either express or implied. he has a right to sell the goods. A buyer desires to buy a Sony TV model no.5 Distinction Between Condition and Warranty Notes S. Warranty Check Your Progress Warranty is a stipulation collateral to the main purpose. the law incorporates into a contract of sale of goods the following implied conditions: a) Conditions as to Title: There is an implied condition on the part of the seller that (i) In the case of a sale. 4.

The bottle burst when hot water was poured into it and injured X’s wife. brand name or the type of packing. The chemist (Y) told him that the bottle was meant to hold hot water. Basmati rice or may simply mention the trademark. free from any defect which render them unfit for human consumption. That the goods shall be free from any defect (latent).25 62 Self-Learning Material . the rule of law being ‘Caveat Emptor’ (i. the implied conditions are: i. ii. iii. Sugar C -30.21 Example: X purchased a hot water bottle from Y.e.22 f) Condition as to Merchantability: Where the goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or producer or not). H was held liable to W for the consequent illness.19 Example: G bought from N ‘Foreign refined rapeseed oil’ which was warranted to be equal to sample. It was held that because of such a defect the underwears were not of merchantable quality and the buyer was entitled to reject the goods. That the bulk shall correspond with the sample in quality.24 g) Condition as to Wholesomeness: In case of eatables or provisions or food stuffs. a retail chemist. The buyer should rely on the seller’s skill or judgment. c) Condition in a Sale by Sample: When under a contract of sale. the goods must correspond both with the sample as well as the description. The sample was actually a mixture of rapeseed oil and hemp oil.18 d) Condition in a Sale by Sample as well as by Description: If the sale is by sample as well as by description. etc. W. on taking the beer fell ill. The expression ‘merchantable quality” means that the quality and condition of goods must be such that a man of ordinary prudence would accept them as the goods of that description. ii. Goods must be free from any latent or hidden defects.Notes Example: Long staple cotton.23 Example: Where the underwears supplied contained certain chemicals which could cause skin disease to a person wearing them next to skin. iii. The oil supplied was equal to the sample. a dealer in wines.e. i. goods are to be supplied according to a sample agreed upon. Y is liable to refund the price and pay damages because bottle was unfit for the purpose for which it was purchased.20 e) Condition as to Fitness or Quality: Ordinarily in a contract of sale there is no implied condition or warranty as to quality or fitness for any particular purpose of goods supplied. G was entitled to reject the goods because the goods supplied did not correspond with the description. let the buyer beware). Kalyan wheat. The particular purpose for which goods are required must have been disclosed (expressly or impliedly) by the buyer to the seller. if the following conditions are satisfied: i. there is an implied condition that the goods shall be of merchantable quality. The seller’s business must be to sell such goods. The beer was contaminated with arsenic. there is an implied condition as to wholesomeness. X asked Y if it would stand boiling water. But an implied condition is deemed to exist on the part of the seller that the goods supplied shall be reasonably fit for the purpose for which the buyer wants them. That the buyer shall have a reasonable opportunity of comparing the bulk with the sample. Example: W bought a bottle of beer from H.

It is not part of the seller’s duty to point out defects of the goods which he offers for sale. Later on X sold this radio to Z who bought in good faith.9 Implied Warranties Unless otherwise agreed. a) Custom or Usage of Trade: An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the custom or usage of trade. the seller is liable.31 3. and (ii) the seller is made aware of it. Warranty of Disclosing the Dangerous Nature of Goods to the Ignorant Buyer: There is an implied warranty on the part of the seller that in case the goods are of dangerous nature he will warn the ignorant buyer of the probable danger.28 Example: X borrowed Rs.9. the law also incorporates into a contract of sale of goods the following implied warranties: a) Warranty of Quiet Possession: There is an implied warranty that the buyer shall have and enjoy quiet possession of the goods. Merchantable Quality: Where (i) the sale is by description and (ii) purchased from the seller who deals in goods of that description. but tells nothing to C.26 Example: M a lady purchased a second hand type-writer from B. 500 from Y and hypothecated his radio with Y as security. there is an implied condition that the goods shall be reasonably fit for such purpose.2 Exceptions In the following cases.30 Example: Pigs were sold subject to all faults and the seller knew that the pigs were suffering from swine-fever but he did not inform the buyer about this defect. doctrine of ‘Caveat Emptor’ does not apply. Fraud: Where the seller obtains the consent of the buyer by fraud or conceals a defect. custom should not be unreasonable and inconsistent with the express terms of the contract. Here Z can claim damages from X because his possession is disturbed by Y having a charge. For Specific Purpose: (i) Where the goods are ordered for specific purpose. Unknown to the parties the type-writer was a stolen one and M was compelled to return the same to its true owner. The seller was not liable for damages because Caveat Emptor is the rule.8. rather it is the duty of the buyer to satisfy himself about the quality as well as the suitability of goods.1 Meaning of the Doctrine of ‘Caveat Emptor’ The expression ‘Caveat Emptor’ means ‘let the buyer be aware’.27 b) Warranty of Freedom From Encumbrances: There is an implied warranty that the goods are free from any charge or encumbrance in favour of any third person if the buyer is not aware of such charge or encumbrance.9. Self-Learning Material 63 b) c) d) . there is an implied condition that the goods shall be of merchantable quality. She was held entitled to recover from the sellers for the breach of this warranty damages reflecting not merely the price paid but also the cost of repair. C opens the tin in the normal way where upon the disinfectant powder flies into her eyes and causes injury. and (iii) the buyer relies on the skill or judgment of the seller.3. She thereafter spent some money on its repair and used it for some months. A knows that the lid of the tin is defective and if it is opened without special care it may be dangerous. Example: C purchases a tin of disinfected powder from A. This is an extension of the implied condition as to title.29 Notes c) 3. A is liable in damages to C as he should have warned C of the probable danger. However.9 The Doctrine of ‘Caveat Emptor’ 3.

35 iii.1 Meaning of Transfer of Property The phrase ‘tranfer of property in goods’ means transfer of ownership of goods and not the physical possession of goods. Future goods mean goods to be manufactured or produced or acquired by the seller after the making of the contract of sale. The goods must have been unconditionally appropriated by the seller or the buyer with the consent of the other.36 b) In Unascertained or Future Goods: Unascertained goods mean goods which have not been identified and agreed upon at the time when contract of sale is made.The seller can sue for the price only if the ownership of goods has been transferred to the buyer. the following rules shall apply: i. and the circumstances of the case. The ownership of unascertained goods is transferred to the buyer when the following two conditions are fulfilled: i. the conduct of the parties. In case of insolvency of a seller can the official receiver or assignee take the possession of goods from buyer? . The goods must have been ascertained.e) Notes Goods are Sold by Sample or Description: In such cases. However. 3. 3. to ascertain price. When the goods have to be measured etc. doctrine of ‘Caveat Emptor’ does not apply. 32 The ownership of specific or ascertained goods is transferred to the buyer at such time as the parties intend it to be transferred. In case of insolvency of a buyer can the official receiver or assignee take the possession of goods from seller? .10 Transfer of Property 3.It is the owner who has to bear the risk and not the person who has the possession of goods.It is the owner who can take action and not the person who has the possession. regard shall be had to the terms of the contract. ii.2 Significance of Transfer of Property The time of transfer of ownership of goods decides various rights and liabilities of the seller and the buyer. 33 For the purpose of ascertaining the intention of the parties.Yes only if the ownership of goods has been transferred to the buyer. When goods are in a deliverable state. only if the ownership of goods has not been transferred to the buyer.10. Who can take action against the third party? . c) 64 Self-Learning Material In Goods sent on Approval or ‘on Sale or Return’ basis: Goods sent on ‘approval’ . when the intention of the parties cannot be judged.10.34 ii. This is important to know the answers of the following questions: a) b) c) d) e) Who shall bear the risk? .Yes. When goods have to be put into a deliverable state.10. Can a seller sue for price? .3 Rules regarding Transfer of Property The rules regarding transfer of property can be classified under the following categories: a) In Specific or Ascertained Goods: ‘Specific goods’ mean goods identified and agreed upon at the time when a contract of sale is made. 3.

uses the goods. or resells them.37 Buyers and sellers are free to provide any terms they like. he himself may not be in actual possession of the goods.11 Performance of a Contract of Sale 3. Symbolic Delivery: Where the goods are bulky and incapable of actual delivery. c) 3. beyond the time fixed for the return of goods. 3. Constructive Delivery: Where a third person in possession of goods acknowledges to hold goods on behalf of and at the disposal of the buyer.or ‘on sale or return’ basis mean those goods in respect of which the buyer has option either to return or retain. are the examples of symbolic delivery.2 Rules Regarding Delivery a) Delivery May be Either Actual or Symbolic or Constructive: Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery. the delivery is constructive. Who bears the expense of the delivery? 3.11.11. in accordance with the terms of the contract of sale. if there is no intention of severing of such part from the whole. 8. Why is Transfer of Property important? Can the Transfer of Property happen before the actual/ physical delivery of goods? When the seller is bound to make a delivery? 3. directly or through any of his representatives. Delivering of key of the warehouse.38 Delivery should have the effect of putting the buyer in possession of the goods so that he may acquire the position of exercising some degree of control over the goods.39 Delivery and Payment are Concurrent: Unless otherwise agreed. If he does not signify his approval or acceptance to the seller but retains the goods.2 Delivery Delivery means voluntary transfer of possession of goods from one person to another.g. 10.11. 9.1 Duty of the Seller and the Buyer “It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them.40 Delivery to be Made to Buyer: Delivery of goods sold has the effect of putting the goods in possession of the buyer or of any person authorized to hold them on his behalf.11. in progress of delivery of the whole amounts to delivery of the whole. delivery of goods and payment of the price are concurrent conditions. pledges the goods. Check Your Progress 7.42 Self-Learning Material 65 b) c) d) . e. beyond a reasonable time.41 Part Delivery: Delivery of part of the goods. bill of lading. railway receipt etc. The property in such type of goods passes to the buyer: i. without giving notice of rejection. or if no time is fixed.. The seller need not be the owner of the goods.1 Modes of Delivery Delivery of goods may be: a) b) Actual Delivery: Where the goods are physically handed over by the seller or his authorized agent to the buyer. place and the manner and acceptance of delivery of goods and payment of the price.2. When he signifies his approval or acceptance to the seller or does any other act adopting the transactions. about the time.2. To constitute delivery to the buyer. The seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price and buyer shall be ready and willing to pay the price in exchange for possession of the goods. Notes ii.

Goods agreed to be sold are to be delivered at the place at which they are at the time of the agreement to sell.e) Notes f) Buyer to Apply for Delivery: Seller of goods is not bound to deliver the goods until the buyer applies for delivery thereof. If the delivery is to be done as and when required.2. agree otherwise. demand for delivery must be made at a reasonable time. If he accepts. express or implied. Goods not then in existence are to be delivered at the place at which they are manufactured or produced.46 It implies that where time is fixed.2. delivery to the buyer is only effected when such third person acknowledges to the buyer that he holds the goods on his behalf. The parties may however.11.50 An agreement for delivery by instalments is made either expressly.11.48 Expenses: Expenses of and incidental to delivery are as a general rule to be borne by the seller. Goods Delivered at Distant Place: Where the seller of goods agrees to deliver the goods at his own risk at a place other than that where they are when sold.47 Goods in Possession of Third Person: Where the goods at the time of sale are in possession of a third person. he must pay for them.44 Place of Delivery: Apart from such a contract: i. Where the Seller Mixes his Goods with the Buyer’s Goods: The buyer may accept the goods which are in accordance with the contract and reject the rest or he may reject the whole. If he accepts the whole. the buyer shall unless otherwise agreed. What is a reasonable hour is a question of fact. Goods sold are to be delivered at the place at which they are at the time of sale. iii. Demand at Reasonable Hour: Demand for or tender of delivery must be made at a reasonable hour. the seller must send the goods in time.45 h) Time of Delivery: Where no time for sending the goods is fixed the seller is bound to send them within a reasonable time. In Case of Excess Delivery: The buyer may accept the goods included in the contract and reject the rest or he may reject the whole. take any risk of deterioration in the goods necessarily incidental to the course of transit. The buyer is deemed to have accepted the goods when he intimates so to the seller or he acts in a manner which is inconsistent with the ownership of the seller or retains the goods without intimating to the seller that he has rejected them. even if the seller agrees to deliver the goods at his own risk. The buyer is not bound to return the rejected 66 Self-Learning Material . the buyer must have a reasonable opportunity of examining them. 3. a) b) c) In Case of Short Delivery: The buyer may reject the goods delivered. or inferred from circumstances or from the conduct of the parties.43 Mode of Delivery: Mode of delivery depends on the contract between the parties whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the contract. excess delivery or mixed delivery. i) j) k) l) m) 3.51 The necessary deterioration of merchantable quality of goods is on the buyer. g) ii. between the parties.3 Delivery of Wrong Quality52 Wrong quantity may be either short delivery.49 Instalment Delivery: Buyer of goods is not bound to accept delivery thereof by instalments unless otherwise agreed. he must pay for them.4 Acceptance of Delivery53 a) Acceptance of Delivery by the Buyer: In order that the delivery of goods may constitute a valid acceptance.

v. To recover the amount paid if the seller fails to deliver the goods. Right of inspection may be waived by agreement between the parties.goods. vi. for example. the seller may sue for the price or for damages. b) Duties i. To sue the seller for damages for non-delivery of the goods. and the buyer does not take delivery of the goods within a reasonable time after such request. In case of breach of contract by the seller. when the buyer sues for the refund of the price. or sends the goods to his sub-purchaser or when he resells them. and A reasonable charge for the care and custody of the goods. The goods are then at the seller’s risk. What right does a buyer has in case of breach of contract? ii. ii. To pay for the goods and take delivery thereof. Neglecting or Refusing Delivery of the Goods Where the seller is ready and willing to deliver the goods and requests the buyer to take delivery. Where goods have been delivered to him and he does any act in relation to the goods which is inconsistent with the ownership of the seller.57 3.5 Buyer’s Liability for Rejecting.54 Rule 2: When Accepted?: The buyer is deemed to have accepted the goods when: i. he is liable to the seller for: a) b) Any loss occasioned by his neglect or refusal to take delivery. To receive delivery of the goods.3 Rights and Duties of the Buyer a) Rights i. To sue the seller for specific performance of the contract. What should be done. When the seller tenders delivery of goods to the buyer he is bound on request to afford the buyer a reasonable opportunity of examining the goods. he retains the goods without intimating to the seller that he has rejected them. To repudiate the contract if the seller commits breach of contract. viii. vii. Provided that where the neglect or refusal of the buyer to take delivery amounts to a repudiation of the contract. entitled to damages. for the purpose of ascertaining whether they are in conformity with the contract. iii. iv. when the buyer wants delivery in installments? 12. Shall the buyer return the rejected goods? 13. To sue seller for damages for breach of warranty. the buyer has a right to claim interest on the amount of price paid from the date on which the payment was made. he pledges the goods. Mere intimation to the seller that he refuses to accept is sufficient. The following rules are relevant: Rule 1: Examining Goods: The buyer is not deemed to have accepted the goods unless and until he has had a reasonable opportunity of examining them. The buyer after direct or indirect acceptance cannot reject the goods.56 Notes Check Your Progress 3. He may be however. or 11.11.11. He intimates to the seller that he has accepted them. Self-Learning Material 67 . When after the lapse of a reasonable time.2.55 Rule 3: Buyer not Bound to Return the Rejected Goods: Unless otherwise agreed where goods are delivered to the buyer and he refuses to accept them he is not bound to return the rejected goods to the seller. To have reasonable opportunity to examine the goods. iii.

If he is unpaid seller then to exercise his right of lien. Where goods are sent by seller to the buyer by a route involving sea transit. ii. the seller shall give such notice to the buyer as may enable him to insure the goods during sea transit. the goods shall be deemed to be at the seller’s risk during such sea transit. To receive compensation or sue for damages for any loss occasioned by him by neglect or refusal of the buyer to take delivery of the goods. prima facie constitutes delivery of the goods to the buyer. To sue for the price of the goods. vi.4 Rights and Duties of the Seller a) Rights i. to exercise his right of stoppage in transit. To compensate the buyer in case he repudiates the contract or commits breach of the contract. 68 Self-Learning Material . ii. If the seller fails to do so. To compensate the seller for any loss occasioned by his neglect or refusal to take delivery of the goods and also for reasonable charge for care and custody of the goods. vii. the duty of insuring the goods is thrown on the buyer.Notes ii. viii. To deliver the goods when buyer demands the delivery thereof. To receive the price of the goods. and to exercise his right of resale. 3.12 Delivery to Carrier or Wharfinger58 a) Delivery of the goods by the seller to a carrier for purpose of transmission whether named by the buyer or not or wharfinger for safe custody. iii. iii. v. To compensate the buyer in case of delivery of wrong quantity. The seller shall make such a contract on behalf of the buyer that the delivery must make carrier or wharfinger responsible for the goods. To give reasonable opportunity to the buyer to examine the goods. To refund the amount paid by the buyer in case he fails to deliver the goods. iv. i. To sue the buyer for damages for wrongfully neglecting or refusing to accept the goods. To apply for the delivery of goods as the seller is not bound to deliver the goods until the buyer applies for delivery.11. b) Duties i.e. To sue for damages on buyer repudiating the contract. iv. iii. b) c) 3. To receive reasonable charge for care and custody of the goods. 3. when the seller sends goods to the buyer involving sea transit. There are three common types of contracts as regards carriage by sea.13 Carriage by Sea In case of sea transit. v. If the seller omits to do so. To recover interest from the buyer if there is specific agreement to that effect or charge interest on the price when it becomes due. and if the goods are lost or damaged the buyer may decline to treat the delivery or may hold the seller responsible for damages.

1 Who is an Unpaid Seller? The seller of goods is deemed to be an ‘unpaid seller’ a) b) When the whole of the price has not been paid or tendered. he is not allowed inspection of the goods.F. How auction sales are completed? 18. failing which the seller can sue for damages for nonacceptance. Contracts: It means “Cost-Insurance-Freight”. the buyer can recover the damages from the insurance or shipping company. in case of loss or damage to the goods in the course of transit. The buyer is responsible to pay freight and also insurance charges and other expenses.F. can it be revoked? If yes. the unpaid seller of goods. contract buyer cannot insist on actual delivery of goods.14. Ex-Ship Contracts: By ex-ship contract. then how? 3. A lien on the goods for the price while he is in possession of them. contract.F. The buyer must name the ship on which the goods are to be delivered. Contract: F. However. or he must authorize the seller to select the ship.3 Rights of Unpaid Seller The rights of an unpaid seller can be studied under two heads: a) When the Property in the Goods Has Passed to the Buyer: The Act lays down that notwithstanding that the property in the goods may have passed to the buyer.a) C. 14. 17.59 3. The seller gives the notice of the shipment to the buyer to enable him to insure the goods. C. Self-Learning Material 69 .I.e. and he must be unpaid. F. The seller has to pay the freight. its insurance and freight charges. Failure to give notice makes the seller liable for risk.14 Unpaid Seller 3.2 Characteristics of an Unpaid Seller Check Your Progress The following characteristics of an unpaid seller should be there: a) b) c) He must sell goods on cash terms and not on credit.B means “Free on Board”. The seller puts the goods on board at his own expense. As the buyer pays for the documents. as such has by implication of law: i. Once the bidding is made. if there is a breach of contract or if the goods are not according to the specifications. and the same has been dishonoured. i. He must not refuse to accept payment when tendered.F.B.I.I.14. In C. and the buyer’s liability begins. The seller pays cost of loading and other expenses for placing the goods on ship. Mere tender of shipping documents through a bank is sufficient performance on part of seller to entitle him to claim payment.I. unless the buyer waives the notice. Notes b) c) 3. The goods are at the seller’s risk during the voyage.O. cost of insurance and freight charges. contract includes the price of the goods. In the C. Where a bill of exchange or other negotiable instrument has been received as a conditional precedent. What are FOB and CIF contracts? 15. Describe characteristics of an unpaid seller. the seller’s liability ceases. the seller does not merely ship the goods.O.14. The property in the goods passes to the buyer only when the goods are delivered to him. subject to the realization thereof. He must be unpaid either wholly or partly. What are Ex-ship contracts? 16. The seller agrees to sell the goods inclusive of the cost of the goods. No sooner the goods are placed on the board. but he has to deliver the goods to the buyer after the arrival of the ship on the port of delivery to buyer’s place where the goods are to be delivered at his own expense. the buyer may reject the goods and recover the price paid by him.

Where such right is expressly reserved the seller or any person on his behalf may bid at the auction. each lot is prima-facie deemed to be the subject of a separate contract of sale. the auctioneer invites bids from prospective purchasers and sells the goods to the highest bidder. i. The sale may be notified subject to a reserve or upset price. Auction sale is ‘sale’ for purpose of the Act. No seller or any person who has advertised can bid at an auction sale.15 Auction Sales In an auction sale. In case of goods put up for sale in lots. In case of the insolvency of the buyer a right of stopping the goods in transit after he has parted with the possession of them. a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transit where the property has passed to the buyer. iii. any such sale may be treated as fraudulent by the buyer.e.Notes b) ii. damage and interests 3. the sale is voidable at the option of the buyer. A right of re-sale.62 The Act lays down the following rules governing the auction sales.60 When the Property in the Goods has not Passed to the Buyer: Where the property in the goods has not passed to the buyer. The auctioneer has the right to make the auction subject to any conditions he likes. unless the right is expressly reserved and notified. A right to bid may be reserved expressly by or on behalf of the seller. A condition in an auction sale the “biddings once made cannot be withdrawn” is not enforceable. The seller may protect himself by a ‘reserve’ bid. the rights of an unpaid seller are: Rights of an Unpaid Seller Where the property in the goods has not passed Where the property in the goods has passed Lien Stoppage in transit Resale Withholding delivery To sue for price. In short. A bidder is at liberty to withdraw his bid at any time before it is accepted by the auctioneer. If the seller makes use of pretended bidding to raise the price. otherwise. The auctioneer is not bound to sell articles advertised to the highest bidder except when the sale is with reserve. The bidding can be withdrawn before acceptance. there may be a price below i) j) k) l) 70 Self-Learning Material . The auctioneer is not bound to hold auction on the date of advertisement. Agreements not to bid against each other are called “Knockout Agreements” and they are not unlawful.63 a) b) c) d) e) f) g) h) The sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner. the unpaid seller has in addition to his other remedies. His advertisement is not an offer but a mere invitation.

They are express when they are mentioned in the contract by the parties. or for the delivery or payment by instalments or that both is done at a future date. What is a Warranty? A Warranty is a stipulation collateral to the main purpose of the contract. the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled. Notes Summary Contract of Sale A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Price must be expressed in money. If the sale is through the court. conditions and warranties may be express or implied. It may provide for the immediate delivery of the goods or immediate payment of the price or both. the principal’s title to the goods is not lost. The reserve price may be kept a secret. Goods here means only movable goods. Implied conditions and warranties are those which are implied by law unless the parties stipulate to the contrary. Its breach gives a right to the buyer to repudiate the contract. Its breach gives rise to a claim for damages but not a right to treat the contract as repudiated. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. m) n) Where the auctioneer discloses the fact that he is acting as an agent. What is a Condition? A Condition is a stipulation essential to the main purpose of the contract. Sale and Agreement to Sell In a sale the property in the goods is transferred from the seller to the buyer. but does not disclose the name of his principal and sells specific goods. In an agreement to sell. How a Contract of Sale is Made? A contract of sale may be made in writing or orally or partly in writing and partly orally or may be implied from the conduct of the parties. What is a Stipulation? A Stipulation in a contract of sale with reference to goods which are the subject thereof may be a Condition or a Warranty. It may be for existing or future goods.which the goods will not be sold. Express and Implied Conditions and Warranties In a Contract of sale. Self-Learning Material 71 . There must be an offer to buy or sell goods for a price and acceptance of such offer. it would be subject to the confirmation of the court.

to merchantability 7.Implied Conditions Notes These are conditions. To ascertain the intention of the parties. 72 Self-Learning Material . property passes. the goods are free from any charge or encumberances 3. Unascertained or Future Goods: If such goods are sold by description. When goods are in a deliverable state 2. Specific Goods: 1. in a sale by sample 4. Rules for Transfer of Property Rules for ascertaining when the property in goods passes to the buyer are the following: 1. when goods according to the description are unconditionally appropriated. there is an impled warranty that 1. What is ‘Caveat Emptor’? This means ‘let the buyer be aware’. in a sale by sample as well as description 5. and the buyer is given a notice thereof. no property in the goods is transferred to the buyer unless and until the goods are ascertained Where there is a Contract for the sale of specific or ascertained goods. The doctrine of Caveat Emptor does not apply 1. a) b) c) Duty of Seller and Buyer Seller’s duty is to deliver the goods and the buyers duty is to accept and pay for the goods as per the terms of the contract of sale. It may be actual. 2. then when the seller has done such thing. the conduct of the parties and the circumstances of the following rules will be relevant. delivery of the goods and payment of the price are concurrent conditions. as to fitness or quality 6. Implied Warranties In a contract of sale. Unless otherwise agreed. 1. that the seller will disclose the dangerous nature of goods to the ignorant buyer. terms of the contract. Rules as to Delivery 1. When the buyer intimates the purpose to the seller and depends upon his skill or judgement 4. a sale by description 3. symbolic or constructive. the buyer shall have and enjoy quiet possession of the goods 2. the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Where there is a contract for the sale of unascertained goods. When there is custom or usage of trade 2. and notice thereof is given to the buyer. property passes when the time agreed for returning the goods expires or a reasonable time has expired. relevant issues are. Delivery of Goods Delivery means voluntary transfer of possession of goods from the seller to the buyer. When there is a fraud by the seller 3. In case of implied conditions and warranties. If the seller has to do something to make goods deliverable. Goods Sent on Approval: In such goods. unless there is a contrary intention. as to title 2. as to wholesomeness. property passes when the buyer signifies his approval or acceptance or when he does some act adopting the transaction if he retains the goods without giving notice of rejection.

Right of Stoppage in Transit: When the buyer of goods becomes insolvent the unpaid seller who has parted with the possession of the goods has the right of stopping them in transit.2. Right of Lien: It is available to the unpaid seller when a) the goods have been sold without any stipulation as to credit. If the seller sends to the buyer a larger or a smaller quantity of goods than he ordered. 5. the seller of goods is not bound to deliver them until the buyer applies for delivery. Notes Rights of an Unpaid Seller A seller of goods is deemed to be an unpaid seller . for the purpose of passing the property in such goods. 2. iii. 4. Damages for Non-acceptance: Where the buyer wrongfully neglects or refuses . The place of delivery is the place at which they are at the time of the sale. of the delivery of whole. they must be sent within a reasonable time. c) the buyer becomes insolvent. the buyer may a) reject the whole. b) the goods have been sold on credit. or c) accept the quantity he ordered and reject the rest. a right of withholding delivery similar to and coextensive with his rights of lien and stoppage in transit where the property has passed to the buyer. A delivery of part of the goods. If the seller delivers.1. ii. or otherwise. 3 Apart from any express contract. Where the seller is bound to send the goods to the buyer but no time for sending them is fixed. the buyer may accept the goods ordered and reject the rest or reject the whole. If the goods are in possession of a third party. As Against the Buyer Personally i. the seller may sue him for the price of the goods. as long as they are in the course of transit and may retain them until payment or tender of the price. 8. 9. the goods are not to be delivered by instalments. 10. Right of Withholding Delivery Where the property in goods has not passed to the buyer. Right of Re-sale: The unpaid seller can re-sell the goods— Where the goods are of a perishable nature. in addition to his other remedies. Self-Learning Material 73 ii. Unless otherwise agreed. When the whole of the price has not been paid or tendered 2. 7. with the goods ordered. The seller may resume possession of the goods. the unpaid seller has. 6. The unpaid seller may exercise this right of stoppage in transit either by taking actual possession of the goods. in progress. goods of a wrong description. there is no delivery until such third party acknowledges to the buyer that he holds the goods on his behalf. but the term of the credit has expired. and—Where the seller expressly reserves a right of re-sale in case the buyer should make default. or b) accept the whole. Suit for Price: Where under a contract of sale the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract. An unpaid seller has the rights: 1. When a bill of exchange or other negotiable instrument has been received as a conditional payment. Expenses of making delivery are borne by the seller and expenses of obtaining delivery by the buyer. and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument. 3. amounts to. or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. As Against the Goods i.Where he has exercised his right of lien or stoppage in transit and given notice to the buyer of his intention to re-sell the goods and where the buyer has not within a reasonable time paid the price. as a delivery of the whole.

5. An unpaid seller is bound to resell the goods. Practical Problems Attempt the following problems giving reasons: 1.to pay for the goods. Can he do so? A purchases a television from B on B’s plea that though it is old. Generally. iv. his cheque is dishonoured by the bank. A does not correct B’s impression. if goods are destroyed while still in the possession of the seller. if there is a special agreement to that effect. therefore. B pays to A through a cheque. When the goods are sent on sale or return basis. A knows that B thinks so but knows that it is not Indian silk. Can he reject the set and recover his money? A sells goods to B. B was injured by the bursting of one of the bottles. In a contract of sale by sample. Is A’s action justified? 4. 5. A stipulation the breach of which gives the aggrieved party a right to terminate the contract is called a warranty. 4. 2. Suit for Interest: The seller can recover interest on price from the date on which the payment became due. 10. Can B claim damages from S? A contracts to sell B a piece of silk. Repudiation of Contract Before Due Date: Where the buyer in a contract of sale repudiates the contract before the date of delivery. The goods are ultimately sold to the highest bidder. B thinks that it is Indian silk. 6. 9. refuses to deliver the goods until paid. the property in goods passes when the buyer retains the goods beyond a reasonable time. risk follows ownership whether the goods have been delivered or not and whether price has been paid or not. The consideration for the contract of sale can be partly in money and partly in goods. it is in an excellent condition. or he may treat the contract as rescinded and sue for damages for the breach. The property in goods passes only when the goods are delivered. the seller may sue him for damages for non-acceptance. the loss falls on the seller. Before it could be delivered to B. 2. Stipulations relating to time of payment are not of the essence of a contract of sale. A sold 100 tons of groundnut oil to B. In a contract of sale of goods. 74 Self-Learning Material . Notes iii. The term property in goods and possession of goods means the same thing. the bulk of goods supplied may not correspond with sample. A finds later on that the television set does not work at all. Review Questions True or False 1. Auction Sale A sale by auction is a public sale where different intending buyers try to outbid each other. B later discovers that it is not Indian silk and wants to repudiate the contract. the seller may either treat the contract as subsisting and wait till the date of delivery. the government requisitioned the whole quantity of A in public interest. 3. 8. 4. 7. Before B could obtain the delivery of goods. 3. Can B sue A for breach of Contract? Soda Water was supplied by S to B in bottles. A.

a rule 3 13) 3.2.11. B can claim damages from S for the injury as the bottle is not of merchantable quality and there is a sale of goods by description. 4.5. “Delivery does not amount to acceptance of goods”.c 16) 3. False 9.2. Notes Test Questions 1.15 18) 3. 6. “The right or stoppage in transit is an extension of an unpaid seller’s right of lien. set and recover his money. No. 15. b) unascertained goods. b) the risk.14. Discuss when a buyer can be said to have accepted the goods. Answers to “True or False” 1. indicating respective paragraphs for reference. False 5. Summarise the provisions of the Sale of Goods Act in regard to the passing of property in a) ascertained goods. True 7.2 8) 3.11.5 & 3. In a contract for the sale of goods.10. Yes. Comment. True 6. the rule of ‘Caveat Emptor’ will apply here. False Answers to “Check Your Progress” Following are the answers to “Check Your Progress”.2. Differentiate between a) ‘Sale’ and ‘Hire Purchase Agreement’.b 15) 3. 3. to be in excellent condition whereas it was not.2. 8.3. What are Implied Conditions and Implied Warranties? What is meant by ‘Caveat Emptor’? In what circumstances the doctrine does not apply? Explain the rules governing passing of property.1 5) 3.11.11. False 8. 5. b) Auction sale. This is a contract of sale by description. Define ‘Unpaid Seller’. 1) 3.1 4) 3.2.1 6) 3.10. state when a) the property.Practical Problems 1.2. B cannot repudiate the contract. What are the rights of an unpaid seller over the goods sold by him? Write Short notes on: a) Carriage by sea.V.13.15. 3. 9. Thus. 10. B described the T. here A is an ‘Unpaid Seller’ and under the Sale of Goods Act (section 47) can exercise his right of lien over the goods. False 4.3.2 2) 3. 12.8. What are the different types of goods? “In a contract for the sale of goods there is no implied condition or warranty as to the quality of the goods or their fitness for any oparticular purpose”. 11. Explain ‘Sale’ and give essential elements of a contract of sale.4 3) 3. 2.V.13.5 7) 3. Explain rights and duties of the buyer and the seller. Define the term ‘goods’. 16. 13.” Comment.11.2 10) 3. c) goods sold on approval or on sale or return. in the goods sold passes from the seller to the buyer.3 9) 3. 5.b Self-Learning Material 75 . State the rules gegarding sale by auction. 2.8./ 12) 3.9. A can reject the T.a. 14. False 10. 7. 4. b) ‘Sale’ and ‘Agreement to sell’. True 2. B cannot sue A for breach of contract as the contract becomes void because of supervening impossibility.3 14) 3.2 17) 3.k 11) 3. Explain the terms ‘Condition and Warranty’ and distinguish them. True 3.4.

v. Ivan E. Australian Knitting Mills Ltd. 32 Section 2 (14) 33 Secton 19 (1) 34 Section 20 35 Section 21 36 Section 22 37 Section 31 38 Section 2 (2) 39 Section 33 40 Section 32 41 note 33 ibid 42 Section 34 43 Section 35 44 Section 36 (1) 45 note 44 ibid 46 Section 35 (2) 47 Section 36 (4) 48 Section 36 (3) 49 Section 36 (5) 50 Section 38 (1) 51 Section 40 52 Section 37 53 Sections 41 to 43 54 Section 41 1 2 Section 42 Section 43 57 Section 44 58 Section 39 59 Section 45 (1) 60 Section 46 (1) 61 Section 46 (2) 62 Loon Karan Sethia and ors. 13.B. 10 Ex. 148. K. 500. 4 A. 21 Section 16 (1) 22 Priest v. (1936).I. (1854).AIR 1973 SC 376.B.References Notes Section 3 Section 4 (1) 3 Section 2 (11) 4 Section 2 (7) 5 Rash Behari v. 2 K. 26 Section 14 (b) 27 Mason v.R. (1878).B. 155. 63 Section 64 55 56 76 Self-Learning Material . 191. Hobbs.C.B. Burmingham (1949). (1923). 28 Section 14 (c) 29 Clarke v. Army and Navy Cooperative Society Ltd. 753 6 Section 2 (10) 7 Section 4 (3) 8 note 7 ibid 9 Section 5 10 note 9 ibid 11 Section 12 (1) 12 Section 12 (2) 13 Section 12 (3) 14 Section 12 (4) 15 Section 14 (a) 16 Rowland v. Halt. 17 Section 15 18 Section 17 19 note 17 ibid 20 Nichol v. 545. A. Cal. 23 Section 16 (2) 24 Grant v. (1903). Last. A. (1903).C. Godts. 2 K. Emperor.B. (1936). (1903). John and ors. 1 K. 85. 25 Wren v. Divall. . 2 K. 30 Section 16 31 Ward v. 610. 1.

10 Parties to Negotiable Instruments.2 4.11 Endorsement.9 Introduction What is a Negotiable Instrument? Characteristics of Negotiable Instruments.Section Law Relating to Negotiable Instruments Notes 4 “Money speaks sense in a language all nations understand.3 4.1 4. Laws of Negotiable Instruments. Bill of Exchange. Self-Learning Material 77 .8 4. 4.7 4. Presumptions as to Negotiable Instruments Promissory Note. Negotiation.6 4.” —Aphra Behn STRUCTURE 4.5 4. 4. Cheque.4 4.

negotiated for consideration.The law relating to ‘negotiable Instruments’ is contained in the Negotiable Instruments Act. etc.4 Kinds of Negotiable Instruments Negotiable Instruments may be of two kinds: a) b) Negotiable by Statute: The Act mentions only three kinds of instruments. bill of exchange or cheque payable either to order or to bearer”. Money orders. It came into force on 01-03-1882. Signed by the maker/drawer. banker’s draft. Time of Acceptance: Every accepted bill was accepted within a reasonable time after its date and before its maturity. Thus. In trade and commerce the use of ready cash is desirable.4.7 and 4. “A ‘negotiable instrument’ means a promissory note. and Payment in money. Promise/order must be unconditional. accepted. 4.2 What is a Negotiable Instrument? The term “negotiable instrument’ consists of two words ‘negotiable’ and ‘instrument’. For Example: hundis.8 ). The need for some safe and effective substitute for money lead to the development of the use of negotiable instrument.1 Judge Wills defines a negotiable instrument as “One. 4. Bill of Exchange and Cheque (These are discussed in paragraphs 4. Promise or order to pay. Railway receipts.5 Presumptions as to Negotiable Instruments The Act2 provides the following presumptions as to negotiable instruments: a) b) c) d) 78 Self-Learning Material Consideration: Every negotiable instrument was made or drawn. not withstanding any defect of title in the person from whom he took it”. or usage or the Companies Act. but it may cause inconvenience and risk. .3 Characteristics of a Negotiable Instrument An instrument must possess the following characteristics in order to be treated as a negotiable instrument: In writing. etc. treasury bills. Dock warrants. 4. Negotiable by Custom or Usage: Though the Act speaks of only three kinds of negotiable instruments. The word ‘negotiable’ means ‘transferable by delivery’ or by endorsement and delivery and the word ‘instrument’ means ‘a written document by which a right is created in favour of some person or entity’.6. drawee must be named or described with reasonable certainty. Date: Every negotiable instrument was made or drawn on the date it bears. It extends to the whole of India. it does not mean that there cannot be any other negotiable instruments. endorsed. 1881 (in short the Act). the term ‘negotiable instrument’ literally means ‘a written document transferable by delivery’. bearer warrants. Transfer: Every transfer of a negotiable instrument was made before its maturity. are negotiable instruments recognized by the custom. According to the Act. the property in which is acquired by anyone who takes it bonafide for value. because of its acceptability. i. The reason for this is that money has the exchange value and is also freely transferable. Deposit receipts.e. are not negotiable instruments. For a certain sum. Postal orders. Bills of lading. Promissory note. bearer debentures. they cannot give a better title to the transferee. share warrants. 4. These documents are transferable by delivery and endorsement. 4.1 Introduction Notes Money is the most common medium of exchange in any advanced society. payable at a time certain to arrive.

Stamping: A lost promissory note or bill of exchange was duly stamped. i. Acknowledges debt but no promise to pay. The sum payable must be certain. Notes The above presumptions are rebuttable by evidence to the contrary. 2. presume the fact of dishonour. 1.e.1 Definition According to the Act.2 Essentials of a Promissory Note From the definition given in the Act. which prohibits the issue of a promissory note payable to bearer by anybody other than the Reserve Bank of India4 and the Central Government of India. 4. The amount payable must be in legal tender money of India. Acknowledges debt but no promise to pay.e) f) g) h) Order of Endorsement: The endorsements on a negotiable instrument were made in the order in which they appear. 2000 from Y. 1. counter evidence.3 Bank notes and currency notes are not treated as promissory notes. 1000. a certain person. the court shall. The maker must be a certain person. Check Your Progress Remarks Acknowledges debt but no promise to pay. I am liable to pay X Rs. The words “or to the bearer of the instrument” in the definition of the promissory note are inoperative in view of the provisions of the Reserve Bank of India Act. Holder in Due Course: The holder of a negotiable instrument is a holder in due course. The payee must be certain. it follows that to be a valid promissory note. “A ‘promissory note’ is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking signed by the maker. I have borrowed Rs. on proof of protest.6 Promissory Note 4.6. 4. to pay a certain sum of money only to. Proof of Protest: In a suit upon an instrument which has been dishonoured. Moreover. The promise to pay must be unconditional. or to the order of. Other formalities like proper stamping should be there. 500. 4. Self-Learning Material 79 Instrument I owe B Rs. It must be signed by the maker.6. an instrument must fulfill the following essential requirements: a) b) c) d) e) f) g) h) i) It must be in writing. How many types of negotiable instruments are there? 3. It must contain a promise or undertaking to pay. What is a ‘Promissory Note’? 3.3 Illustrations S. . these presumptions would not arise if an instrument has been obtained by means of fraud (or) for unlawful consideration. or to the bearer of the instrument”. unless and until such fact is disproved. No. What is a ‘Negotiable Instrument’? 2.6.

Notes 4. I promise to pay B Rs.6. directing a certain person to pay a certain sum of money only to. 7. Instrument I promise to pay B Rs. Promise to pay is contingent on other factors. Promise to pay is contingent on other factors. Remarks Promise to pay is contingent on other factors. It is a conditional promise to pay. 9. 5. I promise to pay Rs. This instrument is a promissory note. 1000 to be paid on demand. 10.7 Bill of Exchange 4. I promise to pay B or his orders Rs. I promise to pay B Rs. 4. or to the order of. 1000 after receiving money from Y. No. 1000 as soon as I am able to. The payable sum is uncertain. 500.4 Specimen of a Promissory Note 4.S. 6. 80 Self-Learning Material . I acknowledge myself to be indebted to B in Rs. The payable sum is uncertain.1 Definition According to the Act. a certain person or to the bearer of the instrument”. It is conditional promise to pay. for value received.7. I promise to pay B Rs. 500 and other charges. It is a conditional promise to pay. 1000 after his successful completion of studies. signed by the maker. “A ‘bill of exchange’ is an instrument in writing containing an unconditional order. The payable sum is certain and it is a promissory note. 500 but after deducting money owed by him. 8.

4. one person may assume any of the two capacities out of the three. A pro-note is based on a debtor creditor relationship. A pro-note contains an unconditional undertaking or promise. The liability of the drawer of a bill is secondary and conditional.. i.7.The person on whom the bill of exchange is drawn. A bill contains an unconditional order. due notice of dishonour must be given by the holder to all prior parties (including drawer and intermediate endorsers). Numbers of parties Bill of Exchange There are three parties in the case of a bill of exchange. A bill needs to be accepted to make it valid. i.3 Distinction Between Bill and Promissory Note S. The drawee puts his signature as acceptor (Bills payable on demand do not require acceptance). 6. The drawee or the acceptor is primarily liable. No such acceptance is required. Notice to prior parties Notice of dishonour need not be given to the maker of a pro-note. Point of Distinction 1.2 Parties to a Bill of Exchange There are three parties to a bill of exchange as under: a) b) c) Drawer . Order and promise Nature of relationship 3. When a bill is dishonoured either by non-payment. 2. the maker of a pro-note is debtor and the payee is creditor. No.The person who draws a bill of exchange. Promisory Note (Pro-note) There are only two parties to a pro-note. Drawer. He is also called as an acceptor of the bill. viz. Hence. Payee . Maker and Payee. What is a ‘Bill of Exchange? 5. Notes Check Your Progress 4. Drawee and Payee.e the drawer of a bill is the creditor and the drawee is the debtor. viz. The maker of a note stands in immdiate relation with the payee. Acceptacne 5. it is a two party paper. Who are the parties to a ‘Bill of Exchange’? 4. Drawee . Immediate relation 7.e. Nature of liability The liability of the maker of a pro-note is primary and absolute because he himself is the main debtor. Self-Learning Material 81 . a pro-note is signed by the maker only.4.The person named in the instrument to whom or to whose order the money is directed to be paid by the instrument. The drawer (maker) of an acceptance bill stands in immediate relation with the acceptor and the payee.7. A bill arises usually upon the basis of a creditor-debtor relationship.

”5 Explanation I – For the purposes of this section.Notes S. No.8 Cheque 4. Foreign bills must be protested for dishonour when such protest is required by the law of the place where they are drawn. A not cannot be made payable to the market himself. 4. Conditional acceptance Acceptor for honour Payable to the maker himself The maker of the pro-note cannot attach any such condition to it. The acceptor for honour can even make the payment of a bill. It cannot be paid for honour.1 Definition According to the Act “A ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. A bill may be payable to the maker (drawer) himself when the drawer and the payee are one and the same person. 11. Protest No such protest for dishonour is required for foreign pro-notes. the expressions: 82 Self-Learning Material . Promisory Note (Pro-note) Pro-notes are not so drawn. 10.8. 12. 9. Point of Distinction 8.4 Specimen of a Bill of Exchange 4. Sets Bill of Exchange Foreign bills are drawn in sets (of three or four).7. A bill may be accepted conditionally.

Payable to the bearer on demand Acceptance 4. 3. A cheque does not require any stamp. In the case of time bills three days of grace are allowed from the due date for calculating the maturity of the bill. Crossing A bill cannot be crossed. A cheque is always payable on demand and may be made payable to bearer or order. Stamping A bill must be properly stamped (except in the case of demand bills).a) “a cheque in the electronic form” means a cheque which contains the exact mirror image of a paper cheque. 5. Days of grace 6. the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognized as such by the Reserve Bank of India. No. “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle. Point of Distinction 1. No days of grace are allowed. there is no such presumption. Notes b) Explanation II – For the purposes of this section. 4. In case of a bill. 7.2 Distinction Between Cheque and Bill of Exchange A cheque can be distinguished from a bill of exchange as shown below: S. A cheque is always payable on demand and may be made payable to bearer or order. written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system.8. Self-Learning Material 83 . Supposition It is presumed that the customer is having an account with sufficient credit balance or credit arrangement. 8. substituting the further physical movement of the cheque in writing. A bill may be drawn payable on demand or on the expiry of a certain period after date or sight. immediately on generation of an electronic image for transmission. and is generated. either by the clearing house or by the bank whether paying or receiving payment. A bill must be accepted before payment can be claimed. Bill of Exchange A bill may be drawn on any one including a banker. 2. A cheque requires no acceptance. A bill cannot be drawn payable to the bearer on demand. Drawee demand Payable on demand Cheque A cheque is always drawn on a specified banker only. A cheque can be crossed either generally or specially.

Notes

S. No. Point of Distinction
9.
Countermanding

Cheque
A payment of a cheque can be countermanded by the drawer. A cheque is not intended for circulation but for immediate payment. A cheque is not generally discounted. If the cheque is not presented for payment on the due date, the drawer is not discharged from liability unless he suffers any damages by delay in presentment, e.g. the liquidation of the bank. The drawer of chequie is primarily liable for payment. The banker is protected if he pays a cheque under a forged endorsement. A cheque need not be noted and protested when dishonoured. Cheques are not issued in sets.

Bill of Exchange
The payment of a bill cannot be countermanded by the drawer. A bill can be discounted and rediscounted with the banks.

10.

Circulation

11.

Discounting

A bill can be discounted and rediscounted with the bank. The drawer of a bill is discharged if it is not duly presented to the acceptor for payment or else.

12.

Failure to present

13.

Primary liability Statutory protection

The drawee or the acceptor of a bill is primarily liable for it. The drawee of a bill has no such protection.

14.

15.

Noting and protesting

A Bill must be noted and protested when it is dishonoured. Foreign bills are generally drawn in sets of three or four.

16.

Sets

4.8.3 Specimen of a Cheque

84 Self-Learning Material

4.8.4 Crossing of Cheque
A crossed cheque is payable only through a collecting banker and not directly at the counter of the bank. A cheque is said to be crossed when two parallel transverse lines, with or without any words, are drawn on the left hand top corner of the cheque. There are the following types of crossing: a) General: Where a cheque bears across its face, two parallel transverse lines either with or without any words, that shall be deemed to be crossed generally. The words used are ‘& Co.’ ‘Not negotialbe’ or a combination of both. Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. Special: Where a cheque bears across its face an addition of the name of a banker, either with or without the words ‘not negotiable’, ‘and company’, the cheque is deemed to be crossed specially. The payment of a specially crossed cheque can be obtained only through the particular banker whose name appears across the face of the cheque or between the transverse lines, if any. Restrictive: In addition to the two statutory types of crossing (general or special) discussed above, there is another type which has been adopted by commercial and banking usage. In this type of crossing the words ‘A/c Payee only’ are added to general or special crossing. The words ‘A/c Payee only’ on a cheque are a direction to the collecting banker that the amount collected on the cheque is to be credited to the account of the payee. A/c payee cheques are negotiable. Notes

b)

c)

Not negotiable crossing (Section 130) - The effect of the words ‘not negotiable’ on a crossed cheque is that the title of the transferee of such a cheque cannot be better than that of its transferor. The addition of the words ‘not negotiable’ does not restrict the further transferability of the cheque. The object of crossing a cheque ‘not negotiable’ is to afford protection to the drawer or holder of the cheque against miscarriage or dishonesty in the course of transit by making it difficult to get the cheque so crossed cashed, until it reaches its destination. For example: W drew a cheque ‘not negotiable’ in bank and handed it to his clerk to fill in the amount and the name of the payee. The clerk inserted a sum in excess of her authority, and delivered the cheque to P in payment of a debt of her own. Held, that the clerk had no title to the cheque and as such P had no better title, and therefore W was not liable.

4.8.5 Bouncing of Cheques
A drawer of a dishonoured (bounced) cheque shall be deemed to have committed an offence. For this offence, the punishment provided in the Act is imprisonment upto two years or with a fine which may extend to twice the amount of the cheque or with both provided the following conditions are fulfilled: a) Cheque should have been dishonoured due to insufficiency of funds. The courts have held the following amounting to dishounour for insufficiency of funds: i. Stop-payment instructions to the payee bank. ii. Request to the payee not to present the cheque till further intimation. iii. Cheque received back from the payee bank with the remarks ‘Account Closed’. However, remarks ‘Refer to Drawer’ will not constitute dishonour for insufficiency of funds because a cheque may be referred to a drawer for reasons other than insufficiency of funds. b) c) d) The cheque should be presented within its validity. The cheque was issued for the discharge of legally enforceable debt or other liability (not for charity or marriage or birthday presents). The payee is to give notice demanding payment, within thirty days, from the drawer, on receipt of information of dishonour of cheque from the bank.

Check Your Progress
6 What is a “Truncated
Cheque”? 7. What is the effect and type of crossing? 8. What are the rules for bouncing of cheque?

Self-Learning Material 85

e) Notes f)

The drawer is liable only if he fails to make payment within fifteen days of such notice period. A written complaint to a Metropolitan Magistrate or a Judicial Magistrate of the first class is made within one month of cause of action arising.

4.8.6 Offences by Companies
For the offence of dishonour of cheque for insufficiency of funds in the account (Section 138) by a company following rules are note-worthy. a) b) The word Company includes a partnership firm, or any other body corporate, or body of individuals, and ‘director’, in relation to a firm means partner in a firm.6 If the offence under section 138 of the Act is committed by a company, then every person, who at the time when the offence was committed, was in charge of, and was responsible to, the company for conducting its business, shall be deemed to be guilty as also the company itself of the offence.7 The persons who are guilty under Section 138 being in charge of the affairs of the company can escape the liability if they can prove that: i. d) e) The offence was committed without their knowledge, or ii. They had exercised due diligence to prevent the commission of such offence.8 The words ‘in charge of the company’ must mean ‘In overall conduct of the day-to-day business of the company or the firm’.9 In order to proceed against any director, manager, secretary or other officer of the company, it has got to be proved that the offence has been committed by the company, and such offence has been committed with the consent, or connivance of or is attributable to the neglect on the part of any such director, manager, secretary or other officer of the company.10 The company, and the person in charge of or officer of the company may be prosecuted independently, or jointly.11

c)

f)

Note: The remedy available to the payee (or any other holder) of a cheque dishonoured for the
reasons mentioned in Section 138 of the Act is an additional remedy. Since the amount of the cheque dishonoured basically constitutes a debt, the holder of the cheque can sue the drawer under the civil law to claim his debt.

4.9

Negotiation

4.9.1 Definition
According to the Act, “When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.12 Thus negotiation implies a transfer of negotiable instrument so as to constitute the transferee a holder thereof, who should be entitled in his own name to sue on the instrument and recover the amount due thereon. Example: Handing over a bearer instrument to a servant for safe keeping is not negotiation.

4.10 Parties to Negotiable Instruments
The parties to negotiable instrument in case of promissory note, bill of exchange and cheque are stated below: a)
86 Self-Learning Material

Drawer: The maker of a negotiable instrument is called ‘drawer’.

b) c)

Drawee: He is the person on whom the instrument is drawn. Acceptor: He is a the person who accepts the instrument of bill of exchange. Generally the drawee becomes the acceptor after accepting the instrument (but sometimes a stranger may accept on behalf of the drawee). Payee: Payee is a person to whom the sum stated in the instrument is payable. The drawer or any other person may also be the payee. In the latter case, he is called Payee for Honour. Endorser: When the holder endorses the instrument to any one else, he becomes the endorser. Endorsee: The person to whom the instrument is endorsed is known as endorsee. Endorsee in Case of Need: The person to whom resort may be had in case of need (In English law, he is called referee in case of need), i.e. when the bill is dishonoured either by non-acceptance or by non-payment. Acceptor for Honour: Further, any person may voluntarily become a party to a bill as an acceptor. A person who, on refusal by the original drawee to accept the bill or to furnish better security when demanded by the notary, accepts the bill in order to safeguard the honour of the drawer or any endorser is called acceptor for honour. Holder: According to the Act, “The ‘holder’ of a negotiable instrument means any person entitled to the possession of the instrument in his own name and to receive or recover the amount due thereon from the parties thereto. 13 Where the promissory note, bill of exchange or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction. Holder in Due Course: According to the Act, “‘Holder in due course’ means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque, if payable to the bearer, or the payee or endorsee thereof, if payable to the order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.14 For example: A bank note sent by post was taken and carried away by a robber. The next day the same note was received by X. He received it for full and valuable consideration and in the usual course of his business and without any notice of the bank note being taken out of the mail. The court held him to be a holder in due course. Notes

d) e) f) g)

h)

i)

j)

4.10.1 Essentials to Become a Holder in Due Course
The essential requirements for attaining the status of a holder in due course are elaborated below: a) b) c) d) e) He must be a holder. The holder must have paid a valuable consideration. He must have become the holder of the negotiable instrument before its maturity. He must take the negotiable instrument complete and regular on the face of it. The holder must have obtained the instrument without a sufficient cause to believe that any defect existed in the title of the person from whom he has derived his title (Good faith).

4.10.2 Privileges of a Holder in Due Course
A holder in due course is given certain other privileges under the Act, which are not available to a holder. a) A person, who signed and delivered to another a stamped but otherwise inchoate (incomplete) instrument, is stopped from asserting, as against a holder in due course, that the instrument has not been filled in accordance with the authority given by him provided the amount filled is covered by the stamp affixed.15

Check Your Progress
9. Who is holder in due course?

10. What is endorsement?

Self-Learning Material 87

11. b. the parties to the instrument cannot escape liability on the ground that the delivery of the instrument was conditional or for a special purpose only. otherwise than such a maker. Any person acquiring it takes it as free of all defects. The maker signing it otherwise as such maker. 4. it is purged of all defects.3 Types of Endorsement a) Blank or General Endorsement: An endorsement is said to be blank or general when the endorser merely signs on the back of the instrument without specifying any person to whom the payment is to be made.18 Not only that the title of the holder in due course is not subject to the defect in previous holder’s title but once the instrument passes through the hands of a holder in due course. and is called the ‘endorser’. on the back or face thereof or on a slip of paper annexed thereto.11 Endorsement 4. The holder in due course shall. have to prove that the instrument was endorsed by the same hand as the drawer’s signature. drawer.16 Where a bill of exchange is drawn by a fictitious person and is payable to his order. 4.”23 The person who signs the instrument with the intention of transferring its ownership to another is called the ‘endorser’ and the person in whose favour the instrument is transferred is called the ‘endorsee’ and the procedure is called ‘endorsement’. Every sole maker. the acceptor cannot be relieved from his liability to the holder in due course. be permitted to deny the validity of the instrument as originally made or drawn. for the purpose of negotiation. unless he was himself a party to the fraud. payee or endorsee or all of several joint makers. drawers.11. the acceptor. Estoppel against denying capacity of payee to endorse.22 d) e) f) 4. the maker or drawer.17 Where as instrument is negotiated to a holder in due course.19 No maker of a promissory note and no drawer of a bill of exchange or cheque shall in a suit thereon by a holder in due course. he is said to endorse the same.e. 88 Self-Learning Material . and all the intermediate endorsers continue to remain liable to the holder in due course until the instrument is duly satisfied.11.21 Defence that instrument is obtained by unlawful means or for unlawful consideration is not valid against a holder in due course.1 Definition “When the maker or holder of a negotiable instrument signs the same. however. i.b) Notes c) Every prior party to a negotiable instrument. or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument.2 Who may Endorse? The following persons may endorse a negotiable instrument: a) b) c) d) e) The payee of the instrument. The holder in due course of the instrument.20 a. The holder of instrument. payees or endorsees of the instrument.

the holder of a promissory note for Rs. payment in money. draweee must be named or described with reasonable certainity. A partial endorsement does not operate as a negotiation of the instrument. for a certain sum. f) stamping. Such endorsement is called ‘Endorsement Sans Recourse’ or ‘without recourse to me’. 2. e) order of endorsement. the endorsement is termed as ‘Faculative Endorsement’. But where a instrument has been partly paid. Self-Learning Material 89 . signed by the maker / drawer. 3. “pay B Rs. restricts the right of further negotiation of the instrument. d) time of transfer.25 It differs from a restrictive endorsement which restricts the negotiability of the instrument but does not in any way limit or negate the liability of the endorser.g. Sans Frais: These words. Unconditional. 1881. it is called qualified endorsement. Conditional or Qualified Endorsement: Where an endorsement limits or negates the liability of the endorser. and h) proof of interest.b) Full or special Endorsement: When an endorser signs his name and also specifies a person to whom or to whose order the amount of the instrument is to be said the endorsement is said to be full or special. c) time of acceptance. when added at the end of the endorsement. it can be negotiated for the balance. 6. San Recourse Endorsement: An endorsement of a negotiable instrument may be express words in the endorsement exclude his own liability thereon.24 Restrictive Endorsement: An endorsement is said to be restrictive when endorser. a certain person or to the bearer of the instrument. A negotiable instrument means a promissory note. For example. by express words. indicate that no expenses should be incurred on account of the bill. or to the order of. and the person so specified is called the “endorsee” of the instrument. a promise or order to pay. Presumptions The presumptions laid down by the Act in favour of negotiable instruments are as to a) consideration.000 writes on it. g) holder in due course. Partial Endorsement: Where only part of the amount of the instrument is transferred. 2. 1. Promissory Note A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking signed by the maker. it is called partial endorsement. 5. payable at a time certain to arrive and 8. Notes c) d) e) f) g) h) Summary The law relating to negotiable instruments is contained in the Negotiable Instruments Act. 4. Faculative Endorsement: Where such words are added to an endorsement whereby the endorser waives his right to receive notice of dishonour. b) date.000” and endorses the note. where X endorses a cheque as: ‘Pay Y or order Sans Recourse’ or ‘Pay Y order without recourse to me’. in writing. ‘X’ will not be liable on the instrument if it is dishonoured. to pay a certain sum of money only to. bill of exchange or cheque payable to order or to bearer. e. Characteristics of a Negotiable Instrument An instrument in order to be treated as a negotiable instrument must be 1. 7. The endorsement is invalid for the purpose of negotiation. provided the fact of partpayment is noted on the instrument (Section 56).

1. 4.Bill of Exchange Notes A bill of exchange is an instrument in writing containing an unconditional order. Crossing of Cheque When a cheque bears across its face two parallel transverse lines. Holder The holder of a negotiable instrument means any person entitled to the possession of the instrument in his own name and to receive or recover the amount due thereon from the parties thereto. The payment of a crossed cheque can be obtained only through another banker. or to the order of. Drawer is allowed to make payment within fifteen days after receiving the notice. or the payee or endorse thereof. Cheque A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. Holder in due Course Holder in due course means any person who for consideration became the possessor of a promissory note. He gets a better title than that of the transfer. The crossing may be general. Cheque should have been dishonoured due to insufficiency of funds. If the cheque issued by a company is dishonoured. These conditions are. 3. Privileges of a holder in due course He enjoys the following privileges 1. bill of exchange or cheque. 5. so as to constitute that person the holder thereof. special or restrictive. if payable to the bearer. if payable to the order. signed by the maker. bill of exchange or cheque is transferred to any person. cheque should be presented within its validity. and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. before the amount mentioned in it became payable. Bouncing of Cheque A drawer of a dishonoured cheque is punishable to imprisonment upto two years or with a fine upto twice the amount of the cheque. 2. then the company and the person in charge of or officer of the company may be prosecuted independently or jointly. All prior parties are 90 Self-Learning Material . directing a certain person to pay a certain sum of money only to. Privileges in case of inchoate stamped instruments upto the value of the stamps fixed. the cheque is said to be crossed. A written complaint to a Metropolitan Magistrate or a Judicial Magistrate of the first class is made within one month of cause of action arising. the instrument is said to be negotiated. Cheque was issued for the discharge of legally enforceable debt or other liability. Payee is to give notice demanding payment within thirty days of dishonour. 2. Negotiation When a promissory note. and 6. 3. a certain person or to the bearer of the instrument. if cerain conditions are fulfilled.

4. A minor signing a promissory note for necessaries is personally liable. 4. 2. 7. 1.000. 8. 3. 1. A makes a promissory note for the amount payable to B. 5. 6. 5. 10. Partial . 4. A signed as maker. Can B sue upon it? A cheque payable to bearer is crossed generally and is marked ‘not negotiable’. Restrictive. Conditional or qualified. Mr. . San Recourse. Acceptor of a fictitious bill is liable to a holder in due course provided the latter can show that the first endorsement on the bill and the signature of the supposed drawer are in the same handwriting. 6. A dies and the promissory note was found by his legal heirs. 1. The cheque Self-Learning Material 91 3. for the purpose of negotiation. his partner. 10. All negotiable instruments are entitled to three days of grace. and delivered to B. Practical Problems 1. he is said to endorse the same. Notes Endorsement When the maker or holder of a negotiable instrument signs the same. or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument. Blank or general. 5. afterwards among his papers. every holder of a negotiable instrument is presumed by law to be holder in due course. Faculative. 3. The payment of a specially crossed cheque can be obtained only by the particular banker whose name appears between the crossing. B fraudulently filled it up as a note for Rs.000 from A? A owes Rs. it can be a promissory note. Review Questions True or False 1. Privilege when an instrument delivered conditionally is negotiated. and 8. 6. Every prior party to a negotiable instrument is duly liable thereon to a holder in due course until the instrument is satisfied. A cheque is a species of bill of exchange. 4. Sans Frais.liable to him. The liability of the maker of a note is primary and unconditional. 7. Generally.000 to B. A bill of exchange can be drawn upon bank. a blank stamped paper and gave it to B and authorized him to fill it as a note for Rs.000 in the event of Y’s retirement from the partnership firm. 1. Estopped against denying capacity of payee to endorse. X promises by way of promissory note to pay Y. Full or special. Types of Endorsement 1. who in good faith advanced Rs. 9. 2. If an instrument contains a promise to pay something in addition to money. 7. Is this a valid promissory note. 2.000 payable to C. 500. Estopped against denying original validity of instrument. on the back or face thereof or on a slip of paper annexed thereto. ortherwise than such a maker. and is called the endorser. Noting and protesting are compulsory in the case of all bills. a sum of Rs. Can C recover Rs.

3. True 7. B cannot sue upon it because the instrument was not properly negotiated. who takes it in good faith and for value. False 92 Self-Learning Material . 4. How does it differ from bill of exchange? What is a bill of exchange? How does it differ from a cheque? Define a cheque. Ram deposits the cheque in his bank account and the banker collects the same. Explain the terms ‘holder’ and ‘holder in due course’. No.Notes 5. No. 5. True 5. 2. 4. True 9. 6. a stranger to the bill cannot accept it unless it is done for the honour of the party liable on the bill after the bill has been noted or protested for non-acceptance. 10. 14. Discuss the law relating to bouncing of cheques for insufficiency of funds in the account. What is a Negotiable Instrument? Explain its essential characteristics. Yes. What are the presumptions as to negotiable instruments? Define a Promissory Note. 1. Arun writes an acceptance on it. False 2. 11. is lost and comes into possession of Ram. 3. ‘A holder in due course gets a title free from equities’. 2. False 8. Do you agree with this statement? Answers to “True or False” 1. True 4. 1. 12.000 from A provided the stamp covers the value of Rs. What do you mean by the term ‘Endorsement’? What are the types of endorsement? What are the types of negotiable instruments? What is a Promissory Note? What are its essential elements? Why are bills of exchange. Delivery is essential to complete negotiation. C. Further retirement of Y from the partnership firm is not a certain event. Is it a valid acceptance? Practical Problems 1. The promise of X is conditional. 15. Test Questions 1. True 10. being a holder in due course can recover Rs. and hence it cannot be constituted as a valid promissory note. True 3. promissory notes and cheques called ‘negotiable instruments’? Dishonour of a cheque for want of funds is an offence under the Negotiable Instrument Act. 13. 7. 5. Explain briefly what is meant by negotiation. In what ways a cheque is different from a promissory note? What is meant by the term “crossing a cheque”? Explain the different types of crossings. 8. the true owner can compel Ram to refund money because the cheque bears ‘not negotiable’ crossing as a request of which the transferee cannot get a better title than that of the transferor. 9. Explain the statement and discuss the various privileges of a holder in due course. The delivery effected by legal heirs of a deceased is not considered as a good delivery under the Negotiable Instruments Act. Can Ram be compelled to return the money to the true owner of the cheque? Amit draws a bill of exchange on Shashi.000. False 6.

1b 7) 4.1 Notes References 1 Section 13 (1). 1) 4. Section 15.7. Rather it enumerates the class of instruments considered as negotiable by the statute.1 5) 4. Section 120.7. Section 141(2). D. Proviso to section 141(1). Section 16.f.2003). indicating respective paragraphs for reference. Supreme Court decision in Girdhari Lal v.6. Section 53. 2002 (55 of 2002) (w. Section 121. Section 20. Section 36.Answers to “Check Your Progress” Following are the answers to “Check Your Progress”.4 3) 4. Sheoratan Agarwal v. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Self-Learning Material 93 .5 9) 4.e. AIR 1984 n 4 SCC 352. State of Madhya Pradesh. Section 9. It may be noted that the Act does not give the meaning of the term ‘negotiable instrument’. Section 42.8.10. Section 6 as amended by the Negotiable Instrument (Amendment and Miscellaneous Provisions) Act.1 4) 4.1 10) 4.4 8) 4. Section 141(1).2 6) 4.11. 6.8. Mehta 1971 SC 2162.8. Section 4.2. 6 7 8 9 Explanation to section 141. Section 52. Sections 46 and 47. Section 14. 2 3 4 5 Sections 118 and 119. Section 58. Act. Section 31 (2) of the Reserve Bank of India.2 2) 4. Section 8.N.

Notes 94 Self-Learning Material .

7 5.1 5.3 5.5 5.9 Introduction Objects of the Act Meaning of Some Important and Relevant Terms Consumer Disputes Redressal Agencies Manner of Making a Complaint Procedure on Admission of Complaint Findings Miscellaneous Some Decisions of National Commission / Supreme Court Self-Learning Material 95 .2 5. Kennedy STRUCTURE 5.6 5.” —Florynce—Aphra Behn R.8 5.” “Money speaks sense in a language all nations understand. organise.4 5.Section Consumer Protection Act 1986 Notes 5 “Don’t agonise.

iii. Consumer issues started gaining importance. 5.3. The right to be heard: And to be assured that consumer’s interest will receive due consideration at appropriate forums.1 Introduction Notes In India.1 Consumer According to the Act.2 Objects of the Act The objects of the Act are as follows: a) b) Better Protection of Interests of Consumers: The Act seeks to provide consumer councils and authorities for settlement of consumer disputes. state and district levels. iv. v. The Act extends to the whole of India except the state of Jammu and Kashmir. Quasi-judicial Machinery for Speedy Redressal of Consumer Disputes: The Act seeks to provide speedy and simple redressal to consumer disputes. The right to be assured: Wherever possible. with industrialisation and economic development. The right to seek redressal: Against unfair trade practices or restrictive trade practices or unscrupulous exploitation of consumers. the following consumer disputes redressal agencies are envisaged: i. nongovernment organisations. 1872 and the Sale of Goods Act. Right to consumer education: By publishing material and magazines for the benefit of consumers. 1930 provided remedies but they were time consuming and expensive.The law relating to consumer protection is contained in the Consumer Protection Act. State Commissions: at State level. c) Consumer Protection Councils: The above said objects are sought to be promoted and protected by the consumer protection councils established at the central. The interests of consumers were highlighted by media. The government of India also realised that consumers need to be protected by law. social activists and even business concerns. ii. quantity. ii. iii. potency. The United Nations organised a session on the need for the protection of consumers. such as magazine like ‘Upbhokta Jagran’. vi. the population of consumers and the volume of consumption of goods and services increased.3 Meaning of Some Important and Relevant Terms 5. District Forums: at district level. Protection of Rights of Consumers: The Act seeks to promote and protect the rights of consumers such as: i. For this purpose. “Consumer means any person who: a) 96 Self-Learning Material Buys any goods for consideration which has been paid or promised or partly paid and . access to goods and services at competitive prices. National Commission: at Central or National level. The right to be protected: Against marketing of goods and services which are hazardous to life and property. The Contract Act. The right to be informed: About the quality. purity. standard and price of goods and services so as to protect the consumers against unfair trade practices. 1986 (in short the Act).5. d) 5.

grass and things attached to or forming part of land which are agreed to be severed before sale or under the contract of sale”.S. when such use is made with the approval of such person’. “ ‘Goods’ means every kind of moveable property other than actionable claims and money. or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid or partly promised or under any system of deferred payment when such use is made with the approval of such person. as the purchase was neither for resale nor for commercial purpose.partly promised.2 Goods As per the Act. when such services are availed of with the approval of the first mentioned person but does not include a person who avails of such services for any commercial purpose”. and therefore the ‘Trust’ was not a consumer. Amar is a consumer due to the first part of (i) ‘buys any goods for consideration’.. but does not include a person who obtains such goods for resale or for any commercial purpose. Amar bought a pressure cooker for use by his family. 1930. 512).. Who is a consumer? What is a service? What is known as Unfair Trade Practice? Self-Learning Material 97 . were ordinarily required to pay for the same and only 10% of them being provided free service. Bindu is also a consumer as the provision provides and includes any user of such goods other than the person who buys such goods for consideration.2 According to the Sale of Goods Act. “Goods mean goods as defined in the Sale of Goods Act. Dev is an advocate and uses the laptop for his business.1 To put briefly..((2000) I. . or under system of deferred payment and includes any beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised or partly paid and partly promised. or b) Hires or avails of any services for a consideration which has been paid or promised or partly paid or partly promised. Notes “Commercial purpose does not include use by a person of goods bought and used by him and services availed by him exclusively for the purposes of earning his livelihood by means of selfemployment”.3.Kalpavraksha Charitable Trust vs Toshniwal Brothers (Bombay) (P) Ltd. while his wife Bindu was using it. Answers to Examples 1. Case A charitable trust was running a diagnostic centre. However.C. Is Amar a consumer? Is Bindu a consumer? Chander bought a laptop and gifted it to his son Dev. . 2. Dev is not a consumer as he is using it for commercial purpose. In the first use it self. where patients taking advantage of X-ray. the pressure cooker burst. It was held that the machines purchased by the ‘Trust’ for use in the diagnostic centre were meant for ‘commercial purpose’.. 2. hurting her. or under any system of deferred payment. . growing crops. and includes stocks and shares. Esamples 1..C. Are Chander and Dev Consumers? 2. Check Your Progress 5.3 1. CT scan etc. Chander was a consumer when he bought the laptop. consumer is a person who buys any goods or hires or avails of any services for a consideration. 3.

processing. amusement or the purveying of news or other information. . “ ‘Service’ means service of any description which is available to potential users and includes.6 Restrictive Trade Practice According to the Act.3.5 Complaint ‘Complaint’ means any allegation in writing made by a complainant with a view to obtaining any relief under the Act.”5 Case Where Insurance company pays and settles the claim of the insured. transport. entertainment. when loss is caused to such goods because of negligence of transport company. supply of electrical or other energy.Vimal Chandra Grover vs Bank of India ((2002). cas: 499 (SC)) 5.3 Services Notes According to the Act. .5. hiring or availing of other goods or services.4 Complainant According to the Act. “Complainant meansa) b) c) d) a consumer. the insurance company can file a claim against the transport company. vs Green Transport Co.3.”4 Case A customer of a bank is a’consumer’ entitled to seek compensation under the act. 1956 or under any other law for the time being in force. any voluntary consumer association registered under the companies act. 5. services as condition precedent to buying. as the case may be. one or more consumers. Any trade practice which requires a consumer to buy.3.”6 98 Self-Learning Material . board or lodging or both. his legal heir or representative. housing construction. it can file a complaint for the loss caused to the insured goods by negligence of goods/service providers. the central government or any state government. hire or avail of any goods or. financing. For example. 110 comp. 5. and the bank is liable for deficiency of service.3. ((1991). in case of a death of a consumer. insurance. but does not include the rendering of any service free of charge or under a contract of personal service. CPJ(I) Delhi). “Restrictive trade practice means a trade practice which tends to bring about manipulation of price or its conditions of delivery or to affect flow of supplies in the market relating to goods or services in such a manner as to impose on the consumers unjustified costs or restrictions and shall include: a) b) Delay beyond the period agreed to by a trader in supply of such goods or in providing the services which has led or is likely to lead to rise in the prices.New India Assurance Company Ltd. who or which makes a complaint. where there are numerous consumers having the same interest. the provision of facilities in connection with banking. but not limited to.

adopts any unfair method or unfair or deceptive practices. use or supply of any goods or for the provision of any service.000 only. This is not a restrictive trade practice.000 and Double Bed at Rs.10 Person The expression ‘person’ for the purposes of the Act shall include: a) b) A firm whether registered or not A hindu undivided family Self-Learning Material 99 .3. like misleading advertisements and making of false statements. permitting publication of any advertisement for the sale at a bargain price that are not intended to be offered for sale at bargain price. Ajit can make a complaint against Bimal for supplying a defective computer. quantity. 20. purity or standard which is required to be maintained under any law or contract. 15. A made a complaint against Railways for deficiency in service. Here the choice is open to the customer to buy the products single or composte.3. Example Akash sold a second hand computer to Bharat representing it to be a new one.7 Unfair Trade Practice Unfair trade practice means a trade practice. 1500 was awarded to A. imperfection. which. South Eastern Railway vs Anand Prasad Sinha ((1991). CPJ 10 (12) NC).8 Defect A ‘defect’ is defined to mean any fault. imperfection or shortcoming in the quality.Case A furniture dealer offers to sell a Sofa at Rs. shortcoming or inadequacy in the quality. or not conforming to prescribed standards or hoarding of goods or manufacturing of spurious goods. potency. 5.000. 5.3. nature and manner of performance which is required to be maintained under any law or contract. 30. The compartmet in which he travelled was in ban shape-fans and shutters of windows were not working. He has an offer that whoever will buy Sofa and Bed both he will charge Rs.3. 5. for the purposes of promoting the sale. rexin of the berth was badly torn and there were rusty nails which caused some injury to his wife who was also travelling along with him.9 Deficiency It is defined to mean any fault.8 Example Ajit bought a computer from Bimal. It was not working properly since day one.9 Case A boarded a train. Here Bharat can make a complaint against Akash for adopting an unfair trade practice. or permitting the offering of gifts and prizes with the intention of not providing them or with holding gifts/prizes after declaration of result of the scheme. It was held that the faults or short-coming pointed out in the plaint constituted ‘deficieny in service’ and teh compensation of Rs. General Manager. Notes 5.7 The Act also lists out some of the practices as unfair trade practice.

Territorial Composition One or more district. 3. c) Unsound mind. President & minimum seven members . 5. President & minimum two members . Serving or retired judge of High Court. a) Convicted & sentenced to imprisonment for an offence of moral turpitude. law. Qualifications of members Age .11 Consumer Dispute It means a dispute where the person against whom a complaint has been made. Disqualifications of members Same as for District Forum. Same as for District Forum. State Commission One or more state.C.Secretary Law. 4. 100 Self-Learning Material . Same as for District Forum.one woman. Chairman . Secretary Consumers Affairs of State. Bachelors degree 10 yrs experience in economics. e) Has financial or other interest.3. 5. President & two members . Qualifications for President Serving or retired or qualified to be a District Judge. Serving or retired judge of Supreme Court.Secy.one woman. National Commission All India. Deptt of Consumer Affairs.35 yrs. b) Undischarged insolvent. Point of District Forum Distinction 1. S. 2. Members . 6. Deptt of legal affairs Secy. Selection Committee Same as for District Forum. d) Removed or dismissed from service. (Consultation with Chief Justice of the High Court necessary).4 Consumer Disputes Redressal Agencies S. ecommerce.c) Notes d) A co-operative society Every other association of persons whether registered under the Societies Registration Act or not.President of State Commission. Judge Members . (Consultation with Chief Justice of India necessary). accountancy etc. Same as for District Forum. Chairman. f) Others as may be prescribed.10 5. No. denies or disputes the allegations contained in the complaint.one woman.

50000. Imprisonment Not less than one month but may extend to 3 years. 10. Are defects and deficiencies the same? Is a co-operative society treated on the basis of separate individual under law? 6.000. Yes Notes 5 years or age of 65 5 years or age of whichever is earlier. 10. 2000. 2000. delivered or agreed to be sold or delivered or any service provided or agreed to be provided.not less than Rs. forwarded to the appropriate court. State Commission within 30 days of order. 10. More than one crore. Dismiss the complaint and costs upto Rs. forwarded to the appropriate court. but may extend to Rs.000. Between 20 lakhs and one crore. Term District Forum State Commission National Commission 5 years or age of 70 whichever is earlier. whichever is less to be deposited by the appellant. 5. whichever is less to be deposited by the appellant. Imprisonment . 2000. Fine . Upto 2 years from the date on which the cause of action arose.000. 12. Penalties Check Your Progress 4. Frivolous or Vexatious Complaints Dismiss the complaint and costs upto Rs. Complaint shall be filed along with fees as prescribed. As if it is a court order. 13. Fine . No. 50% of the amount payable or Rs. Enforcement of the order As if it is a court order. Admissibility of the complaint shall Self-Learning Material 101 . Who bears the laboratory expenses incurred? 7. As if it is a court order. Fine .000. National Commission.000. forwarded to the appropriate court. How diligently the complaint shall be handled? 5. Point of Distinction 7. Fees prescribed is very nominal. 50% of the amount payable or Rs. 11. but may extend to Rs. 25000. 10. Upto 2 years from the date on which the cause of action arose. Imprisonment .not less than Rs.S.000. Eligibility for Yes reappointment 9. 10. 67 whichever is earlier. Yes 8. -------Upto 2 years from the date on which the cause of action arose. but may extend to Rs. State commission.5 Manner of Making a Complaint A complaint can be made by any complainant in relation to any goods sold. 10. 14.not less than Rs.Not less than one month but may extend to 3 years. 15. Dismiss the complaint and costs upto Rs. order.Not less than one month but may extend to 3 years. Appeal National commission Supreme Court within 30 days of within 30 days of order. Monetary Jurisdiction Administratove control Limitation Upto 20 lakhs. 10.

To discontinue the unfair trade practice or the restrictive trade practice . If the opposite party does not file any reply the complaint shall be decided exparte. Not to offer hazardous goods for sale. To return to the complainant the price .as may be determined by it.7 a) b) c) d) Findings To remove the defect .to neutralise the effect of misleading advertisement at The following orders can be made by the consumer dispute redressal agency: e) f) g) h) i) j) k) 102 Self-Learning Material . To pay such sum . the charges paid by the complainant. To withdraw the hazardous goods . The fees for the laboratory test shall be payable by the complainant. if it is of the opinion that loss or injury has been suffered by a large number of consumers who are not identifiable conveniently. However before rejection. 5. To issue corrective advertisement . the matter will be decided on the basis of evidence adduced by the complainant and the opposite party. To cease manufacture of hazardous goods .6 Procedure on Admission of Complaint If a complaint relates to any goods. then a copy of the complaint is referred to the opposite party directing him to give his version within a period of thirty days.Notes ordinarily be decided within twenty one days of the receipt of complaint.If the complaint relates to any services or in respect of goods where laboratory report is not required. To replace the goods . A reasonable opportunity of being heard shall be given regarding the objections made in relation to laboratory test.and to desist from offering services which are hazardous in nature. as the case may be.with new goods of similar description which shall be free from any defect. an opportunity to be given to the complainant for hearing. A complaint may be proceeded with or rejected.from being offered for sale. If any of the parties disputes the correctness of the laboratory test report. This can be extended by fifteen days. (Initial 30 days and can be extended by 15 days) then the complaint shall be proceeded further. a sample of the goods shall be sent to the laboratory for a report within forty five days.pointed out by the appropriate laboratory from the goods in question. To pay compensation .or. Every complaint shall be heard expeditiously and endeavour shall be made to decide the complaint within three months when it does not require analysis or testing by any laboratory and within five months if it requires analysis or testing of commodities.11 5. To remove the defects in goods or deficiencies in services . It may also provide that the amount so obtained shall be credited in favour of such person and utilised in such manner as may be prescribed. However. However the consumer disputes redressal agency shall have the power to grant punitive damages in such circumstances as it deems fit.or not to repeat them. a copy of the admitted complaint should be given to the opposite party within 21 days for him to give his version within thirty days.in question.to the consumer for any loss or injury suffered due to the negligence of the opposite party. denies or disputes the allegations made in complaint. If the defect in goods needs analysis or testing by a laboratory. If the opposite party. If the opposite party denies or disputes the complaint or fails or omits to take any action within the time given. The report of the laboratory test is given to the opposite party. the minimum amount of sum so payable shall not be less than five percent of the value of such defective gods sold or services provided as the case may be to such consumers. the objections to such report shall be made in writing.

not provided seat in aircraft and consequently lost job.to parties.24 Complainant having confirmed ticket. The National Commission gave the reason that the opposite party should not be deprived of its natural and legal right to put forward its defence.the cost of the opposite party responsible for issuing such misleading advertisement.19 Where the opposite party failed to file written objections within the time allowed. It was held that the complainant (wife of the deceased) is entitled to claim the insurance amount from the employer. Employer failed to deduct the premium from the salary of the employee.8 Miscellaneous The act also lays down provisions regarding the following: a) b) Protection of action taken in good faith.15 5. which included loss of interest.23 When an intra-muscular injection administered intra-venously.9 a) b) Some decisions of National Commission/Supreme Court Doctors are within the purview of the Act.12 Notes 5.C. The Supreme Court ruled that the shortcoming in the service by bank did not arise due to failure on the part of bank in performing its duty or discharging its obligations as required by law.13 Power to make rules by the central government or by the state governments. Gold chain snatched by miscreants while travelling in reserved compartment. The Supreme Court did not agree with the contention that the expenses of running the said hospitals are met by appropriation from the Consolidated Fund which is raised from the taxes paid by the tax payers.20 Provident fund subscribers are also consumers. It was held that there was deficiency of service on the part of the airlines. it could not be denied the privilege of oral submissions before the Forums.14 and laying of such rules before parliament/state legislature.17 Under the Act. Negligence was also proved.16 Government hospitals/health centres/dispensaries where services are rendered free of charge to all the patients.21 Wearing of jewellery on body of person included in luggage. the provisions of the Act do not apply. The customers were prevented from entering the bank for 54 days. The striking employees created barricades by forming a human wall before the bank.I. The customers had suffered losses.18 Employees of Bank of Baroda. it was held that there was negligence and deficiency in medical care. When forceps delivery was done in haste which caused haemorrhage and no attempt was made to stop profuse bleeding. caused combolism of heart as the blood circulation to heart stopped and the patient died within minutes. is like a builder or a contractor. l) To provide for adequate costs . in opposition to a scheme of transfer of its employees. then it would be an unfair trade practice. As a result policy lapsed. The argument that he did not pay for the services was negated as how a deadman can pay for the services. It was held that there was deficiency in service on the part of Railways.25 Nursing home had no proper arrangements to meet emergency and not properly equipped. if the service is defective.27 Self-Learning Material 103 c) d) e) f) g) h) i) j) k) . Calcutta. resorted to a strike.22 A Statutory Authority developing land or constructing a house.26 Deceased was insured under the Salary Savings Scheme from L. damages are payable only if there is ‘negligence’ of the opposite party. it is deficient in service. being in his charge during travel in Railway.

29 Summary The law relating to consumer protection is contained in the Consumer Protection Act. 104 Self-Learning Material .l) Notes m) When there is a delay in delivery of motor vehicle and there is unauthorised escalation in price. g) not to offer hazardous goods for sale. If the defect in goods needs analysis or testing by a laboratory. The contention of the Housing Board that the scheme was given up due to unavoidable reasons and the option given to the complainant to opt for another scheme is not valid. e) to remove deficiencies in services. Findings The consumer dispute redressal agencies can arrive at any of these findings a) to remove defects. Consumer Disputes Redressal Agencies There are three such agencies a) District Forum b) State Commission and c) National Commission. i) to cease manufacture of hazardous goods. i) deficiency. c) to provide for consumer protection councils and d) to provide quasi-judicial machinery for speedy redressal of consumer disputes. District Forum is for one or more district and a consumer can file his claim if the limit of the claim is upto Rs. Its objects are a) better protection of interests of consumers. g) unfair trade practices h) defect. and l) to provide for adequate costs to parties. h) to withdraw hazardous goods. A State Commission is for one or more states. j) to pay such sum as may be determined by such agency k) to issue corrective advertisement. f) to discontinue the unfair trade practice or the restrictive trade practice. a sample of the goods is sent to the laboratory for a report within 45 days. How a Complaint is Made and Dealt With? A complainant can make a complaint before the appropriate consumer dispute redressal agency in relation to any defect in goods or deficiency in service. Appeal from the decisions of the National Commission can be made in the Supreme Court of India. 20 lakhs but below one crore. National Commission is one for the whole of India. Appeal from the decision of the District Forum is to be filed within 30 days of its order to the State Commission. The complaint relating to any goods or services is given to the opposite party within 21 days to allow him to give his version in 30 days. 1 crore. b) to replace goods. consumer is not liable to pay. d) complainant.28 Complainant applied for allotment of a flat under a scheme of Housing Board and made full payment. 20 lakhs. c) to return the price. It was held that there was a deficiency in service on the part of the Housing Board. i) persons and k) consumer dispute. The report is given to the opposite party. e) complaint f) restrictive trade practices. Appeal from the decision of the State Commission can be filed within 30 days of its order to the National Commission. 1986. Possession of the flat was not given as per the scheme. Complaint shall be decided within 3 months if no laboratory test is required and within 5 months if the laboratory test is required. b) protection of rights of consumers. The Act also defines terms like a) consumer who buys goods and services for a price b) goods means every kind of moveable property c) services. A consumer can file his claim if the claim is above Rs. d) to pay compensation. A Consumer can file his claim if it is more than Rs.

A woman is necessary as a member in all the consumer disputes redressal agencies. 5. 10. Ghaziabad. Mr. A claim of Rs. A tutor teaches a student for one year and the student fails. A patient receiving free medical treatment in a government hospital is a consumer. The student is a consumer under the Consumer Protection Act. 8. 5. Meerut against M/s Ashok Leyland for defects in the trailor. This trailor did not give satisfactory service and started giving trouble on account of manufacturing defects.75 lakhs within the stipulated period of 20 days. 3. 1952 could not get final provident fund dues amounting to Rs. Provisions Act. He filed a complaint before District Forum. Consumer Protection Act does not provide any remedy for frivolous and vexatious complaints. A member of the District Forum under the Consumer Protection Act. Does this amount to an unfair trade practice? A boy aged 10 years was admitted in a private nursing home with high fever.75 lakhs. Complainant is required to pay the cost of testing of goods in an appropriate laboratory. 7. 50 lakhs under Consumer Protection Act is to be filed before the National Commission. can hold office upto the age of 65 years. No appeal can be filed from the orders of the National Commission. On account of negligence and deficiency on the part of nursing home. Self-Learning Material 105 . He has two trailors of Ashok Leyland make. Chaluram is a transport contractor and has a proprietory firm in Meerut by the name of M/s Ram and Sons. After waiting for twenty months he filed a complaint in the concerned District Forum against the relevant Regional Provident Fund Commissioner. Chaluram succeed? Sampatilal became a member of a Cooperative Group Housing Society. Advise him as to which consumer dispute redressal agency he can file his complaint and whether he will succeed or not. The Managing Committee of the society did not allot the flat to Sampatilal and he had to wait over 20 months after making full payment of Rs. 9. Sampatilal wants to file a complaint under the Consumer Protection Act. Kamjor. 2. A member is not eligible for reappointment in the National Commission. 25 lakhs to get the flat. 3. When a cause of action has arisen. He purchased a third trailor for a sum of Rs. a subscriber to the Provident Fund Under Employees Provident Fund and Misc. 4. a complaint before a consumer dispute redressal agency is to be filed within three years. by which purchasers of the bottles wherein coupons are placed would get prizes. Can child’s parents file complaint under the Consumers Protection Act? 2. doctors and nurses the child suffered irreparable damage.Review Questions Notes True or False 1. Practical Problems 1. 4. Will Mr. 6. 4. Will Kamjor succeed? Akash a reputed manufacturer of consumer goods advertised a scheme called “Hidden treasure prize offer” where prize coupons were placed inside some of the bottles of the product. 5.

4. False 3. Yes. it does not amount to Unfair Trade Practice under the Consumer Protection Act. 106 Self-Learning Material .7 4) 5. seeks to achieve? Discuss the main features of the Consumer Protection Act.3. False 6. Yes as the Regional Commissioner to the employees provident fund comes under the purview of Consumer Protection Act.Test Questions Notes 1.10 6) 5. 6. they come under the definition of consumer under the Act. 1986. 1986. True 7. 5.3. Section 2 (1) (i). Explain the rights of a consumer enshrined under the Consumer Protection Act.9 5) 5. indicating respective paragraphs for reference. False 8. Goods Services Complainant Restrictive Trade Practice Unfair Trade Practice Which are the Consumer Dispute Redressal Agencies and what are their powers? How a complaint is made? Describe the procedure for disposal of a complaint. 1986. Uttar Pradesh Consumer Disputes Redressal Commission as the claim amount of Rs. Non payment of dues within the stipulated period is a deficiency of service.3 3) 5. What are the objects which the Consumer Protection Act. 2. False 5. True 4. 1) 5.3. 1930. e. Answers to “True or False” 1.6 References 1 2 3 4 5 Section 2 (1) (d). False 2.3. Define the following terms as used in the Consumer Protection Act. He will succeed as the Cooperative Group Housing Society comes under Consumer Protection Act. False Answers to “Check Your Progress” Following are the answers to “Check Your Progress”. Section 2 (1) (o). Section 2 (7) of the Sale of Goods Act. 3. No. a.8 & 5. d. c. Consumer b. as he is not a consumer because trailor was purchased for commercial purpose.1 2) 5. True 9. False 10. 7. Section 2 (1) (b). What findings can by given by the Consumer Disputes Redressal Agencies? Practical Problems 1. 25 lakhs is within the jurisdiction of State Commission. 1986. 2. 3.6 7) 5. No.3. 4. 5. f.3.

M.D. P. George Thomas & ors. Kanthimathi & Anr v. Notes 10 11 12 13 14 15 16 Indian Medical Association V.C. M. Smt. Section 2 (1) (r). v. A Moideen Kutty & Ors. Shantha & Ors.. T. & ors. v. Vani Devi & ors. Mrs. Dr. II 1994 CPJ 49. [1995 (III) CPJ 1 (SC)]. 23 24 25 26 27 28 29 Self-Learning Material 107 . v. Section 2 (1) (g). Rajeshwari v L. Mrs Saroj Rani & Ors.A. Section 2 (1) (c). Shiv Kumar Joshi (1997) 24 CLA NCDRC. Chairman and Managing Director. I (2003) CPJ 47 (NC). 21 22 (NC). v.I.6 7 8 9 Section 2 (1) (nnn). (1995) 3 CTJ 969 (Supreme Court CP). Madhu Regional Provident Fund Commissioner. Manager Air India Ltd. C. Narasa Reddy. 6237 of 1990 (SC). & Anr. I (2003) CPJ 65 (NC). Section 14. Jain. Section 30. 20 Rathour.L. Sham Lal & ors. K. I 2003 CPJ 16 Lucknow Development Authority v. See note 16 ibid. A No. Calcutta and Another. Smt. Consumer Unity and Trust Society. I (2003) CPJ 180 (NC). Section 14 (1) (d). Section 13. Ministry of Railways. 1995 (2) SCC 150. of India & Anr. II (1999) CPJ 44 (SC). Section 28. Government of India. Faridabad v. T.K. Bank of South Delhi University Teacher Cooperative Group Housing Society Ltd. Jaipur v.N. G. v. Dr. Dr. Gupta. M/s Vikas Motors Ltd v. C. 17 18 19 Baroda.P. Dr. I (2000) CPJ 50 (NC). I (1999) CPJ 18 (NC). Section 31. Section 2 (1) (f).

Notes 108 Self-Learning Material .

Section

Introduction to Law of Partnership

Notes

6
“The most enlightened judicial policy is to let people manage their own “Money speaks sense way.” business in their own in a language all nations understand.” —Aphra Behn —Oliver Wendell Holmes STRUCTURE
6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 Introduction Definition of Partnership Essential Elements of a Partnership Meaning of Partner, Firm and Firm Name Nature of a Partnership Firm Partnership and other Association Registration of Firms Rights and Duties of a Partner Reconstitution of Firm

6.10 Types of Dissolution of Partnership Firm 6.11 Modes of Dissolution of Firm 6.12 Limited Liability Partnership (LLP)

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6.1 Introduction
Notes To carry on a business, a person may choose any form of organization depending upon his needs. When a person works in his individual capacity, he runs a proprietary organization, also known as a sole trader. When he works with some person, they are running a partnership. ‘Partnership’ is the most common form of organisation . Law relating to partnership is governed by the Indian Partnership Act, 1932 (the Act). it extends to the whole of India except to the state of Jammu and Kashmir.

6.2 Definition of Partnership
Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.1

6.3 Essential Elements of a Partnership
An analysis of the definition of partnership reveals the following essential elements. a) An agreement: partnership is the result of an agreement. It does not arise from status (as in the case of Hindu Undivided Family) operation of law (as of co-owners) or inheritance. Agreement may be express or implied. Again it may be oral or in writing. partnership deed is example, of an agreement in writing. Two or More Persons: There must be at least two persons to form a partnership. The Act does not mention any thing about the maximum number of persons who can be partners in a partnership firm but the Companies Act, 1956 (Section 11) lays down that a partnership consisting of more than 10 persons for banking business and 20 persons for any other business would be illegal. Hence these should be regarded as the maximum limits on the number of partners in a partnership firm.

b)

Note: The term ‘person’ means any person competent to enter into a contract and includes a company also. A minor can be admitted as a partner only for the benefits of partnership. c) Carrying on a Business: For a partnership to exist, it is essential that there should be a business. Business includes every trade, occupation and profession.2 It may be for long term business activities or for a particular venture or for a short duration. Sharing of Profits: There must be sharing of profits. However, partners may agree to share profits in any proportion. But whenever the partnership firm runs into losses, the partners will share it too since a loss represents a negative profit. Mutual Agency: There must exist a mutual agency relationship among the partners. Mutual agency implies that each partner acts for the other partners. He, thus, is an agent of other partners. Also, each partner is a principal for he is bound by the acts of other partners.

d)

e)

6.4 Meaning of ‘Partner’, ‘Firm’, and ‘Firm name’
Persons who have entered into partnership with one another are called individually ‘partners’ and collectively ‘a firm’, and the name under which their business is carried on is called the ‘firm name’.3

6.5 Nature of a Partnership Firm
A partnership firm is not a person in the eyes of law. It has no separate legal entity apart from the parners constituting it.
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6.6 Partnership and Other Association
Notes

6.6.1 Partnership and Joint Hindu Family
A business in Hindu Law is a heritable asset. If an ancestral business descends on the members of a Joint Hindu Family (also called Hindu Undivided Family), or if they start a common business out of the Joint funds at any time after the death of the ancestors such a business is called a Joint Family Business. The members of a Joint Hindu Family carrying on family business as such are not partners in such business. The points of distinction between the two are as follows : 1. 2. Mode of creation. Partnership is essentially the result of an agreement. A Joint Hindu Family arises from status and is not the result of an agreement. It arises by operation of law. Interest in business. In partnership a person does not acquire interest in partnership business by birth. It is the result of an agreement In a joint family business, the male members acquire Interest by birth. Admission of new members. In partnership, a new partner can be admitted only with the consent of all the partners. In a joint family business, a male becomes a member by his birth. a) Female members. A female can become a full-fledged partner in partnership, whereas in a joint family business, a female does not become its member by birth. 3.

Check Your Progress
1. 2. What is partnership? What are the essential elements of a partnership? Is it compulsory to register a partnership firm?

3.

b) Minor members. In partnership, a minor can be admitted to the benefits of partnership with the consent of the other partners. In a Joint family business, a male minor becomes its member merely by birth. c) Membership fluctuating. In partnership, the number of partners should not exceed ten in case of a firm carrying on banking business and twenty in case of any other business. In a joint family business, there is no limit to the maximum number of members.

4.

Authority of members. In partnership each partner has implied authority to bind the firm by acts done in the ordinary course of the business of the firm. In a joint family business, only the Karta (usually the eldest male member of the family) has implied authority to contract debts and pledge the credit and the property of the family for the ordinary purposes of the family business. Liability of members. In partnership, the liability of the partners is unlimited. The share of each partner in the partnership property along with his private property is liable for the discharge of partnership liabilities. In a joint family business, the Karta is personally liable for the debts of the family whereas the other members are liable only to the extent of their Interest in the Joint family business. The other members are personally liable If they are also contracting parties. Right of members to demand accounts. In partnership, every partner has a right to have access to and inspect and copy any of the books of the firm and ask for the account of profits and losses. The members of a joint family business cannot ask the Karta of the family for accounts of his past dealings concerning the family business. Similarly, they cannot ask the Karta for the account of profits and losses. Registration. In case of partnership, it is not compulsory that it should be registered. But, indirectly, law has made registration compulsory because an unregistered firm suffers from certain disabilities. A joint family business does hot require any such registration.

5.

6.

7.

6.6.2 Partnership and co-ownership
Co-ownership means joint ownership of some property which does not necessarily result in partnership. In partnership the partners are necessarily co-owners of the property of the firm, but In co-ownership the co-owners are not necessarily partners. The following are the points of difference
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between the two: Notes 1. 2. 3. 4. Mode of creation. Partnership is necessarily the result of an agreement. Co-ownership may or may not arise from agreement; it may also arise by status. Business. Business Is necessary for the existence of partnership ; co-ownership can exisf without it Nature of interest. Partnership involves community of interest whereas co-ownership may not necessarily involve any such interest. Transfer of interest. A partner cannot transfer his share to a stranger without the consent of the other partners. A co-owner can. When a co-owner transfers his share, the transferee becomes vis-a-vis the other co- wners a substitute of the co owner who transfers his share. Number of members. In partnership, the number of members cannot exceed the statutory limit. In co-ownership there is no limit on maximum number. Authority of members. A partner is the agent of his co-partners. A co-owner is not the agent of the other co-owners. Partition of property. A partner cannot sue for the partition of partnership property in specie but he can sue his co-partners for the dissolution of the firm and accounts. A co-owner can sue for the partition of the property. Lien for expenses. A partner has a lien on the partnership property for expenses incurred by him on such property on behalf of the firm ; a co-owner has no such lien.

5. 6. 7.

8.

6.6.3 Clubs
A club or a society, such as a cricket club or a debating society or a residents’ welfare society, is not a partnership. It is not formed to earn profit and its members are not agents of one another and as such are not liable for one another’s acts. A member of a club Is not liable to a creditor except so far as he has assented to the contract in respect of which such liability has arisen. A club Is formed upon the implied condition that its members are not bound to contribute to its losses beyond the amount or subscription as laid down in the rules to be paid so long as he remains a member.

6.7 Registration of Firms
According to the Act, it is not compulsory to get a firm registered with the Registrar of Firms. (Appointed by the State Government). It is, thus, an optional affair. The Act, however, puts an unregistered firm to certain disabilities thereby making registration of firms desirable. A firm may get registered anytime, i.e. at the time of formation or anytime thereafter.

6.8 Rights and Duties of a Partner
Check Your Progress
4. 5. Explain the rights and duties of a partner. Under what circumstances does reconstitution of a partnership firm take place?

6.8.1 Relation of Partners to one another
The relations of the partners of a firm to one another are usually governed by the agreement among them. Such agreement may be express or may be implied from the course of dealing among them. It may be varied by consent of all them, and such consent may be expressed or may be implied by a course of dealing [Sec. 11 (1)]. Where there is no specific agreement or where the agreement is silent on a certain point, the relations of partners to one another as regards their rights and duties are governed by Sees. 9 to 17 of the Partnership Act.

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The partnership agreement usually provides the mode of the conduct of the business. 14. How does the dissolution of a partnership firm takes place? What is a limited liability partnership? 2. insolvency. Subject to contract between the partners. the partner incurs any liability or makes any payment. In the absence of any agreement. 8. No partner has a right to treat it as his individual property. Every partner has a right to prevent the introduction of a new partner unless he consents to that or unless there is an express term in the contract permitting such introduction. Right to be consulted. or (c) where the partnership is at will. the partners are entitled to share equally in the profits earned and are liable to contribute equally to the losses sustained by the firm. the surviving or continuing partners may carry on the business with the property of the firm Self-Learning Material 113 Notes Check Your Progress 6. 7. Right to take part in business. 10. Right to retire. 4. Where a partner makes. Right of outgoing partner to share in the subsequent profits. or (b) in accordance with an express agreement between the partners. he is entitled to interest on such advance at the rate of six per cent per annum. Right of access to accounts. in an emergency. A partner has a right not to be expelled from the firm by any majority of the partners. acting under similar circumstances. if any. Such interest.6.2 Rights 1. Right to interest on advances. Subject to contract between the partners. Right to interest on capital The partnership agreement may contain a clause as to the right of the partners to claim interest on capital at a certain rate. No new partner to be introduced. by giving notice to all the other partners of his intention to retire. in the usual way. 5. in his own case. Right not to be expelled. earned by the firm. binds the firm. the property of the firm must be held and used by the partners exclusively for the purposes of the business of the firm. every partner has a right to take part in the conduct of the business. every partner has a right to have access to and inspect and copy any of the books of the firm. 9. Every partner for the purposes of the business of the firm is the agent of the firm. Such interest is not only payable out of the profits of the business but also out of the assets of the firm. 3. 12.8. he must account to the firm for the profits which he may have earned by the use of that property. Every partner has an inherent right to be consulted in all matters affecting the business of the partnership and express his views before any decision is taken by the partners. Such acts of the partner bind the firm. business of the kind carried on by the firm. Right of partner as agent of the firm. 6. save in the exercise in good faith of powers conferred by the contract between the partners. Right to share in profits. Right to the use of partnership property. 13. This is based on the general principle that partnership business is the common business of all the partners. Where a partner has died. A partner has authority. Right to be indemnified. If as a consequence of any such act. 7. expulsion. Subject to any such agreement between the partners. And subject to the provisions of the Indian Partnership Act the act of a partner which is done to carry on. No liability before joining. A person who is introduced as a partner into a firm is not liable for any act of the firm done before he became a partner. 11. any advance beyond the amount of capital. to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence. for the purposes of the business of the firm. or any ether cause. If a partner uses the property of the firm directly or indirectly for his private purpose. A minor partner may have access to and inspect any of the accounts of the firm but not ‘books’. . he has a right to be indemnified. or has ceased to be a partner by retirement. A partner has a right to retire (a) with the consent of all the other partners. subject to contract between the partners is payable only out of profits.

Notes

without any final settlement of accounts as between them and the outgoing partner or his estate. In such a case, legal representative of the deceased partner or the outgoing partner, in the absence of a contract to the contrary. Is entitled, at his option, to — a) such share, of the profits as is proportionate to his share in the property of the firm, or b) Interest at the rate of 6 per cent per annum on the amount of his share in the property of the firm.

6.8.3 Duties
Partnership is a contract of uberrimae fidea. The partners must act with utmost good faith as the very basis of partnership is mutual trust and confidence. According to Sec. 9, which deals with the general duties of partners, partners are bound — a) b) c) to carry on the business of the firm to the greatest common advantage, to be Just and faithful to each other, and to render true accounts and full Information of all things affecting the firm to any partner or his legal representative. To carry on business to the greatest common advantage. Every partner is bound to carry on the business of the firm to the greatest common advantage. He is bound, in all transactions affecting the partnership, to do his best in the ‘common interest of the firm. He must share with other partners any benefit which he may have been able to obtain from other people and in which the firm is in honour and conscience entitled to participate. To observe faith. Partnership is a fiduciary relation. Every partner must be Just and faithful, and observe utmost good faith towards every other partner of the firm. Good faith requires that he shall not obtain a private advantage at the expense of the firm. He is bound, in all transactions affecting the partnership, to do his best In the common interest of the firm. To indemnijy for fraud. Every partner is bound to indemnify the firm for any loss caused to it by his fraud In the conduct of the business of the firm. This is an absolute duty of a partner and no partner can contract himself out of it. The innocent partners of the firm are, however, liable to third parties for the fraud of any of the partners. But they can proceed to claim damages against the partner who has committed the fraud. To attend diligently. Subject to contract, between the partners, it is the duty of every partner to attend diligently to his duties in the conduct of the business of the firm, and to use his knowledge and skill to the common advantage of all the partners. Not to claim remuneration. A partner Is not entitled to receive any remuneration in any form for taking part in the conduct of the business of the firm. It is, however, usual to allow some remuneration to the working partners provided there is a specific agreement to that effect. To share losses. It is the duty of every partner to contribute to the losses of the firm. In the absence of an agreement to the contrary, the partners are bound to contribute equally to the losses sustained by the firm. An agreement to share profits implies an agreement to share losses also. To indemnify for wilful neglect. Every partner Is, subject to contract between the partners, bound to indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm. The firm is, however, liable to the third persons for the wilful neglect or fraud of any of the partners. To hold and use property of the firm exclusively for the firm. It is the duty of every partner of the firm to hold and use the property of the firm exclusively for the purposes of the business of the firm. The partners may agree differently but, in such a case, there should be a specific agreement to that effect.

The other duties are spread over the Partnership Act These duties are summed up as under: 1.

2.

3.

4.

5.

6.

7.

8.

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9.

To account for personal profits. If a partner derives any benefit, without the consent of the other partners, from partnership transactions (or from any use by him of the partnership property, name or business connection), he must account for it and pay it to the firm. This is because the relationship between partners is a fiduciary relationships and no partner is entitled to make any personal profit. To account for profits in competing business. A partner must not carry on any business of the same nature as competing with that of the firm. If he does that he is bound to account for and pay to the firm all profits made by him in that business. This is, however, subject to contract between the partners. To act within authority. Every partner is bound to act within the scope of his actual or Implied authority. Where he exceeds the authority conferred on him and the firm suffers a loss, he shall have to compensate the firm for any such loss. To be liable jointly and severally. Every partner is liable, jointly with all the other partners and also severally, for all the acts of the firm done while he is a partner. Not to assign his rights. A partner cannot assign his rights and interest in the firm to an outsider so as to make him the partner of the firm. He can, however, assign his share of the profit and his share in the assets of the firm.

Notes

10.

11.

12. 13.

6.9 Reconstitution of Firm
A firm is reconstituted when there is a change in the composition of its partners without affecting the continuity of the firm. Such a reconstitution may take place due to: a) b) c) d) e) f) Introduction of a new partner Retirement of a partner Expulsion of a partner Insolvency of a partner Death of a partner, or Transfer of a partner’s share

6.10 Types of Dissolution of Partnership Firm
The Act contemplates and distinguishes between: a) Dissolution of Firm: The term refers to “the dissolution of partnership between all the partners of a firm”. Thus, where all the partners in a firm agree to sever their relationship, it is known as dissolution of firm. Dissolution of Partnership: The term implies the re-organisation or reconstitution of firm wherein one or more partners sever their relationship with other partners who decide to continue with the business under altered conditions but without dissolution of firm. This may happen when one or more partners in a firm either die, retire or are declared insolvent and the remaining partners elect to continue with business. Thus, the dissolution of firm necessarily implies the dissolution of partnership but the dissolution of partnership may not necessarily lead to the dissolution of firm.

b)

6.11 Modes of Dissolution of Firm
Broadly speaking, the dissolution of a firm may take place: a) Without court order: Such a dissolution may take place in the following ways: i. Dissolution by agreement
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Notes

ii. Compulsory dissolution by the adjudication of all partners or of all the partners but one as insolvent, or by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership. iii. Dissolution on happening of certain contingencies. Subject to contract between the partners a firm is dissolved: a. If constituted for a fixed term, by the expiry of that term; b. If constituted to carry out one or more adventures or undertakings by the completion thereof; c. By the death of a partner; and d. By the adjudication of a partner as an insolvent. iv. Dissolution by notice of partnership at will: a. Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. b. The firm is dissolved as from the date mentioned in the notice as the date of dissolution, or if no date is mentioned, as from the date of the communication of the notice. b) Dissolution by the Court: At the suit of a partner, the court may dissolve a firm on any of the following grounds, namely: i. That a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner;

ii. That a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner; iii. That a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business; iv. That a partner, other than the partner suing willfully or persistently commits breach of agreements relating to the management of affairs of the firm or the conduct of its business; or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him; v. That the business of a firm cannot be carried on except at a loss; vi. That a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed it to be sold if the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner; or vii. On any other ground which renders it just and equitable that the firm should be dissolved.

6.12 Limited Liability Partnership (LLP)
A partnership firm entails unlimited liability for its partners, where the chief advantage of forming a company under the Companies Act, 1956 is the limited liability of its members. A company is required to carry out a number of legal formalities. To get the advantage of limited liability as well as that of partnership establishment of limited liability partnership (LLP) has now been given legal recognition. LLP Act has now been enacted and the professionals can now form partnership firm with limited liability. This would promote a new era of entrepreneurship. Forming an LLP has all the advantages of a sole trader or partnership like flexibility in taking decisions, less legal formalities than that of a joint stock company and the advantage of a limited liability. A firm of professionals like chartered accountants lawyers and company secretaries may take benefit of such a partnership under the LLP Act.4
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Notes

Law Relating to Partnership
Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Essential elements of a partnership are 1- Agreement, 2- Two or more persons, 3- Carrying on a business, 4- Sharing of profits, and 5- Mutual agency. Persons who have entered into partnership with one another are called individually ‘partners’ and collectively a firm, and the name under which their business is carried on is called the ‘firm name’. A partnership firm is not a person in the eyes of law. A Partnership is different from their associations like joint hindu family, co-ownership and clubs. Registration of firm is optional. Rights of a partner are, 1- To take part in business, 2- To be consulted, 3- Access to accounts, 4Share profits, 5- Interest on capital, 6- Interest on advances, 7- To be indemnified, 8- To use partnership property, 9- Agent of firm, 10- To permit introduction of new partner, 11- To retire, 12Not to be expelled, and 13- Outgoing partner to share subsequent profits. Duties of a partner are: 1General duties like to be just and faithful to other, to render true accounts, to carry on the business of the firm to the greater common advantage and to provide full information to all partners, 2- To indemnity for loss caused due to fraud or willful neglect, 3- To attend diligently, 4- Not to claim remuneration, 5-To contribute to losses, 6- To use firm’s property for business, 7- To account for personal profits, 8- To account for profits in competing business, 9- To act with authority, 10- Joint and several liability for acts of firm, and 11- Not to assign his partnership rights. A firm is reconstituted when there is a change in the composition of its partners without affecting the continuity of the firm. There are two types of dissolution, 1- Dissolution of firm, and 2- Dissolution of partnership. Dissolution of firm may take place in two modes, 1- Without court order, and 2Dissolution by the court. Limited liability partnership (LLP) has been given a legal recognition.

Review Questions
True or False
1. 2. 3. A money lender getting a share in the profits of the firm for the sum lent is a partner in the firm. A partner is an agent of other partners in a partnership firm. Permanent incapacity of partner is not a ground for dissolution of partnership.

Test Questions
1. 2. 3. 4. 5. 6. 7. 8. What is parternship? Give essential elements of a partnership. Is partnership a person as per law? Is registration of partnership firm compulsory? What are the rights of a partner? Give primary duties of a partner. What do you understand by the reconstitution of a partnership firm? A parnership firm can be dissolved by a court order only? Is it true?

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State whether the aforesaid relationship amounts to partnership between X and Y or not. 3.7 4) 6. A spends the amount for his own purpose. No.Practical Problems Notes Attempt the following problem giving reasons: 1. the manager of a theatrical company. False Answers to “Practical Problems” 1. 2. B and C carry on partnership business. True 3.nic. ‘Details of LLP can be obtained on Ministry of Company Affairs site http://www. 40000? A. A borrows Rs.icsi. X. Is the reference competent? 2. the lessee and manager of a theatre enters into an agreement for the performance of a play at his theatre.9 References ‘Section 4 of the Indian Partnership Act. 118 Self-Learning Material . with Y.3 3) 6. False 2. Section 4 of the Indian Partnership Act. indicating respective paragraphs or reference. 1932. 1932. C can hold B liable.2 2) 6. Can C hold B liable for Rs. The terms of the agreement provide that X would provide the theatre. 1) 6. the participation in profit is not the decisive test of partnership. A dispute about partnership accounts is referred to arbitration by A and B. No. 2 3 Section 2 (b) of the Indian Partnership Act. Answers to “Check Your Progress” Following are the answers to “Check Your Progress”. 1932. pay for the lighting and pay bills and would receive 60 per cent of the receipts.in/dca and Institute of Company Affairs site www.8 5) 6. the reference is invalid and the ‘award’ will not bind even the consenting parties. as all the parties interested in the matter of dispute are not ad-idem on the question of reference. 40000 from C in the name of the firm without the knowledge of B. A and B are partners of a trading firm. Yes. and Y would receive the remaining 40 per cent. 3.edu. Answers to “True or False” 1.

9 Introduction Extent and Application Prohibition of Certain Agreements. Abuse of Dominant Position and Regulation of Combination Competition Commission of India Director General (DG) Penalties Competition Advocacy Finance.5 7.10 Miscelianeous Self-Learning Material 119 . 2002 Notes 7 “Free competition is worth more to society thanunderstand.8 7.7 7.2 7. Accounts And Audit Competition Appellate Tribunal (CAT) 7.4 7.1 7.” —Oliver Wendell Holmes —Aphra Behn STRUCTURE 7.3 7.6 7.” “Money speaks sense in a language all nations it costs.Section The Competition Act.

1969 had become obsolete in certain respects in the light of international economic development relating more particularly to competition laws. in the relevant market in India Regulation of combination: The acquisition of one or more enterprises by one or more persons or acquiring of control or merger or amalgamation of enterprises under certain circumstances (exceeding monetary limits of assets or turnover as specified in section 5 of the Act and given below) shall be construed as combination. As without blood. shall be void.2 Extent And Application1 The Act extends to the whole of India except Jammu and Kashmir. Abuse of Dominant position: No enterprise or group shall abuse its Dominant position. control of source of production or services. Abuse of Dominant Position and Regulation of Combination2 a) Anti-competitive Agreements: The Act provides for prohibition of agreement.06. acquisition. The group jointly havea. 500 crores in 120 Self-Learning Material b) c) . which causes or is likely to cause an appreciable adverse effect on competition within India. There is a need to shift our focus from curbing monopolies to promoting competition.1000 crores or turnover>Rs. In India or outside India assets >500 million US$ including at least Rs. It defines the terms such as Cartel. The monetary limits specified for acquisition under the Act are: i. Raghavan). b. market . relevant product market.5.sharing.1 Introduction: Notes India has in the pursuit of globalization.2000. Competition in business is like the blood in the body. In India assets > Rs 4000 crores or turnover > Rs 12000 crores .2003. The parties jointly have a. Thereafter the Central Government consulted all concerned including the trade and industry associations and the general public.1. business will languish and perish.S.2003. tie-in agreements or exclusive supply or distribution agreements.3. in India or outside India the assets >2billion US$ including at least Ks. enterprise. Even giants like Microsoft was slapped a fine of US$ 613 million by European Union competition authority for its antitrust (anti-competitive) practices.2003 and some from 19. In India assets > Rs. ii. price. However the right of any person to restrain any infringements of for protecting any of his rights under Intellectual Property Rights (like Copyright Act 1957. The Central Government after considering the suggestions of all concerned parties enacted the Competition Act. relevant geographic market.3000 crores b. The Act was further extensivly amended in 2007. 7. This committee submitted its report on 22. 7. The Act received the assent of the President on 13. . enjoyed by an Enteiprise. 2002.3 Prohibition of Certain Agreements. consumer. Microsoft had also lost the Case in US. similarly without competition. goods and service. Patents Act 1970 or such other IPR protection law) is protected. Any combination. under anti-trust law. hereinafter referred to as the Act. The Monopolistic Restrictive Trade Practices Act. The natural corollary of this is that the Indian market should be geared to face competition from within the country and outside. if entered into. Certain section of the Act have come into force from 31. In this category come agreements relating to bid-rigging or collusive bidding. V.1500 crores in India. responded to liberalization. relevant market. In India the Central Government constituted a High Level Committee on competition Policy and Law (Under the chairmanship of Mr. body will perish. 500 crores in India or turnover > 1500 million US$ including at least Rs. The expression ‘dominant position’ means a position of strength.7.

I. 7. Procedure for Inquiry: C. Note:1. 1500 crores in India. What are anticompetitive agreement. Any enterprise after merger/amalgamation a. ii. No enquiry shall take place after the expiiy of 1 year from the date on which combination has taken effect. Central Government or State Government. Ensure freedom of trade carried on by other participants in markets in India..India or turnover > 6 billion US$ including at least Rs. 500 crores in India or turnover > 6 billion US$ including at least Rs. can direct the Director General (D. 3. d) 4.C. In India or outside India the assets > 2 billion US$ including at least Rs. What is abuse of dominant position? What do you understand by combination? Explain duties of CCI.I. iv. Duties of C. Central Government may appoint a Director General for assisting CCI. who shall send the report to the parties. 4000 crores or turnover Notes c. assets > Rs. Self-Learning Material 121 . Promote and sustain competition. If DG’s report says no contravention. It can order division of enterprise enjoying dominant position.G. 3000 crores. Any other enterprise in India -for the limits as provided in i (a). CCI has power to inquire into acts taking place outside India but 2. 12000 crores. a. if primafacie case exists.4 Competition Commission of India3 a) Establishment of Competition Commission (CCI): The Act provides for the establishment of the CCI which shall consist of the chairperson and not less than 2 and not more than 6 members. Direct or indirect contract of acquisition if the acquirer has directly or indirectly control over. To eliminate practices having adverse effect on competition.C. v. 500 crores in India or turnover > 6 billion US$. Their term shall be of 5 years and are eligible for re-appointment. the matter shall be closed D. can dismiss or order further enquiry. C.I. Protect the interests of consumers. CCI has powers to regulate its own procedure and to rectify its own orders and to make a reference to the statutory authority. iii. b.) to investigate. then the complainant or the relevant authorities shall be given an opportunity to rebut DG’s findings. which may deal with the notice in accordance with the Act. In India assets > Rs. In India or outside India assets > 500 million US$ including at least Rs. c) To make inquiries into certain agreements and dominant position of enterprise and about combinations.: It shall be the duty of CCI:i. to be appointed by the Central Government. If there is no prima-facie case. b.C. 2. b) Check Your Progress 1. iii. Any person/enterprise entering into a combination shall give notice to the Competition Commission of India (CCI) within 30 days of approval of the proposal by it’s board of directors or execution of any agreement or other document for execution. Powers of CCI: After inquiring into agreements or abuse of dominant position CCI can pass appropriate orders. 1000 crores or turnover > Rs.I. after inquiry shall submit the report to C.G. iv. 1500 crores in India.C. A group in India > Rs. No combination shall come into effect until 210 days have passed from the day on which the notice has been given to CCI.

50 lakhs extendable upto Rs. shall on directions from C.C. 4. creating awareness and imparting training about competition issues.I.C. 2. Check Your Progress 5. shall give its opinion within 60 days but the opinion given by C.5 Director General (DG)4 D.I assist CCI in investigating into any contravention of the Act. 7. No. CCI shall take suitable measures for the promotion of competition advocacy. DG has all the powers of the court to summon witnesses.6 Penalties5 Some of the penalties under the Act are as under: Note:i.C. Fine upto Rs. 1956 (Sec. seller. discovery and production of documents. Non furnishing of information on combination Making false statements or omission to furnish material information (being a party to the combination) Making false statement. C.having its effect on competition in India. Offences Contravention of orders of C. C.I. ii. Failure to comply with the directions of C. omission of material fact or alteration or destruction of document (offences in relation to furnishing of information) Upto one percent of total turnover or assets whichever is higher.I. Does DG have power of a court? What penalties are provided for the contravention of orders of CCI? Is opinion given by CCI binding on Central/State Government.l lakh for each day of default.C. trader or service provider has made a full and true disclosure.I shall not be binding on the Central/State Government. 5. has power to impose a lesser penalty.I and D. Not less than Rs.7 Competition Advocacy6 The Central or a State Government may in formulating competition policy (including a review of competition law) or any other matter ask the opinion of the C. 7. 6. distributor. if any producer. Penalties Imprisonment upto 3 years or fine upto Rs. Amount of penalties to be credited to the Consolidated Fund of India. DG has also the powers of an Inspector under the Companies Act.C.G.I.G. One crore but shall not be less than Rs. 7. 50 lakhs. 122 Self-Learning Material . S. 240 and 240A) for investigation of the companies. subject to a maximum of Rs. Notes 7. receiving evidence. 3.C. 1 crore.C. issuing commission etc. 25 crore or both Rs. 1. One crore.

The exclusion of jurisdiction of civil court. Any agreement arising out of treaty. i.C. Establishment of CAT: The Central Government shall establish CAT to hear and dispose of appeals against any direction issued or decision made or order passed by CCI. CAT shall have the same powers as are vested in a civil court. Appeal to Supreme Court: Any person/authority/enterprise or Government aggrieved by any decision or order of CAT may file an appeal to the Supreme court within 60 days from the communication of the decision/order of CAT.7. The term of chairperson or a member of CAT is five years and they are eligible for reappointment. iii. 1969 is repeated. Composition of CAT: CAT shall consist of a chairperson and not more than two members. CAT shall have power to regulate its own procedure.C...I. C. Power to exempt by government of: i. Monopolistic Restrictive Trade Practices Act.C. It shall be guided by the principles of natural justice. h. The audit report shall be forwarded annually to the Central Government and shall be laid before each House of Parliament. CAT shall also adjudicate on claims for compensation. ii. CAT should dispose of the appeal within 6 months of its receipts. b. Secretary officers and employees are public servants.I. Contravention of orders of CAT. d. e.I.8 Finance. Power to remove difficulties upto 2 years. The Act to have over-riding effect. g. decision or order of CCI may file an appeal to CAT. Self-Learning Material 123 . f. a local authority.10 Miscellaneous9 This part of the Act provides for: a. Notes 7. D. c. Protection of action taken in good faith.G. Accounts And Audit7 Central Government may make grants to C. The application of other laws is not barred. c. b. 1 crore or imprisonment upto 3 years or both. Appeal to CAT: The Central or State Government.9 Competition Appellate Tribunal (CAT)8 a. The chairpersons and members of C. enterprise or any person aggrieved by any direction. Any enterprise performing sovereign function. provisions of the Act and rules made by the Central Government.I shall maintain proper accounts in the form as prescribed by the Central Government in Consultation with the Comptroller and Auditor-General of India.C.I shall. Any enterprise necessary in the interest of security of state or public interest. be met. Power to make rules and regulations. Appeal shall be filed within 60 days of the receipt of the order/decision by the appellant. f. CAT. There shall be constituted a fund to be called the ‘Competition Fund’ to which all incomes and grants shall be credited and from which all expenses of C.C.: Any person contravening any order of CAT shall be liable for a penalty upto Rs. Procedure and Powers of CAT: CAT shall not be bound by the procedure laid down in the Code of Civil Procedure. The audit of accounts shall be done by the Comptroller and Auditor General of India. agreement or convention with any country. e. 7. Government has power to issue directions or supersede C. d.

Answers to “Check Your Progress” Following are the answers to “Check Your Progress”. True 3. The law regarding competition is contained in the Competition Act. indicating respective paragraphs or reference.4 (b) 5) 7.C. 4. 2. Explain the composition. Answers to “True or False” 1. Write a short note on Competition Appellate Tribunal. 2002 as amended in 2007. What are the main anti-competitive practices? What is competition advocacy. 1986. appeal can be filed to the competition Appellate Tribunal (CAT) and from its orders in the Supreme Court of India. Summary The Competition Act. powers and duties of the CCI. audit and accounts and some miscellaneous aspects.j. 5.3 (c) 4) 7. There are provisions for finance. Notes All pending cases relating to Monopolistic Restrictive Trade Practices shall revert to C. 3. abuse of dominant position and regulates combination by laying down monetary limits for acquisition by one or by a group in or outside India.5 6) 7.i and of Unfair Trade Practices (except some) to the National Commission under the Consumer Protection Act.7 124 Self-Learning Material . Review Questions True or False 1. non furnishing of information on combination making false statements and the punishment for them. False 2. Discuss briefly the offences and penalties provided in the Competition Act.6 7) 7. The Competition Commission of India (CCI) shall consist of members not more than: a) Two b) Three c) Five d) Six Choose the Right Answer Test Questions 1. 2.3 (a) 2) 7. From the orders of CCI. The Act provides for various offences like contravention of orders of CCI. Two. The CCI orders are not appeal-able From the orders of the CAT appeal is made to the Supreme Court of India. The Act prohibits anti-Competitive agreements. The Act also provides for the establishment of Competition Commission of India (CCI) and its power and duties and the procedure for Inquiry to be conducted by the Director General. 2002 Competition is necessary for any business in India. It extends to the whole of India except Jammu and Kashmir. 3.3 (b) 3) 7. 1) 7. 2002.

2002 Sections 7 to 34 of th e Competition Act. 2002 Sections 3 to 6 of the Competition Act. 2002 Sections 54 to 66 of the Competition Act. 2002 Sections 42 to 48 of the Competition Act.References 1 2 3 4 5 6 7 8 9 Sections 1 to 2 of the Competition Act. 2002 Sections 50 to 53 of the Competition Act. 2002 Notes Self-Learning Material 125 . 2002 Section 41 of the Competition Act. 2002 Sections 53A 53U of the Competition Act. 2002 Section 49 of the Competition Act.

Notes 126 Self-Learning Material .

10 Duties of Subscribers. Authentication of Electronic Records.7 8.Section 8 STRUCTURE 8.13 Offences.” “Men keep agreements a language the advantage of neither —Aphra Behn —Salon Objectives of the Act. Attribution.” to break them.1 8. Electronic Governance. Applicability. 8.14 Liability of Network Service Provider.6 8. Digital Signature Certificates (DSC) 8.8 8. 8.3 8.12 The Cyber Regulation Appellate Tribunal.9 Introdution Highlights of Information Technology Act Notes “Money speaks sense inwhen it is to all nations understand. 8.11 Penalties and Adjudication. 8. 8. Self-Learning Material 127 .15 Miscellaneous. Regulation of Certifying Authorities. Secure Electronic Records and Secure Digital Signatures.2 8.4 8.5 8. Acknowledgement and Despatch of Electronic Records.

2000 (hereinafter referred to as the Act) which came into force on 17-10-2000. A trust as defined in section 3 of the Indian Trusts Act. to facilitate electronic filing of documents with the Government agencies. which envelop and transform the initial electronic record into another electronic record. recommended that all states should give favourable considerations to the said model law when they enact or revise their law. A power-of-attorney as defined in section 1A of the Powers-of-Attorney Act. 1891 and the Reserve Bank of India Act. The authentication of the electronic record shall be effected by the use of asymmetric crypto system and hash function. 8. These two keys constitute a functioning key pair. The United Nations Commission on International Trade Law (UNCITRAL) adopted the model law on e-commerce in 1996. The General Assembly of the United Nations by its resolution No. 1882. 1872. This Act provides for legal recognition for transactions carried out by means of electronic communication. 1882.2 Objectives of the Act The Act is set to revolutionise the technology scenerio in the country.1 Introduction Notes Electronic commerce eliminates the need for paper based transactions. the Banker’s Books Evidence Act. 1860. Any contract for the sale or conveyance of immovable property or any interest in such property. 1925.1 8. The Act is not applicable to: a) b) c) d) e) f) A negotiable instrument as defined in section 13 of the Negotiable Instruments Act.5 Electronic Governance a) 128 Self-Learning Material Legal recognition of electronic records. The private key and the public key are unique to the subscriber. commonly referred to as ‘electronic commerce’. The entire regime of digital signatures is based upon the concept of public key and private key. therefore to facilitate ecommerce there is a need for legal changes. and further to amend the Indian Penal Code.3 Applicability The Act extends to the whole of India. which involve the use of alternatives to paper based methods of communication and storage of information. the public key remains with the Certifying Authority and the public key is used by other members of the public to verify that the digital signature on a particular document has been affixed by using the private key of the subscriber. including any other testamentary disposition by whatever name called.4 Authentication of Electronic Records2 Any subscriber may authenticate an electronic record by affixing his digital signatures. A/RES/51/162 dated 30 January 1997. 8. It shall also apply to any violation or contravention of the provisions of the Act done by any person any where in the world.8. 8. Consequently. While the private key remains with the subscriber.3 Where any law provides that information or any matter shall be in writing or in the typewritten . Both these keys are simultaneously generated by the algorithm. the Indian Evidence Act. A will as defined in clause (h) of section 2 of the Indian Succession Act. Any such class of documents or transactions as may be notified by the Central Government in the Official Gazette. 1881. 1934 and for matters connected therewith or incidental thereto. India enacted Information Technology Act.

By any person who has such an authority. enters designated C. for the purpose of receiving E.8 not to confer right to insist document should be accepted in electronic form. if any. Accessible so as to be usable for a subsequent reference. 2. 13 Where any security procedure has been applied to an E.R. if such information/ matter is authenticated by means of digital signature. 12 Check Your Progress 1. affixed in the prescribed manner.R. at a specified point of time.R. enters the C.7 Secure Electronic Records and Secure Digital Signatures a) Secure E. b) Acknowledgement of receipt. How are digital signature certificates issued? The dispatch of an electronic record (E. ii. If the addressee has designated a C. along with specified timings. as may be prescribed by appropriate Government. shall be determined: i. Legal recognition of digital signatures.R.R.R. 3.. when E. records or information are required to be retained for any specified period. then such requirement shall be deemed to have been satisfied. issue. b) Rendered or made available in the electronic form. in Electronic Gazette.The time of receipt of an E.R.or printed form. c) Use of electronic records and digital signatures in Government and its agencies.R.R. then that requirement shall be deemed to have been satisfied if the same is retained in electronic form.R. from such point of time to the time of Self-Learning Material 129 .) outside the control of the originator. If it was sent by the originator himself. If the addressee has not designated a C. ii. then such requirement shall be deemed to have been satisfied if such information or matter is:i. receipt occurs when the E.4 If any information/matter is required by law to be authenticated by affixing the signature.8 Central Govt. ii. or when E.6 If any law provides that documents.7 It provides for the publication of the Official Gazette in the electronic form. is retrieved by the addressee. grant of licenses/permit or receipt/ payment of money. of the addressee. then such record shall be deemed to be a secure E. Sections 6.7. iii. regulations.5 This is permitted for filing of any records. By an information system programmed by or on behalf of the originator to operate automatically. d) Retention of electronic records. c) Time and place of dispatch and receipt of electronic record. if so desired by the originator.) occurs when it enters a computer resource (C.R.R. etc. Acknowledgement and Despatch of Electronic Records a) Attribution of electronic records.R. has power to make rules in respect of digital signatures. How are electronic records authenticated? Are digital signatures legally recognised? What is a secure digital signature? 4. 8.9 Notes 8.R. e) f) g) Publication of rules.6 Attribution.10 An electronic record shall be attributed to the originator: i.11 This can be given of electronic record in a particular form or by a particular method.

S. 1.8 Regulation of Certifying Authorities16 Central government may appoint Controller of Certifying Authorities. 8.9 Digital Signature Certificates (DSC)17 Any person can make an application to the Certifying Authority for the issue of a DSC by paying the fees upto Rs. conditions of service. would be invalidated.13 Offences21 a) 130 Self-Learning Material Offences and the punishment provided can be summarised in the following table: . upto Rs. Application must be accompanied by a certification practice statement or a statement containing specified particulars. Acceptance of DSC once it is published or authorised for publication. qualifications and terms of office of presiding officer CAT. 8.15 The central government shall prescribe the security procedure having regard to commercial circumstances prevailing at the time when the procedure was used. computer system etc. Civil Courts shall not have any jurisdiction. The appeal shall be disposed of finally within six months.S. 8. The Act provides for the composition of CAT. (iii) created in a manner or using a means under the exclusive control of the subscriber and is linked to the E. shall be deemed to be a secure D. 8.S). upto Rs. 8. 8.14 If it can be verified that a D. Control of private key corresponding to public key shall be exercised.S.R. 1 crore and for failure to furnish information. A DSC can be revoked as provided in the Act. return etc.R.10 Duties of Subscribers18 The duties of subscribers are: a) b) c) Generating key pair (private and public) by applying the security procedure.S.11 Penalties and Adjudication19 The Act provides for: a) b) Penalties for damage to computer. Appeal from the decisions of CAT shall be filed to the High Court within sixty days from the date of communication of the decision of CAT. was (i) unique to the subscriber affixing it (ii) capable of identifying the subscriber. 25000. was altered. The Controller may issue license to any person to issue DSC. Notes b) Secure digital signature (D. the D. The Controller or any person authorised by him shall have access to any computer system and data to find out if any contravention of the Act has been committed. The Controller shall be the repository of all Digital Signature Certificates (DSC).12 The Cyber Regulation Appellate Tribunal20 The Central Government shall establish one or more Cyber Appellate Tribunal (CAT). to which it relates in such a manner that if the E.verification. c) Security Procedure. at the time it was affixed.5 lakhs. Power to adjudicate by adjudicating officer to be appointed by the central government. then such D.

Check Your Progress 5. Breach of confidentiality and piracy. Indian Evidence Act 1872. d) e) 8.24 Self-Learning Material 131 . 8. 3 years 7 years 2 lakhs NIL 6. 7. Offences Punishment Imprisonment Term upto 3 years 3 years 5 years Fine upto Notes 1. Publishing of Information which is obscene in electronic form.S. By an amendment made in 2002 the Act shall apply to electronic cheques and truncated cheques. Act? 8. To what extent. No. 2 lakhs 2 lakhs 1 lakh 4. Tempering with computer source document. Securing access to a protected system. the penalties may go in case of noncompliance with the Act? 6. Power to investigate offences . and the Reserve Bank of India Act.15 Miscellaneous23 This portion of the Act deals with miscellaneous subjects like power to make rules and regulations and amendments to Indian Penal Code I860.T. 2. 3. Who has the power to investigate offences under the I. Misrepresentation or suppression of fact.14 Liability of Network Service Provider22 Network service provider shall not be liable if the offence or contravention was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence or contravention. Failure to comply with the orders of the Controller. Bankers Books Evidence Act 1891. Failure to comply with the directions of the Controller to extend facilities to decrypt information. Hacking with computer system. 5. 1934. in respect of which any contravention has been committed shall be liable to confiscation.Any computer. publishing false or fraudulent DSC. 10 years 2 years 2 years No Limit 1 lakh 1 lakh b) c) Extra-territorial jurisdiction . Confiscation . floppies. tape drive or any other accessories related thereto. Penalties or confiscation not to interfere with other punishments provided in any other law.This power is vested with police officer not below the rank of Deputy Superintendent of Police.The provisions of the Act shall apply also to any offence committee outside India by any person irrespective of his nationality. compact discs.

is not applicable to: a) Company law b) Central Excise c) Income Tax d) Trust Test Questions 1. The Act extends to India and also it has extra-territorial application even outside India. There is no provision of appeal in the Information Technology Act. in electronic gazette. 4. Authentication of electronic records is done by digital signature which is based on the concept of private and public key. E-governance is provided by means of legal recognition of electronic records. 132 Self-Learning Material Digital signature b) Electronic governance Explain the provisions on penalties. adjudication and offences of the Information Technology Act. A contravention of Information Technology Act by any person any where in the world is punishable under the Act. . 2000. 2000. 3. In India the law relating to Information Technology is based on this model law and contained in the Information Technology Act. 3. The objectives of this Act are ecommerce and e-governance. Explain the areas where ‘Information Technology Act 2000 is not applicable. Digital Signatures shall be given by the Controller of Certifying Authority appointed by the central government. trust. retention of electronic records and publication of rules. regulations etc. Write short notes on: a) 2. Review Questions True or False 1. The Act also provides for Digital signatures Certificates.Summary Notes Information Technology Act The United Commission on International Trade Law (UNCITRAL) had adopted the model law on e-commerce in 1996. penalties. power of attorney and any conveyance of immovable property. 2. How are electronic records authenticated? Give highlights of the Information Technology Act. An electronic record is attributed to the originator when it was sent by himself or by authorised person. the Cyber Appellate Tribunal and the liability of network service provider. Multiple Choice Questions 1 Digital signature can be obtained from: a) c) 2 Central Government Certifying Authority b) d) State Government Cyber Regulation Appellate Tribunal Information Technology Act. of digital siginatures. The Act is not applicable to certain documents like negotiable instruments. 5. will. adjudication. The digital signatures are generated by one key and not by a set of keys.

13. 2000.7 (b) 4) 8. 2000. Section 11 of the Information Technology Act.f. 2000. 2000. True 2. Section 12 of the Information Technology Act.b 3) 8. 2000. Section 6 of the Information Technology Act.e References 1 2 3 4 5 6 7 8 9 Section 1 (4) of the Information Technology Act. Sections 43 to 47 of the Information Technology Act. Sections 80 to 94 of the Information Technology Act. Sections 79 of the Information Technology Act. Sections 40 to 42 of the Information Technology Act. Sections 48 to 64 of the Information Technology Act. 2000. Sections 65 to 78 of the Information Technology Act. indicating respective paragraphs for reference. 2000. Section 15 of the Information Technology Act. Section 5 of the Information Technology Act. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Self-Learning Material 133 . 2000. 2000. 2000. 1) 8. 2000. Section 7 of the Information Technology Act. Section 3 of the Information Technology Act. Sections 17 to 34 of the Information Technology Act. 2000.5. (55 of2002) w. 2000. 2000. Section 14 of the Information Technology Act. False 3. Section 9 of the Information Technology Act. 2000.Answers to “True or False” 1. 2000. 2000. 6-2-2003. 2000. Section 4 of the Information Technology Act. Section 16 of the Information Technology Act. c 2.9 5) 8. False Notes Multiple Choice Questions 1. 2000. Section 8 of the Information Technology Act.4 2) 8. Sections 35 to 39 of the Information Technology Act. Section 13 of the Information Technology Act.e. 2000. 2000. 2000. Inserted by Amendment Act. 2002.13 (a) 6) 8. d Answers to “Check Your Progress” Following are the answers to “Check Your Progress”. Section 10 of the Information Technology Act. 2000.

Notes 134 Self-Learning Material .

4 9.1 9. 4.8 9.2 9.3 9. its Ownership and Term Licences Copyright Societies Rights of Broadcasting Organisations and of Performers International Copyright Registration of Copyright Infringement of Copyright 2.13 Some Cases on Copyright Self-Learning Material 135 . emotions and sensationsall nations understand.9 Introduction Copyright Office and Copyright Board Copyright. What is a Copyright Board? Who is the owner of a copyright? What is the life of a copyright? Does the use of copyrighted material for a judicial proceeding infringe copyright? Check Your Progress 9.11 Offences 9.Section Important Features of Copyright Law Notes 9 “Thoughts.6 9.10 Civil Remedies 9.12 Miscellaneous 9.7 9.” —Louis D.5 9. Brandeis —Aphra Behn STRUCTURE 9. 1. 3.” “Money speaks sense in a language demand legal recognition.

Case 3 It is the original inventive literary work that is entitled to protection under the Act. Original literary. Idea does not have a copyright protection. 3. musical and artistic works. tables and compilations including computer databases. 4 HLC 815). sculpture. The Act has been amended in 1983. The words ‘musical works’ mean a work consisting of music and includes any graphical notation of such work. The Copyright Board shall be deemed to be a civil court. iii. Thus the term ‘literary’ is not confined to works of literature in the commonly understood sense but would include of what is expressed in writing whether they have inherent or latent literary merit or not. To claim copyright. . 9. Case 2 The term ‘literary’ means anything written or printed such as books on various subjects. The term ‘dramatic works’ includes any piece of recitation. 1957 (referred to as the Act). It extends to the whole of India and came into force on 21-11958. The Board functions through Benches consisting of 3 members. 4. etc. but to their expression.2 Copyright Office and Copyright Board1 The Central Government has established a Copyright Office under the control of Registrar of Copyrights. poetry.1 Introduction Notes Copyright is about the right to copy.Agarwal Publishing House vs Board of Higher Secondary and Intermediate Education. 1994 and 1999 primarily to bring the Indian law in conformity with the international conventions like Bern Convention. What is a Copyright Board? Who is the owner of a copyright? What is the life of a copyright? Does the use of copyrighted material for a judicial proceeding infringe copyright? Basically for a copyright. choreographic work or entertainment in dumb show or acting. critique. It is based on the principle that people who produce creative work like poems. its Ownership and Term2 a) Works in which Copyright Subsists: Copyright subsists throughout India in the following classes of work: i. . Universal Copyright Convention and agreements ofWorld Trade Organization relating to Trade Related Intellectual Property Rights (TRIPS). anthology. Case 1 Check Your Progress 1. Sound recordings. The 136 Self-Learning Material .3 Copyright.9. (UP AIR 1967 (All) 91). novels have a right to decide how their works can be reproduced. A painting. excerpts with comments. What is material is that there should be some originality and skill in the work turned out. Law relating to copyright is contained in the Copyright Act. the work should be in a material form which involves the ideas translated. there should be a work and not a mere idea. 1992.Jeffreys vs Bosey (1854. drama. serious and non-serious. 1984. 9. The Central Government has also constituted a Copyright Board. Cinematograph films. It is relevant to mention that copyright is not related to ideas. 2. The Registrar of Copyrights is the Secretary of the Board. novels. ii. ‘Literary works’ include computer programmes. The Copyright Board consists of a Chairman and between 2 to 14 members. drawing or works of architecture and photograph are included in ‘artistic works’. dramatic.

In respect of cinematographic films the word ‘original’ is missing in the section. sound recording. shall subsist until 60 years from the beginning of the calendar year next following the year in which the work is first published. vs Cooper. If published with in the lifetime of the author until 60 years from the beginning of the calendar year next following the year in which the author dies.Jagdish Prasad vs Parameswar Prasad. The work must not be copied from another work. however. a particular actor cannot claim any copyright and hence the actor’s performance is not copyrighted. In the case of question papers. government work. The term of the copyright in case of a photograph. (AIR 1924 PC 75). In a television programme also. A VCR which is used for playing pre-recorded cassettes of movies similarly will also be subject . until 60 years from the beginning of the calendar year next following the year in which the work is first published. b. d) e) Self-Learning Material 137 . there exists a copyright. subject to some exceptions like an employer can have the ownership on a work produced by an author. dramatic. If. work of public undertaking and the works of an international organisation. they enjoy copyright. . (AIR 1979.International Films vs Dev Anand. The Tambola ticket books carry copyright protection as it consists of tables and numbers of skill and labour as has been bestowed. In a film. Bom 17). (AIR 1966 Pat 33). ii. Assignment of Copyright: The owner of the copyright may assign to any person the copyright.matter of copyrights protection. Term of Copyright: i. a cine artiste in a film does not have a copyright protection. The assignment is valid only when it is in writing. magnetic tapes or disks as the case may be. This is.MacMillan & Co. and either generally or subject to limitation and either for the whole term of the copyright or any part thereof.word original does not mean that the work must be the expression or inventive thought. Notes Case 4 Copyright exists in computer programes (software) and the written requests. musical or artistic work (other than a photograph) is: a. If published anonymously or pseudonymously. punched cards. b) c) Meaning of Copyright: The word Copyright means the exclusive right in all the works in which the copyright subsists (See paragraph 9. The term of the copyright in any literary. cinematograph film. Case 5 An exhibition of a film in a television through video tape in which the cinematograph film is recorded will be the subject matter of copyright protection. In other words. the identity of the author is disclosed before the expiry of the said period. it should not originate from another.3 (a)) Ownership of Copyright: The author of the work is the first owner of the copyright therein. however. under a Contract of ‘Service or apprenticeship’ or the ownership of a computer related work vests in one who pays for it. . either wholly or partially. In posthumous works. then copyright shall subsist as per ‘a’ above. Orginality relates to the expression of thought but the Act does not require that the expression must be in original or other form. that is. c.3. . until 60 years from the beginning of the calendar year next following the year in which the work is first published.

Where payment of royalty is specified in the agreement the preponderance of the conclusion that there is no assignment would be right in law. Register of copyrights is a prima-facie evidence of the particulars entered there in. 1958. Case Many a time there arises a contentious issue whether a deed is one of assignment of copyright or licensing of copyright may arise.8 Registration of Copyright7 Registration of copyright is optional.4 Licences3 Notes The owner of the copyright in any existing work or the prospective owner of the copyright in any future work may grant any interest in the right by license in writing signed by him or by his duly authorised agent. 9.Sundaram vs Rattan Prakashan Mandir. (AIR 1983 Del 461). For example: Phonographic Performance Ltd. A License to translate foreign literary or dramatic work. after a period of 7 years from the first publication of the work.6 Rights of Broadcasting Organisations and of Performers5 Every broadcasting organisation shall have a special right known as “Broadcasting Reproduction Right’ in respect of its broadcasts. The term of this right is 25 years and of performer’s right subsists for 50 years. A certificate of registration becomes a crucial prima-facie evidence before a court 138 Self-Learning Material .5 Copyright Societies4 No person or association of persons can commence or carry on the business of issuing or granting licenses in respect of any work in which copyright subsists unless a copyright society is registered by the Central Government.9. 1991 and the Copyright (International Organisations) Order. the inference that could be drawn is that there is no assignment of the copyright. 9. All details of works in which registration is applied for is entered in that register. License to produce and publish a translation of a literary or dramatic work in any language may be applied to the Copyright Board. (PPL) is a copyright society which has got licenses from music companies for broadcasting their music in India. 9. A register of copyright is kept in the copyright office. Much of the confusion is because of the manner of drafting the deed. and works made and published by certain International Organisations. Particularly whether there is an exclusive licence or a partial licence or non-exclusive licence or a partial assignment or otherwise of the copyright the problem of interpretation becomes necessary in the context of the intention expressed in the deed but where the agreement contain express words indicating a licence or a partial assignment not much difference would areise. there would be in law an inference that there is no assignment of the copyright whatsoever. where the publishers have been conferred exclusive licence to publish and sell and the authors are under obligation to revise the work and keep it up-to-date. The register is open for inspection and extracts of it can be obtained. 9. Accordingly the Central Government has made the International Copyright Order.7 International Copyright6 The Central Government can extend copyright protection to foreign works. . The entries in the register can be corrected or rectified and shall be published. may be applied after three years from its publication. Similarly. Many times where the agreement provides for royalties for sharing of profits in respect of literary works.

Hum Hindustani. Sehgal had dishonestly imitated the play in the film and violated his copyright. Thereafter. Mr. The key argument of the opposite party was that there could be no copyright on the subject or idea of provincialism. in his office. or by means of photographs. Sehgal announced the production of a film ‘New Delhi’. Thereafter. The play was enacted in the next few years. Mr. magazine or by broadcast or in a cinematograph film. Reading in public of any reasonable extract from a published literary or dramatic work. Mr. spirit and climax. He. Recording to be heard in public by utilising it in an enclosed room. for the bonafide use of educational institutions. Some similarities could be explained by the fact that both were based Self-Learning Material 139 . become interested in making a film based on the play. In any work prepared by the Secretariat of a Legislature exclusively for the use of its members. Anand himself saw the picture and felt that the film was entirely based on his play. Anand wrote a play entitled ‘Hum Hindustani’ in 1953. Notes 9.in the ownership of the material and other facts recorded therein. Anand. vs Samrat Pharmaceuticals (AIR 1984 Del 265).9 Infringement of Copyright8 Some of the acts which are considered as no infringement of copyright are: a) b) c) d) e) f) g) h) i) j) k) l) Private use including research.making copies for the purpose for which it was supplied or make backup copies. For judicial proceedings. but it was too inadequate for the purposes of making a full length commercial motion picture. He heard the play from Mr. Mohan did not receive any further communication from Mr. ‘Hum Hindustani’ in its content. Along with non-copyright matter. Reporting current events in a newspaper. The play was based on the theme of provincialism and its baneful and divisive effects on the society. The picture was released in Delhi in September. Case Mr. therefore. By a teacher or pupil in the course of instruction or as a part of question or answer in examination. Mr. Anand felt that the film was very much like his play. Hindustan Times. 1956. Any bonafide religious ceremony held by the Central or State Government or any Local Authority. A film maker. The opposite party (Delux Films) claimed that they had communicated to Mr. He felt that Mr. Sehgal. and the registration is merely a piece of evidence as to when a certain author started claiming copyrights in some artistic or some other work. Anand that the play might have been all right for the amateur stage. . Case The copyright exists whether the registration is done or not. Any one can adopt it in his own way. The Times of India and other papers. From comments in the press. It got good reviews in newspapers like the Indian Express. They claimed that the motion picture was quite different from the play. in Delhi and Calcutta. Mr. Computer programme . moved the court and the case finally came before the Supreme Court. Copy made in accordance with any law. Mohan Sehgal. Criticism or review.Glaxo Operations UK Ltd.

On the point that the police should have produced the evidence of the copyright owners. 50 thousand but may extend to Rs. Notes Thus the position appears to be that an idea. 9.10 Civil Remedies9 The owner of copyright can sue in the district court having jurisdiction and shall be entitled to remedies such as injunction. 9. 2 lakh.12 Miscellaneous11 This provides for the Central Government to make rules and also that all the actions taken by officials under the Act.R. Delhi edition 1st Jan. 50 thousand but may extend to Rs. then he can file appeal within 30 days of the date of the order to the higher appellate court. The court found that there had been no copyright violation in that case. principle. If any person is aggrieved by any order made by the court.on the idea of provincialism. similarities are bound to occur because the central idea of both are the same but the similarities or coincidences by themselves cannot lead to an irressistible inference of plagiarism or piracy. 9. Ratnasagar Pvt. (6) Scale 417 and 1996. Anand vs M/s Delux Films and others (AIR 1978 SC 1613). and fine of Rs. damages. if done in goods faith are protected. He used to give these pirated cassettes to customers on hire. It is always open to any person to choose an idea as a subject matter and develop it in his own manner and give expression to the idea by treating it differently from others. the High Court of Bombay directed hotels of Mumbai b) c) 140 Self-Learning Material .13 Some Cases on Copyright a) Ratnasagar Pvt. theme. urged that their copyright has been infringed by Trisea Publications and prayed for an injunction which was granted. 9. had published a book titled ‘Living Science’ and claimed rights of literary work in that book. 2 lakhs. (PPL) (As reported in the Times of India. Trisea Publications brought out another book titled ‘Unique Science’. Music Companies are members of PPL and have assigned it the right to issue licenses to event organisers for playing music at public performance. Hindi and English movies video cassettes.I. For infringement of copyright in computer programme punishment provided is imprisonment of not less than seven days but may extend to 3 years and fine of not less than Rs. 2004). Nagoti Venkataramana Case (Citation: 1996. or subject matter or historical or legendary facts being common property. cannot be the subject matter of copyright of a particular person. v. Trisea Publications and others (citation: (1997) 24 CLA (SNR) 1 Delhi) Ratnasagar Pvt. He was sentenced to 3 months R. It is the sole authority to administer the broadcasting. In a petition filed by PPL in Bombay High Court against the hotels of Mumbai for not paying license fee to PPL for playing music in respect of the companies with PPL on New years eve parties. 3000 for keeping 90 pirated Telugu. the Supreme Court ruled that “It is unnecessary for the prosecution to track on and trace out the owner of the copyright to come and adduce evidence of infringement of the copyright.11 Offences10 Any infringement of copyright is punishable with imprisonment of not less than 6 months but may extend to 3 years or fine not less than Rs. Where two writers write on the same subject. Ltd. Ltd. Ltd. telecasting and public performance rights and to collect licence fees on behalf of the music industry.” Phonographic Performance Ltd. (6) Sec 409)Nagoti Venkataramana was owning a Video parlour named ‘Video City’ in Andhra Pradesh. . PPL is a copyright society registered under the Copyright Act. If the infringement is not for gain or commercial purpose punishment can be less. G.

The term of the copyright in any literary. 40 years c. Multiple Choice Questions Tick the Right Answer: 1. The copyright subsits in 1 . dramatic.making back-up copies of computer programme. c . i . Krishnamurthy. either partially or wholly. The assignment of copyright is valid only when it is in writing. musical and artistic works.private use including research. Krishnamurthy’s Case Shri P. An appeal filed by CARE was dismissed as “Without any merit”. musical or artistic work is 60 years. 3. The term of broadcasting reproduction right is 25 years and of performers right in 50 years. dramatic.sound recordings. or l . The Indian law is in conformity with our obligations in International Conventions. a .in the course of instructions or as a part in examination. N.work prepared by secretariat of a legislature for its members. 70 year old author of Children’s literature won a copyright case against CARE after battling in court for 27 years. g . 20 years b. and 3 .reading in public of any extract from a published literary or dramatic work. The Registrar of Copyright controls Copyright office and above him is the Copyright Board.for the bonafide use of educational institutions. d) P.cinematograph films. CARE was imposed a fine of Rs 5000 for a copyright violation. Notes Summary Copyright The law relating to Copyright is contained in the Copyright Act. Some of the acts which are considered as no infringement of copyright are.copy made in accordance with law. The owner of the copyright may assign to any person the copyright. 2. b . N. 40 years c. 50 years b. Copyright means the exclusive right in all the works in which the copyright subsists. 1957.reporting current events. f. 2 lakhs.any bonafide religious ceremony held by the Central. Making back-up copies of a computer programme is no infringement of copyright. 4. Review Questions True or False 1.original literary. Registration of copyright is compulsory under the Copyright Act. The author of the work is the first owner of the Copyright therein. k . State or Local Government.recording to be heard in an enclosed room.to pay license fee to PPL for the music they play. The Act provides for international copyright and for optional registration of copyright. 80 years The term of copyright is for a period of: a. 30 years d. 60 years Self-Learning Material 141 . 20 years d. Granting license of copyright can only be done to a copyright society registered by the Central Government. j . 2 . d . The term of Performers Right is for a period of: a.criticism or review. h . e -for judicial proceedings. The infringement of copyright gives rise to civil remedies such as injunction or damages and penalties of imprisonment upto 3 years and fine upto Rs. 2.

False 2. 2. 8 Sections 51 to 53 A of the Copyright Act. 3.3 e 4) 9. 1957. 1 2 142 Self-Learning Material . 1957. True 3. 1957. 10 Sections 63 to 73 of the Copyright Act. c Answers to “Check Your Progress” Following are the answers to “Check Your Progress”. 1957. 3 Sections 30 to 32 B of the Copyright Act. 1957. 9 Sections 54 to 62 of the Copyright Act. 11 Sections 74 to 79 of the Copyright Act. 7 Sections 44 to 50 A of the Copyright Act. 6 Sections 40 to 43 of the Copyright Act. 1957. 1957. 1957. 1957. indicating respective paragraphs for reference: 1) 9. 1957? Answers to “True or False” 1. 4 Sections 33 to 36 A of the Copyright Act. 5 Sections 37 to 39 A of the Copyright Act. Sections 13 to 29 of the Copyright Act. Elaborate on the meaning of Copyright.2 2) 9.3 c 3) 9. 1957. 1957? What acts are considered as no infringement of copyright? Give highlights of the Copyright Act.Test Questions Notes 1. How infringements of Copyright are dealt under the copyright Act. 1957. True 4.9 c References Sections 9 to 12 of the Copyright Act. True Answers to “Multiple Choice Questions” 1. a 2.

” —Anonymous —Aphra Behn STRUCTURE 10. Application for Patents 10.Section Important Aspects of Patent Law Notes 10 “Art and law are as different as chalk from cheese. Who makes the 10.3 Inventions not Patentable 10.18 Miscellaneous Self-Learning Material 143 .14 Ratent Office and its Establishment and Powers of Controller 1.1 Introduction 10.10 Amendment of Applications and Specifications 10.9 Patents of Addition 10.12 Surrender and Revocation of Patents 10. But the dreamer also needs support.16 Use of Inventions for Purposes of Government and Acquisition of Inventions by Central applications for Government patents? 10.17 Suits Concerning Infringement of Patents 10.” “Money speaks sense in a language all nations understand. Compulsory Licences and Revocation Which Act governs the law related to patents? Check Your Progress 2.2 What is a Patent? 10.11 Restoration of Lapsed Patents 10.7 Provisions for Secrecy of Certain Inventions 10. 10.4.15 Working of Patents.13 Register of Patents 10.5 Publication and Examination of Application 10.6 Oppositoin Proceedings to Grant of Patents 10.8 Grant of Patents and Rights Conferred Thereby 10.

An invention which. 10. It has been amended in 1999.4 Application for Patents3 A patent application can be made by any of the following persons either alone or jointly: a) 144 Self-Learning Material True and first inventor . Inventions which are contrary to public order or morality. Mere discovery of any new property or mere use of a known process. Topography of integrated circuits. 10. Mere collection of more than one integers or things. for a limited term. The Act describes the procedure for the grant of patent and protects the rights of the patentee against infringement. A mathematical or business method or a computer programme per se or algorithms. ((19) PTC 479 (Del)). A mere scheme or rule or method of performing mental act or method of playing game. the exclusive privilege of making. Ltd. 1970. it must have novelty and utility. animal or plant life or health or to the environment. . not involving the exercise of any inventive faculty does not qualify for the grant of a patent. The Act came into force from 21-91970.1 Introduction Notes The fundamental principle of patent law is that a patent is granted only for an invention which must be new and useful. which confers on the grantee. is traditional knowledge. or which caused serious prejudice to human.3 Inventions not Patentable2 Some of the inventions which are not patentable under the Act are: a) b) c) d) e) f) g) h) i) j) k) Frivolous inventions or which claim anything obvious or contrary to well established natural laws. selling and using an invention and also authorising others to do so. Mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance. Ltd.1 It can also be defined as “a grant from the government. It is essential for the validity of a patent that it must be the inventor’s own creation as opposed to mere verification of what was already known before the date of the patent. A method of agriculture or horticulture. hereinafter referred to as the Act. Case Mere arrangement or rearrangement or duplication of a known device cannot be patented. A presentation of information. vs Oswal Trading Co. The law relating to patents is contained in the Patents Act.Standipack Pvt. It extends to the whole of India. in effect. machine or apparatus unless such known process results in a new product or employs at least one new reactant. Thus a patent is a protection given to a patentee for his invention for a limited term by the Government in consideration of his disclosing the invention. 10. An invention relating to atomic energy. 2002 and again in 2005.10.2 What is a Patent? The Act states that a “patent” means a patent for any invention granted under the Act. That is to say.

10. it appears to the Controller that the invention is one of a class notified to him by the Central Government as relevant for defense purposes. using. 10. give to both the applicant and the opponent an opportunity to be heard before ordering either to maintain or to amend or to revoke the patent. (1995 (35) DRJ 11). . Date of Patent: Every patent shall be dated as of the date on which the application for patent was filed. The examiner can come to the conclusion whether the invention has already been published or claimed or is the subject matter of existing patent.b) c) Assignee of (a) The legal representative of (a) or (b) after their death Notes Every application for a patent shall be for one invention only and on a prescribed form. The Act also provides for international application under the Patent Cooperation Treaty. the Controller shall refer the application and the specifications to an examiner for making a report to him. if so desired. Such directions shall be periodically reviewed at intervals of six months or on a request made by the applicant. It shall be filed in the patent office with provisional or complete specifications. Thereafter the Controller may. for a patent. 10. selling or importing for these purposes the patented product in India. vs Marvel Engineering Co. in writing on specified grounds give. notice of opposition to the Controller against the grant of patent.5 Publication and Examination of Application4 Every application of patent shall be published. At any time after the grant of patent but before the expiry of one year from the date of publication of grant of a patent any person interested may give notice of opposition to the Controller on certain specified grounds only. Case Prior registration of patent in another country prima facie constitutes prior publication and is liable to be rejected. 10.Lintech Electronics (P) Ltd. the application. Where any notice of opposition has been given. 5. which the applicant shall rectify. Self-Learning Material 145 . 3.6 Opposition Proceedings to Grant of Patents5 Where an application for a patent has been published but a patent has not been granted. Controller can make objections. The date of the grant of patent is entered in the register when the patent is granted. the Controller shall constitute an Opposition Board for examination and submission of its recommendations to the Controller. Rights of Patentee: The patentee has exclusive right to prevent third parties from the act of making.7 Provisions for Secrecy of Certain Inventions6 Where in respect of an application for a patent. any person may. then he may give directions for prohibiting or restricting the publication of information with respect to the invention or the communication of such information. When a request for examination is made by the applicant. Term of Patent: The term of every patent shall be 20 years from the date of filing of the application for the patent.8 Grant of Patents and Rights Conferred Thereby7 Check Your Progress a) Grant of Patent: Where the application for the patent is accepted. When the secrecy shall be maintained with regard to patents? What are the rights related to the patentee? How long a patent is valid? b) c) d) 4. specification and other documents related to the patent shall be open for public inspection. then the Controller shall grant the patent.

The High Court may also revoke the patent on a counter claim in a suit for infringement of the patent. apart from linking them with Patent Cooperation Treaty network in Geneva. take evidence either orally or by affidavit. Every such application shall state the reasons and nature of the proposed amendment. The Controller can keep the register in computer floppies.14 146 Self-Learning Material . Opposition can be made and settled and then only the Controller shall revoke the patent. A patent of addition shall not be granted before grant of the patent for the main invention. The Controller shall have powers of Civil Court.9 Patents of Addition8 Notes An application may be for a patent in respect of any improvement in or modification of a patented invention (known as main invention). There shall be a seal of the patent office. Three of the patent offices in Kolkata. If such application is made after the grant of the patent then the nature of the proposed amendment shall be published.10. Chennai. This register shall be open to inspection by the public. The Controller General of Patents.11 Restoration of Lapsed Patents10 Where a patent has ceased to have effect by reason of failure to pay any renewal fee within the prescribed period. assignment. 10.12 Surrender and Revocation of Patents11 A patentee may at any time by giving notice to the Controller. patentee. 10. Design and Trade Marks is the Controller of Patents. The register shall be prima-facie evidence of any matters required or authorised to be entered therein. The term of the patent of addition shall run concurrently and terminate with the main patent. New Delhi and Chennai and head office at Kolkata. The Controller may grant the patent for the improvement or modification as a ‘patent of addition’. 10.10 Amendment of Applications and Specifications9 The Controller is empowered to allow the application for the patent or the complete specification or any document relating thereto to be amended. The modernisation of patent offices helps fast track patent processing.14 Patent Office and its Establishment and Powers of Controller13 The head office and the branch offices of the patent office shall be specified by the Central Government. The Controller has powers to correct clerical errors. Presently it has branch offices at Mumbai. license shall be entered in the register. Mumbai and New Delhi have been modernised. offer to surrender his patent. diskettes. then an application may be made to the Controller within 18 months for the restoration of the patent. 10. on the application of an aggrieved person make such order for the making. Any person can take extracts of the register on payment of prescribed fee. The Appellate Board may also revoke the patent on a petition of any person interested or of the Central Government. The Appellate Board may. The Act also provides revocation of patent by the Central Government in public interest.13 Register of Patents12 A register of patents shall be kept at the patent office. transfer. 10. The particulars regarding the patent. variation or deletion of any entry therein as it may think fit. or any other electronic form. This offer shall be published.

of patents. The Controller may grant compulsory license for export of patented pharmaceutical products in certain exceptional circumstances like public health. They are not granted merely to enable patentees to enjoy a monopoly.10. it cannot plead that the plaintiff has no locus standi to institute proceeding for infringement of patent. may grant a license on such terms as he may deem fit. including an injunction and damages. renewal etc.22 Fees for grant. ((IA no 8522) 2000 (20) PTC 20 (Del)).19 Penalties. Till a couple of years ago.16 Use of Inventions for Purposes of Government and Acquisition of Inventions by Central Government17 At any time after the application for a patent had been filed or the patent has been granted.20 Patent agents. the procedure of completing a patent application will take six months to five years.24 Check Your Progress 6. Self-Learning Material 147 .17 Suits Concerning Infringement of Patents18 The court can grant relief in cases of groundless threats of infringement. Any license of the patent can also be terminated by the Controller.21 International arrangements. the Central Government may use the invention for government purposes. Notes b) 10.16 Compulsory Licenses and Revocation: At any time after the expiration of 3 years from the date of the grant of a patent.15 Working of Patents. merely raising the plea that the plaintiff’s registration is improper. Case Where the defendant neither claims to be the owner of the patent nor has it filed any petition or counter claim. The patents granted do not impede protection of public health and nutrition. The Central Government is working on a fast track solution to ease the burden of ever growing patent applications in India.23 Power of High Courts and Central Government to make rules.18 Miscellaneous The Act also provides for: a) b) c) d) e) f) Appeals to the Appellate Board. In 2004-05. there were about 17000 applications which further went upto 25000 during 2005-06. 10. the Court may grant an injunction. Compulsory Licenses and Revocation15 a) Working of Patents: The patents are granted to encourage inventions. . The Central Government can acquire an invention for a public purpose. only 4000 patent applications were filed annually. Adequate compensation for the acquisition shall be paid. In any suit of infringement. before or after the grant of a patent. At present the government needs at least 11 years to handle one patent application. or seizure of goods or damages. Once the system is in place. 10. any person interested may make an application to the Controller for the grant of compulsory license on patent. How can the modifications be made to an existing patents? What is the time allowed to patentee for restoring a lapsed patent? 7. and to make the benefit of the patented inventions available at reasonably affordable prices to the public. The Controller.Schnieder Electric Industries SA vs Telemecaniqne and Controls (I) Ltd.

3 .mere discovery of any new property or a known substance. The term of the patent shall be 20 years from the date of filing of the application for the patent. the exclusive privilege of making. 8 . for a limited term.contrary to public order or morality. Kolkata 148 Self-Learning Material . Mumbai d. 50 years The head office of the patent office is: a. All the particulars regarding the patent are entered in the register. Patent is a grant from the government. The term of patent under the Patent Act.which in effect is traditional knowledge. it shall be decided by the controller. then the Central Government may give directions as to prohibiting the publication of information.method of playing games.’ The Controller has powers 1 . 3. which confers on the grantee. 1970. A patent application can be made by true and first inventor.relating to atomic energy. A register of patent is kept in the patent office. seizure of goods or damages. his assignee or their legal representative. A method of agriculture cannot be patented.methods of agriculture or horticulture. 2 . 7 years b. 14 years c. If any opposition to the grant of patent is made. Patent is granted only for inventions which are new and useful. For any infringement of patent. 1970 is: a. Some of the inventions which are not patentable are 1 . 9 . using or importing the patented product in India.mathematical or business methods. 7 . If the invention is relevant for defense purposes. New Delhi and Chennai. The patentee has exclusive right to prevent third parties from making. The Central Government can acquire a patent for public purpose without paying any compensation.frivolous. 5 .to allow surrender or to revoke the patent. 4 .to allow the application for the patent or complete specifications.for the restoration of a lapsed patent and 3 . Multiple Choice Questions Tick the Right Answer: 1. and 10 . The Controller may grant the patent for the improvements or modification as a ‘patent of addition.topography of integrated circuits. The Central Government may use the invention for government purposes and also can acquire an invention for a public purpose for adequate compensation. A patent application can be made by true and first inventor. 2. Every application shall be for one invention and accompanied by provisional or complete specifications. The head office of the patent office is at Kolkata and branch offices are at Mumbai. New Delhi b. The register is prima-facie evidence of entries made in the register.Summary Notes Patent The law relating to patents is contained in the Patents Act. 4. Chennai c. 2. the court may grant injunction. Every application shall be published and sent to an examiner for a report. The Controller is empowered to allow the application for the patent to be amended. 20 years d. selling and using an invention and also authorising others to do so.presentation of information. 2 . 6 . Review Questions True or False 1.

Test Questions
1. 2. 3. What is a patent? Explain the procedure for grant of patent? What inventions can not be patented under the Patents Act, 1970? Notes

Answers to “True or False”
1. True 2. False 3. True 4. True

Answers to “Multiple Choice Questions”
1. C 2. D

Answers to “Check Your Progress”
Following are the answers to “Check Your Progress”, indicating respective paragraphs for reference: 1) 10.1 2) 10.4 3) 10.7 4) 10.8 c 5) 10.8 d 6) 10.9 7) 10.11

References
1 2 3 4 5 6 7 8 9

Section 2 (1) (m) of the Patents Act, 1970. Section 3 and 4 of the Patents Act, 1970. Section 6 to 11 of the Patents Act, 1970. Section 11 A to 21 of the Patents Act, 1970. Section 25 to 28 of the Patents Act, 1970. Section 35 to 42 of the Patents Act, 1970. Section 43 to 53 of the Patents Act, 1970. Section 54 to 56 of the Patents Act, 1970. Section 57 to 59 of the Patents Act, 1970. Section 60 to 62 of the Patents Act, 1970. Section 67 to 72 of the Patents Act, 1970. Section 73 to 81 of the Patents Act, 1970. Section 63 to 66 of the Patents Act, 1970.

10 11

12 13 14

Ajay Dua, Secretary, Department of Industrial Policy and Promotion as told to ‘Economic Times’ and published in Economic Times (Delhi edition) dated 9th April 2006. Section 82 to 94. Economic Times (Delhi edition) dated 9th April 2006. Sections 99 to 103 of the Patents Act, 1970. Sections 104 to 115 of the Patents Act, 1970. Sections 116 to 117 H of the Patents Act, 1970. Sections 118 to 124 of the Patents Act, 1970. Section 125 to 132 of the Patents Act, 1970. Sections 133 to 139 of the Patents Act, 1970.
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15 16 17 18 19 20 21 22

23 24

Section 142 of the Patents Act, 1970. Sections 158 and 159 of the Patents Act, 1970.

Notes

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Introduction to FEMA Section

Notes

11
“Obey the law, whoever you be that made the law” “Money speaks sense in a language all nations understand.” —Pittacus —Aphra Behn STRUCTURE
11.1 Introduction 11.2 Extent and Application 11.3 Regulation and Management of Foreign Exchange 11.4. Authorised Person 11.5 Contravention and Penalties 11.6 Adjucdication and Appeal 11.7 Directorate of Enforcement 11.8 Miscellaneous

Self-Learning Material 151

11.1 Introduction
Notes The Foreign Exchange Management Act, 1999 (FEMA) replaces the Foreign Exchange Regulation Act, 1972 (FERA). FERA aimed at having stringent controls to conserve India’s foreign exchange. FERA was amended in 1993 to bring about certain changes, as a result of introduction of economic reforms and liberalisation of the Indian economy. It was soon realized that FERA has outlived its utility and was replaced by FEMA. FEMA has been brought into force with effect from1-6-2000.1 The objective of FEMA is to facilitate external trade and payments and to promote the orderly development and maintenance of foreign exchange market in India.

11.2 Extent and Application2
FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India owned and controlled by a person resident in India and also to any contravention committed outside India by any person to whom this Act applies.

11.3 Regulation and Management of Foreign Exchange3
a) Dealing in Foreign Exchange: No person, except with the general or special permission of the Reserve Bank of India, shall deal in or transfer any foreign exchange, or make any payment to any person resident outside India, or receive any payment from outside India or enter into any financial transaction in India, to acquire any asset outside India. Dealing in foreign exchange can be done only by authorised person. b) Holding of Foreign Exchange etc.: No person resident in India shall hold, own, possess or transfer any foreign exchange or acquire any immovable property outside India without the sanction of the Reserve Bank of India. Foreign exchange may be drawn from an authorised person for current account transactions and for capital account transactions to such restrictions as may be imposed by the Reserve Bank of India in consultations with the central government. c) Export of goods and services: Every exporter of goods and services shall furnish to the Reserve Bank of India or to such other authority a declaration containing true and correct particulars representing full export value or payment for services. d) Realisation and Repatriation of Foreign Exchange: Persons resident in India shall take all reasonable steps to realise and repatriate the foreign exchange due or accrued within such period and in such manner as may be prescribed. However, certain category of persons are exempt from realisation and repatriation.

11.4 Authorised Person4
The Reserve Bank of India appoints in writing any person as authorised dealer, person or money changer to deal in foreign exchange or in foreign security. The Reserve Bank of India has powers to issue directions to and inspect authorised person.

11.5 Contravention and Penalties6
a) Penalties for Contravention: For any contravention under FEMA the penalty is thrice the sum involved when the amount
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All complaints are to be disposed off finally within one year. It is to be disposed off within 180 days. No order for civil imprisonment will be made unless the A. They shall be guided by the principles of natural justice and shall have powers to lay down their own procedure. He can be released from detention if amount is subsequently paid. The Appellate Tribunal and the Special Director (Appeals) shall not be bound by the procedure laid down by the Code of Civil Procedure. b) Appeal to Special Director (Appeals): The central government is empowered to appoint Special Director (Appeals) to hear appeal from the orders of A. The officer so appointed shall exercise the like powers which are conferred on the income tax authorities under the Income-Tax Act. 2 lakhs. currency or property involved. If the contravention continues. Detention order or arrest warrant may be issued by the A. The Special Director (Appeals) shall have the powers of the civil court. The appeal is to be filed within 45 days of the receipt of the order. b) Enforcement of orders of Adjudicating Authority (A. Any contravention can be compounded within 180 days from the date of application for this purpose. otherwise reasons are to be given in writing.A).A.A) for holding inquiries in their respective jurisdiction on a complaint made in writing. The defaulter shall be detained in civil prison upto 3 years where the demand exceeds Rs. Special Director (Appeals) or Appellate Tribunal. The Appellate Tribunal shall have the powers of the civil court.is quantifiable otherwise upto Rs. has issued a show cause notice. 4.A. No civil court shall have jurisdiction in respect of matters to be dealt with by A. Liability is only to the extent of inheritance 5. related to the realisation of foreign exchange? What is the Directorate of Enforcement? 11.6 Adjudication and Appeal7 a) Adjudicating Authority: The central government is empowered to appoint Adjudicating Authorities (A.7 Directorate of Enforcement8 The central government shall establish a Directorate of Enforcement with a Director and other officers as it thinks fit. Check Your Progress 1.8 Miscellaneous9 Under this chapter FEMA provides for: a) b) c) Power to make rules and regulations. Notes 11. and Special Director (Appeals). 3. The person appealing has to deposit the levied penalty.A.A. 1961. otherwise reasons in writing are to be given. When did FEMA come into force? Does FEMA also leave the state of J&K in the terms of enforceability? Can an individual hold foreign exchange in India? What is the duty of person residing in India. subject to such conditions and limitations as the central government may impose. 11.. c) Appellate Tribunal: The central government can establish Appellate Tribunal to hear appeals against the orders of A. may in addition to the penalty. The A. the penalty of Rs. From the orders of the Appellate Tribunal. has powers of a civil court. 500 per day shall be imposed. 2. 1 crore and in any other case upto 6 months.A. he is liable to civil imprisonment.A. direct confiscation of money. The appeal shall be filed within 45 days from the receipt of the order. appeal can be filed in the High Court within 60 days. Power of central government to give directions and suspend the operations of this Act. Any adjudicating authority. Self-Learning Material 153 . security. Other officers not below the rank of Under Secretary to Government of India can also investigate. Death or insolvency shall not abate the action. If a person fails to make payment of penalty within 90 days.

If penalty is not paid within 90 days. Contravention by companies. Adjudicating Authority (AA) may order confiscation of money. Current account transactions are fully convertible whereas there are some restrictions in respect of capital account transactions. Notes d) e) f) There are certain presumptions as to documents in certain cases. Summary The Foreign Exchange Management Act. A. 1 crore detention in civil prison shall be upto 3 years and in other case upto 6 months. Multiple Choice Questions 1. 1961.A is required to dispose of complaint within one year. The Appellate Tribunal is required to dispose of appeals within 180 days. For any contravention of the Act. 1949. appeal can be filed in the High Court within 60 days. If the default in payment of penalty exceeds Rs. From the orders of Appellate Tribunal. 1999 (FEMA) replaces the Foreign Exchange Regulation Act. These officers investigate the matter under the Act and have powers like income tax authorities under the Income Tax Act. is appointed by the Central Government. 1999 The Foreign Exchange Management Act. Person is released from detention if amount is subsequently paid. a) c) 154 Self-Learning Material Central Government Authorised person b) d) State Government Any travel agent b) d) Adjudicating Authority Central Government Authorised persons are appointed by: Foreign Exchange Appellate Tribunal Reserve Bank of India . A person resident in India can purchase a house in Singapore only after getting permission from the Reserve Bank of India. Appeal against the orders of AA is made to the Special Director (Appeals) within 45 days of the receipt of the order. Dealing in foreign exchange can be done only by authorised persons who are appointed by the Reserve Bank of India. security or property involved.or estate of the deceased. In addition to the penalty. 2. Foreign Exchange Management Act (FEMA) applies to a branch in England of a company registered in India. FERA has been repealed. No civil court shall have jurisdiction.A. Review Questions True or False 1. offices outside India owned and controlled by person resident in India. Foreign Exchange can be obtained from: a) c) 2. 3. 2 lakhs. FEMA extends to the whole of India and to all branches. Thereafter appeal can be made to Appellate Tribunal established by the central government. The central government shall establish a Directorate of Enforcement with a Director and other officers. Director of Enforcement under FEMA has powers of the police officers. the penalty is thrice the sum involved when the amount is quantifiable otherwise upto Rs. A. a person is liable for civil imprisonment.

3. B 2. indicating respective paragraphs for reference: 1) 11. C Answers to “Check Your Progress” Following are the answers to “Check Your Progress”. 1999 (FEMA). Sections 13 to 15 of FEMA.1 2) 11. Self-Learning Material 155 . Sections 36 to 38 of FEMA. True 3. dated 1-5-2000. True 2.3 d 5) 11. Sections 16 to 35 of FEMA. penalties. Section 1 of the Foreign Exchange Management Act. 2. False Answers to “Multiple Choice Questions” 1. 3. Sections 39 to 49 of FEMA.Test Questions 1. Sections 10 to 12 of FEMA.b 4) 11.2 3) 11. adjudication and appeal in the Foreign Exchange Management Act? Notes Answers to “True or False” 1. How is regulation and management of foreign exchange done under the Foreign Exchange Management Act? Who is an authorised person? Discuss briefly the provisions ofcontravention. Sections 3 to 9 of FEMA.7 References 1 2 3 4 5 6 7 8 Vide GSR 371 (E).

Notes 156 Self-Learning Material .

1.7 Share and Share Capital 12. Self-Learning Material 157 .12 Prevention of Oppression and Mismanagement —Aphra Behn Check Your Progress Check Your Progress Define a company.10 Company Meetings and Resolutions 12. Debentures and Investments 12.13 Compromises.14 Winding Up of a Company 12.15 Corporate Governance 3. Loans. for they have no souls” “Money speaks sense in a language all nations understand. What do you What do you understand by an understand by an ‘Artificial Legal ‘Artificial Legal Person’? Person’? What is a ‘Common What is a ‘Common Seal’? Seal’? 1. Arrangements. 12.5 Prospectus 12.3 Memorandum of Association 12. Reconstruction and Amalgamation 2. 12.4.1 Meaning and Nature of a Company 12. nor be outlawed. 2. Articles of Association 12.6 Membership 12.11 Accounts and Audit 12.Company Law Section Notes 12 “Corporations cannot commit treason.8 Borrowings. 3. nor excommunicated.2 Formation and Incorporation of a Company 12. Define a company.” —Sir Edward Coke STRUCTURE 12.9 Company Management and Administration 12.

” Section 3(1) (ii) lays down “an existing company means a company formed and registered under any of the previous companies law”. To understand the meaning of a company. 1956 (the Act) merely states that “a ‘company’ means a company formed and registered under this Act or an existing company as defined in Section 3(1) (ii). The text of the law alone occupies more than 700 pages.1 Perpetual Succession: A company being an artificial person does not die. Haney. as amended up to date. 2.” c) 12. It exists only in contemplation of law. Endeavour is. This definition neither gives the meaning of a company clearly. intangible existing only in contemplation of the law. The persons who contribute to it or to whom it pertains are members.12. £ 20.. it possesses only the properties which the charter of its creation confers upon it. The assets of the company were not even sufficient to discharge the debentures (held entirely by Salomon himself). Separate Legal Entity: Unlike partnership. The business belonged to the company and not to Salomon. It implies an association of persons for some common object. The proportion of capital to which each member is entitled is his share. Being a mere creation of law. invisible. does not possess the body of a natural being.1 What is a Company? The word ‘Company’ has no strictly technical or legal meaning. nor defines a company in terms of its features. In the famous case of Salomon V. The company purchased the business of Salomon for £ 39. to present some aspects of company law which are relevant for managers. therefore. either expressly or as incidental to its very existence. Ltd1. the company is distinct from the persons who constitute it. “A corporation is an artificial being. The shares are always transferable although the right to transfer is often more or less restricted. Ltd.000.” As per Prof. The company within a year ran into difficulties and liquidation proceedings commenced. Its life is not Check Your Progress c) 1.000 debenture conferring a charge over the company’s assets.2 Definitions of a Company Section 3(1) (i) of the Companies Act. This Act runs into 658 sections and 15 schedules. The company so formed consisted of Salomon.1 Meaning and Nature of a Company Notes 12.” — Lord Justice Lindley b) According to Chief Justice Marshall. “Artificial Legal Person’. d) 158 Self-Learning Material . The law relating to companies in India is contained in the Companies Act.1. let us see the definition as given by different authorities. Artificial Legal Person: The company. Salomon was leather merchant. Define a company.000 in fully paid £1 share each and the balance in cash. with a perpetual succession and common seal. being a juristic person. He converted his business into a limited company -Salomon and Co. It was held by the House of Lords that the company was validly constituted. And nothing was left for the unsecured creditors. “A company is an artificial person created by law. the purchase consideration was paid in terms of £ 10. having separate entity. The common stock so contributed is denoted in money and is the capital of the company. 1956.1. What do you understand by an. Saloman Co. 12. a) “A company is an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who share the profit and loss arising there-from.3 Characteristics of a Company The characteristic features of a company are as follows: a) b) Incorporated Association: The company must be incorporated or registered under the Act. his wife and five of his children as members.1. What is a Common Seal? 3.

However.2 v. Prof.3 vi. Common Seal: A company can be held bound by only those documents which bear its signature. Transferable Shares: The company’s shares are capable of being easily transferred. A company is a holding company of another. Registered Companies: Are companies registered under the Act.g. That other company controls the composition of its board of directors. Holding and Subsidiary Company7: These are relative terms. a member’s liability is limited to the nominal value of the share. Unit Trust of India. if the other is its subsidiary. Self-Learning Material 159 .5 ii. which are as follows: a) On the basis of mode of incorporationi. Separate Property: Share holders are not. Public: Where the minimum number of member is seven and maximum number is limited by number of shares. in proportion to his interest in the company. the Act provides for unlimited liability company as well. Government Companies: Means any company in which not less than 51% of the paid up share capital is held by the central government and partly by one or more state governments. b. Limited by Guarantee: Where the liability of the members of a company is limited to a fixed amount which the members undertake to contribute to the assets of the company in the event of its being wound up. Notes f) g) h) i) 12. b) On the basis of Liability of Membersiv.1. Private: Where the minimum number of member is two and maximum fifty. viii. ii. Limited by Shares: Where the liability of the members of a company is limited to the amount unpaid on the shares. State Bank of India. Reserve Bank of India. Chartered Companies: Like East India Company. A company being a legal person can hold and own property in its own name. has a distinct legal personality and hence can sue and being sued.dependant on its members. e) Limited Liability: The members of a company are only liable to contribute towards payment of its debts to a limited extent. Unlimited: Every member is liable for the debts of the company. e. This type of company is generally not found in India presently. or The other company holds more than half in nominal value of its equity share capital. A company shall be deemed to be a subsidiary of another if: a.4 Kinds of Companies Companies can be classified on various basis. They are traded in a stock exchange market. Common seal is the official signature of a company. Gower aptly puts that no hydrogen bomb could have destroyed a company. d) Other types of Companiesi. in a company limited by shares. Foreign Company: Means a company incorporated outside India but having a place of business in India. Statutory Companies: Which are created by a special Act like Life Insurance Corporation. as in an ordinary partnership.6 iii. as per law. Capacity to Sue and Being Sued: A company.4 c) On the basis of Number of Membersvii. iii. part owners of the company or its property.

Through prospectus general public is invited to subscribe for shares. 7. Commence business immediately after getting the certificate of incorporation. 12. AAA & B) Must do so. 11.5 Distinction Between Private and Public Company S. 6. AA. Each director’s appointment requires separate resolution. 4. Right to transfer share is restricted.c. Private Company Minimum numbers of members to form a company is 2. as a director with Registrar is not necessary. 5. Freely transferable. This type of company shall have special provisions regarding membership and voting rights and its administration. Five members. Not more than 12 without the approval of central government. Prospectus can not be issued. 5 lakh. Number of directors must be at least 2. 8. 2002. Not so exempted. 1. Exempted from filing of various returns. 9. Directors consent to work. 10. 13. Number of directors may be increased to any number. Public Company Minimum numbers to form a company is 7. No. Can only start after receiving the certificate to commence business from Registrar of Companies. Managerial remuneration no restriction. 3. Directors are not required to retire by rotation. 1 lakh. No restriction. Notes e) It is a subsidiary of a third company which itself is a subsidiary of the controlling company. Must have at least 3. Not more than 11% of net profit (Not more than 5% to single Manager/ Director). has introduced a new type of company known as Producer Companies.1. 160 Self-Learning Material . Rs. Producer Companies8The companies (Amendment) Act. Can accept public deposits (Subject to Secs 58A. At least 2/3 of directors must retire by rotation. Cannot accept deposits from the public. 14. 2. Directors can be approved by a single resolution. debentures or deposits. 16. Any ten or more individual producers or any two or more producer institutions may form and incorporate a company as a producer company. 12. Quorum for general meeting — 2 Can be registered with a paid up capital of Rs. Need not hold a statutory meeting or file a statutory report. 15. Maximum numbers of members should not exceed 50. Necessary.

(Great Britain) Ltd. Non-payment of Tax: Under the Income Tax Act. Liability of Ultra-vires Acts: Directors and other officers of a company will be personally liable for all those acts which they have done on behalf of a company if the same are ultra-vires the company.10 iii.12 v. Under which two categories. Reduction of Membership: When the number of members of a company is reduced below the statutory minimum. What are different types of companies on the basis of liability? What do you understand by a ‘Foreign Company’? 6. Some such cases are: i. 1963.9 5. Notes Check Your Progress 4. Failure to Return Application Money: When a company issues shares to the public. This is known as ‘lifting the corporate veil’.11 iv. then any person signing such document shall be personally liable. At times. ix. when any business of a company has been carried on with intent to defraud creditors of the company or any other person. and minimum subscription as stated in the prospectus has not been received within sixty days of the closure of the issue. directors shall be personally liable to return the money with interest @ 15% per annum. x. Misrepresentation in Prospectus: In such a case.1. Such cases are: i. Continental Tyre and Rubber Co. Liability of Promoters For Pre-incorporation Contracts: Prior to passing of Specific Relief Act. where any private company is wound up and any tax arrears could not be recovered. it may be in the interest of members and in public interest to identify and punish the persons who misuse the medium of corporate personality.12. the facade of corporate personality might have to be removed to identify the persons who are really guilty. b) Under Judicial Interpretations: It is difficult to deal with all the cases in which courts have lifted or might lift the corporate veil. v. lifting the corporate veil is possible? ii. vii. directors’ reports and auditors report in respect of each subsidiary company. every member who is aware of that fact shall be severally liable for the payment of company’s debts. courts do not interfere and essentially go by the principle of separate entity as laid down in the Salomon’s case. would not be borne by the company and promoters are liable for such contracts. For Determining the Enemy Character of a Company: Famous case establishing this point is Daimler Company Ltd. viii. Directors With Unlimited Liability: Shall be personally responsible for the debts of the company.14 The brief facts of this case are that a company was incorporated in London for Self-Learning Material 161 . Generally. profit and loss account. who authorises such issue of prospectus incurs liability towards those who subscribed for shares on the faith of untrue statement. those who are knowingly parties to such conduct of business may. every director. promoter and every other person. The circumstances under which the courts may lift the corporate veil may broadly be grouped under the following two heads: a) Under Statutory Provisions: The advantage of ‘distinct entity’ and ‘limited liability’ may not be allowed in certain circumstances. Fraudulent Conduct of Business: During winding up of a company. and the company carries on business for more than six months. be made personally liable.6 Lifting the Corporate Veil The main advantage of forming a company is to have a separate legal entity.13 vi. Holding-subsidiary Company: Every holding company shall attach to its balance sheet copies of balance sheet. contracted during that time. or not properly mentioned in any document. in case application money is not repaid within 10 days of the closing of issue. then every director of such a company shall be jointly and severally liable for payment of tax. Mis-description of Name: When the company’s name is not mentioned.

a number of business operations familiar to the commercial world by which a company is brought into existence”. J brought the action for specific performance against L and the company. For the Benefit of Revenue: In Sir Dinshaw Maneckjee Petil.15 An assessee was receiving huge income by way of dividend and interest income. Floatation/Raising of Capital. The company had L and a clerk of his solicitors as the only members. the company was a German company and hence an enemy company. The court looked to the reality of the situation.Notes the purpose of selling tyres manufactured in Germany by a German company. and who takes the necessary steps to accomplish that purpose”. 12. Commencement of Business. Held. and ordered that the company should convey the land to J. Lipman16 L agreed to sell a certain land to J. Its majority shareholders and all the directors were Germans. iii. Gerstenberg has defined the term promotion as “the discovery of business opportunities and the subsequent organization of fund. although this term has been used in various sections of the Act. the suit filed by the company to recover a trade debt was dismissed on the ground that such payment would amount to trading with enemy. The word ‘promoter’ has not been defined in the Act.J. Others: Like where company is used to avoid welfare legislation. or where company is a mere sham or cloak. property and managerial ability into a business concern for the purpose of making profits therefrom”.17 the Supreme Court held that the fact that the director and members of the family of Tejwant Singh had created several companies and these companies were mere cloaks and that the device of incorporation was really a ploy adopted for committing illegalities and / or to defraud people. Persons who perform the task of promotion are called promoters. Skipper Construction company (P) Ltd.18 L.2 Promotion Promotion means the preliminary steps taken for the purpose of registration and floatation of the company. Justice Cockburn described a promoter as “one who under takes to form a company with reference to a given project and to set it going. ii. On declaration of war between England and Germany in 1914. In Delhi Development Authority V.19 162 Self-Learning Material . ignored the transfer. Re. Accordingly. transferred his investments to four private companies formed for the purpose of reducing his tax liability. For Prevention of Fraud and Improper Conduct: In Jones v. He subsequently changed his mind and to avoid the specific performance of the contract. the Board of Directors and the general body of shareholders were controlled by Germans. These companies transferred the income to D as a pretended loan. 12. iv. he sold it to a company which was formed specifically for this purpose.2. Bowen observed that the term promoter is “a term not of law but of business.1 Stages of Incorporation The complete process of formation of a company may be divided into four stages namely: a) b) c) d) Promotion.2. usefully summing up in a single word-promotion. the companies were formed by D purely and simply as a means of avoiding tax obligation and the companies were nothing more than the assessee himself. Registration/Incorporation. it was held that since both the decision making bodies.2 Formation and Incorporation of a Company 12.

On January 6th the company made an allotment of shares to Lewis.2. the Registrar of Companies shall issue a ‘certificate of incorporation’. In the case of Jubilee Cotton Mills Ltd v. A statutory declaration of compliance. Every director of the company has paid on his shares in cash. or Deliver a statement in lieu of prospectus where the company has either not issued a prospectus or though it has issued a prospectus it has not proceeded to allot any of the shares offered to the public for subscription.3 Registration/Incorporation of Company The promoter of the company will submit the following documents with the Registrar of Companies for the registration of the company: a) b) c) d) e) The memorandum of association. It was held that the certificate was conclusive evidence of incorporation on Jan 6th and that the allotment was not void on the ground that it was made before the company was incorporated. is filed with the Registrar.2. After scrutiny of all these documents and if they are in order. b) Where the company has not issued a prospectue . What are the stages in incorporation of a company. which was the date he received the documents. iii. a proportion equal to the proportion payable on application and allotment on the shares payable in cash. 9. Every director of the company has paid on his shares in cash.2. Any agreement with the relevant persons of the proposed company.12. but dated it January 6th. What is the significance of certificate of incorporation? . that the above conditions have been complied with.it has to satisfy the following conditions: i.4 Floatation/Raising of Capital A private company is prohibited from inviting public to subscribe to its share capital. 12. The minimum subscription in cash has been received. When the company has complied with the aforesaid conditions. Notes The Registrar of Companies is to allot a Corporate Identity Number (CIN) to each company registered on or after November 1. A list of persons who have consented to act as directors of the proposed company. This certificate of incorporation given by the Registrar shall be conclusive evidence that all the requirements of the Act have been complied with. 7. A public company can take either of the following steps: a) b) Issue a prospectus in case public is to be invited to subscribe to its capital. when a private company is formed. ii. a proportion equal to the proportion payable on application and allotment on the shares payable in cash. A statutory declaration duly verified by one of the directors or the secretary in the Self-Learning Material 163 Check Your Progress 8. Lewis20.5 Commencement of Business Every private company and a company not limited by shares can commence business immediately on receipt of certificate of incorporation. A statutory declaration duly verified by one of the directors or the secretary in the prescribed form. 10. Who is a promoter? Who allots a ‘Corporate Identity Number? ii. 12. 2000. the requisite capital is obtained from friends and relatives by making its own arrangement. A statement in lieu of prospectus has been filed with the Registrar. the Registrar issued a certificate of incorporation on January 8. iii. the Registrar will issue a certificate to commence business. Therefore. The articles of association. a) Where the company has issued a prospectus — it has to satisfy the following conditions: i. But a public company limited by shares is debarred from commencing business or borrowing money without the certification of commencement of business.

1 Meaning and Importance For the formation of a company one of the first steps is to prepare a document called the memorandum of association. the memorandum may contain other information. ii. it means beyond the powers of the company. The memorandum shall be drawn up in such a form as is given in Tables B. Association or Subscription — The initial members are called subscribers. In case of a company. ‘memorandum’ means “the memorandum of association of a company as originally framed or altered from time to time in pursuance of any previous companies law or of this Act”. Each of the subscribers shall at least take one share. that the above conditions have been complied with. numbered consecutively and signed by at least 7 persons (2 in the case of private company) in the presence of at least one witness. divided into paragraphs. for example. The memorandum cannot contain anything contrary to the provisions of the Act. According to the Act.3.Notes prescribed form. It contains the fundamental condition upon which alone the company is allowed to be incorporated. who will attest the signature(s).2 Contents The memorandum of a limited company is to contain the following clauses: a) b) c) Name of the Company — With ‘limited’ or ‘private limited’ as the last word(s) of the name. Therefore the term ‘ultravires’ means beyond the powers. rights attached to various classes of shares. The powers of a company are contained in the statute constituting it and the memorandum of association.21 This definition however. Incidental or ancillary objects.3. 12. Objects of the Company — Stating separately: i.3. According to Lord Cairns. The rule of ultra-vires was for the first time laid down in the case of Ashbury Railway Carriage and Iron Company Ltd. Riche. but it is not unalterable. Thus the memorandum of association is the charter of the company. to carry on the business of mechanical engineers and general contractors’. Registered Office — The name of the state in which the registered office is to be situated.D and E in Schedule I to the Act. the memorandum of association of a company is its charter and defines the limitations of the powers of a company.3 Doctrine of ‘Ultra-vires’ The word ‘ultra’ means beyond and the word ‘vires’ means the powers. Capital — The amount of authorised share capital divided into shares of fixed amounts.22 In this case the company was formed with the object ‘to make and sell. The above clauses of the memorandum are called compulsory clauses. d) e) f) Liability — A declaration is made that the liability of the member is limited. v. In addition to these. 12. Other objects not included in (i) and (ii) above. is filed with the Registrar. or lend or hire railway carriage and wagons and all kinds of railway plants. iii. It has to be printed.3 Memorandum of Association 12. The company repudiated the agreement 164 Self-Learning Material . The main objects. When the company has complied with the aforsaid conditions.C. who sign the memorandum in the presence of one witness. does not state the nature of this document nor is indicative of its importance. the Registrar will issue a certificate to commence business. 12. The company contracted with Riche to finance the construction of railway line in Belgium.

and.24 i. town or village. that the contract in question came well within the meaning of the words ‘general contractors’. All the clauses of the memorandum. To attain its main purpose by new or improved means. The provisions regarding alteration of clauses can be summarized as follows: a) Alteration of name clause. How the capital can be raised by a public company? 12. except the subscription clause can be changed. Notes 12. Directors are personally liable to third parties. ii. is to be filed with the Registrar who is also given notice of new location within thirty days. therefore. From one town or city or village to another town or city or village in the same state.3. c) Alteration of objects clause: i. When name is identical or too closely resembles the name of an existing company then change of name can be done by passing an ordinary resolution and the written approval of the central government.A member can get an order of restraint (injunction) from the court against such an act (ultra-vires) of the company. For the change of name special resolution by a company and written approval of the central government is required.The ultra-vires acts are null and void abinitio (The company is not bound by these acts). directors will be personally liable. Special resolution is passed by the company and a copy of the same is filed with the Registrar within 30 days. Hence the contract was entirely beyond the objects in the memorandum of association. However no approval of the central government is necessary if the change of name involves only the addition or deletion of the word ‘Private’. Which clause of the memorandum cannot be changed? ii. Secondly. Check Your Progress 11.26 Self-Learning Material 165 . This change is permissible only for certain purposes as given in Section 17 of the Act (see paragraph 12. From one state to another state special resolution and confirmation of the central government is required. From one premises to another premises in the same city. Alteration is sought on any of these grounds. ii. within the powers of the company. Confirmation of Regional Director is required if the jurisdiction of the Registrar of company is changed.In such a case company’s right over such property is held secured. a. When can a private company commence its business? 13. that the contract was ratified by the majority of the shareholders. Riche contended firstly.3. if required. otherwise it would authorise the making of contracts of any kind and every description and would. iii. What is ‘ultra vires’? 15. be altogether un-meaningful. b) Change of registered office.4 (c) ii).25 i. The effects of ultra-vires transactions are: a) b) c) d) e) Void abinitio . Personal liability of directors . Acquisition of property that is ultra-vires . A copy of the special resolution and the confirmation of the Regional Director. The court (House of Lords) held that the term ‘general contractors’ must be taken to indicate the making generally of such contracts as were connected with the business of mechanical engineers. What is a ‘Memorandum of Association’? 14.For ultra-vires acts of the company. by passing a resolution of the Board of Directors. To carry on its business more economically and more efficiently. Injunction . by passing a special resolution.4 Alteration of Memorandum The contents of a memorandum can be altered only in the manner and to the extent provided in the Act.and was sued for breach of contract. was therefore. b.

4 Articles of Association 12. To sell or dispose off the whole or any part of the undertaking. remuneration. To amalgamate with any other company. To restrict or abandon any of the objects specified in the memorandum.29 The articles of association of a company are its bye laws or rules and regulations that govern the management of its internal affairs and the conduct of its business.1 Meaning According to the Act. To carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company. Procedure of issuing share certificates and share warrants. From unlimited liability. Lien of shares. etc. conversion of shares into stock. g. The time lag in between calls on shares. Payment of commission on shares and debentures to underwriters. To enlarge or change the local areas of its operations.c.4. The liability of a member of a company cannot be increased unless the member agrees in writing. ‘articles’ means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous company laws or of this Act. ii. They define the powers of its officers.. iii. To cancel shares not taken up. iv. Directors. Rules for adoption of ‘preliminary contracts’ if any. Notes d. To consolidate and subdivide share. To increase the authorised share capital. . Procedure of making an issue of share capital and allotment there of. their appointment. Procedure for transfer and transmission of shares.”. To convert shares into stock and vice versa. 12. Forefeiture of shares and the procedure of their reissue. f.4. qualifications.2 Contents of Articles Articles usually contain provisions relating to the following matters like: a) b) c) d) e) f) g) h) i) j) k) 166 Self-Learning Material Different classes of shares and their rights. it can be made limited by re-registration of the company. They also establish a contract between the company and the members and between the members inter se. ii. e) Alteration of capital clause:28 If the articles authorise a company limited by share capital may by an ordinary resolution alter the capital so as: i. 12.. Accounts and audit. e. d) Alteration of liability clause:27 i.

vi. Notes 12 .l) m) n) o) p) q) r) Re-organisation and consolidation of share capital.4 Binding Force of Memorandum and Articles The following are the legal implications: a) b) c) d) The company is bound to its members. An alteration of articles to effect a conversion of a public company into a private company cannot be made without the approval of the central government. Alteration must be bonafide for the benefit of the company as a whole. Each member is bound to the company. What do you understand by the ‘Article of Association’? 18. Winding up.4. Neither the company nor the members are bound to outsiders. Alteration must not deprive any person of his rights under a contract. ii.4. The central government has not yet constituted NCLT and Company Law Board or the High Court powers are continuing. iii. Check Your Progress 16. Alteration must not be contrary to the order of National Company Law Tribunal (Tribunal). Alteration should not be inconsistent with the provisions of the Act or any other statute. Note: The Act has been amended and the National Company Law Tribunal (in short Tribunal or NCLT) has been provided in the Act. Borrowing power of directors. Dividend and reserves. No retrospective operation of articles. Alteration of share capital and buyback of shares. Alteration must not constitute a fraud on the majority. Passing of a special resolution. v. When does the company require the confirmation from Regional Director to change its registered office? 17. Voting rights of members. vii.3 Alteration of Articles a) Procedure for alteration: i. But NCLT has been used. General meeting. Copy of resolution should be sent to the registrar within 30 days. and conditions contained in memorandum. Each member is bound to other members so far as rights and duties arising out of the articles are concerned. proxies and polls. b) Limitations regarding alteration of articles: i. What is the procedure regarding alteration of articles? 12. iii. Self-Learning Material 167 . iv. Copy of altered articles to be registered within 3 months of passing of resolution. ii.

1. (Table ‘A’ of Schedule 1 may be adopted). 12. Supreme document. In case of forgery.Notes 12. persons are not bound to enquire into regularity of internal proceedings. Can be altered by special resolution. Strict restrictions. No. 6. Therefore. particularly where the directors or other officers of the company were empowered under the articles to exercise certain powers subject only to certain prior approvals or sanctions of the shareholders. . Ramamurthy30 the facts were that the articles of association of a company included a clause that all documents and deeds of the company shall be signed by the managing director. Subordinate to the memorandum. 4. 3. This is the ‘Doctrine of Indoor Management’.6 Doctrine of Constructive Notice The memorandum and articles when registered with the Registrar become public documents and accessible to all. Defines the scope of the activities. In Kotla Venkataswamy v. 12.4. Act ultra-vires is wholly void and cannot be ratified. Persons dealing with the company in good faith have a right to assume that the internal requirements prescribed in public documents (memorandum and articles) have been observed. In other words. Must for every company. The mortgagee should have consulted the articles of association before executing the mortgage deed. C. It was held that the mortgage was invalid in spite of the fact that the plaintiff acted in good faith and the money was utilised for the company. Articles Regulations for Internal Management. 5. Company limited by shares need not have it. acting only against the outsiders and not the company. Acts outside scope of apparent authority. Rules for carrying out the objects of company. A mortgage deed was signed by the secretary and a working director only. This is known as ‘doctrine of constructive notice’. the secretary and working director on behalf of the company.4. there is a presumption that any outsider dealing with company has read and understood these documents.4. 2.5 Difference Between Memorandum of Association and Articles of Association S. Act ultra-vires (but intra-vires the memorandum) can be ratified. They can be inspected on payment of a nominal fee.7 Doctrine of Indoor Management The rule of constructive notice proved too inconvenient for business transactions. Memrandum Charter of company. Whether those sanctions and approvals had actually been obtained or not could not be ascertained. some alterations may require sanction of central government. There are certain exceptions to this doctrine and they can be summarised as: a) b) c) d) 168 Self-Learning Material Where the outsider had knowledge of irregularity. Negligence on the part of the outsider. It is a negative doctrine.

Invitation to public. number and classes of shares. as authorised by the shareholders. b) c) ii.5. particulars of directors. auditors etc.5 Prospectus 12. Prospectus must be issued within 90 days from delivery date for registration. Offer to public. outstanding litigation.It contains reports by the auditors and the accountants. It consists of the following: a) Matters specified in Part I of Schedule II-It includes general information like name and address of the company. It was held that the company was liable on the bond. circular. Prospectus must be Signed: It must be signed by the director(s) or proposed director(s) or by their agents who have such authority in writing. Matters given in Part III of Schedule II. “ ‘prospectus’ means any document described or issued as a prospectus and includes any notice.4 Contents of Prospectus Prospectus is the window through which an investor can look into the soundness of a company’s ventures.5. and some other statutory information.32 12. or debentures of a body corporate”.5. 50 or more persons constitute public as per the amendment of the Act in 2000. as T was entitled to assume that the resolution of the company in general meeting had been passed. advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in.3 Necessary Pre-Requisites of Prospectus a) b) c) Prospectus must be Dated: There are two dates relevant-one is the date of issue and the other is the date of publication. The directors gave a bond without the authority of any resolution. Matters listed in Part II of Schedule II .2 Essentials of Definition The definition of prospectus gives the following essential features: a) b) c) d) Document. its objects. 12. If the prospectus is issued more than 2 years after the date at which the company is Self-Learning Material 169 .1 Definition According to the Act. 12. then the reference is to the number of financial years for which the business has been carried on. details regarding the securities being issued.The doctrine of indoor management was propounded in the case of Royal British Bank v. and auditors. management perception of risk factors and details of any issue within past 3 years. Subscription. underwriters. Notes 12. consent of directors.31 In this case the directors of a company were authorised by the articles to borrow on bonds. For a company carrying on business for less than 5 financial years. Turquand.This would include : i.5. Prospectus must be Registered: It must be registered with the registrar of companies.

5. These facts should be scrupulously accurate.9 Shelf Prospectus and Information Memorandum Shelf Prospectus means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in the prospectus. then the issue houses invite subscription from the public through their own offer documents. penalty is increased to fine upto Rs. 12. 12.5. damages or compensation. For subsequent offering.5. This is valid for a period of one year from the date of opening of the first offering of the shelf prospectus. information memorandum updating the information under the various heads will have to be filed and entire set comprising of shelf prospectus and the information memorandum shall constitute the prospectus and have to be circulated to the general public. Experts need to give their consent in writing. Thus the golden rule of prospectus is that the true nature of the company’s venture to be disclosed. In such a case the promoters are required to prepare a draft prospectus known as ‘statement in lieu of prospectus’. Statements by experts . When is a deemed prospectus issued? 22. Who should sign the prospectus? 20. or an accountant. In case of allotment on fictitious names imprisonment can extend upto 5 years.000 or imprisonment upto 2 years or both. Any mis-statements lead to the following liability: a) b) Civil: This consists of liability against the company and against the directors.5. When should a promoter prepare a ‘statement in lieu of prospectus’? 12. but arranges to get money from private sources. 1 lakh. promoters and experts.6 Mis-statements in Prospectus and Liability There should not be any mis-statements in the prospectus. This will help to reduce the expenses of preparation and issue of prospectus on the part of the issuer and will inform the investors up-to-date position of the issue. The statement In lieu of prospectus must be filed with the Registrar at least three days before any allotment of shares or debentures are made.Notes entitled to commence business. Who is the administrating authority with regard to prospectus? 24. What is the stipulated time period for registering the prospectus? 21. Mis-statements are. 170 Self-Learning Material . If there is a fraud. 50. Such an offer document by the issue houses is treated as a prospectus by the company and known as a deemed prospectus or prospectus by implication. or imprisonment upto 5 years or both. Criminal: Fine upto Rs. Experts not connected with the formation of the company are included in the category of experts.5. 12. iii.7 Deemed Prospectus When a company allots shares or debentures to the public through the medium of issue houses.Prospectus also contains statements made by experts like engineer. This may include rescission of contract.5 Golden Rule of Prospectus There should be full frank and honest disclosure of all facts in the prospectus. It should contain the information required to be disclosed by Schedule-III of the Act. 12. What is an error of omission? 23.8 Statement in lieu of Prospectus Where a public company does not invite public to subscribe for its shares. particulars of the signatories to the memorandum and shares subscribed for by them and details of preliminary expenses need not be given. valuer. it need not issue a prospectus to the public. saying that something is expected when in reality it is not or saying that the directors have an intention to do something when they have no such intention. There should not be any error of commission (mis-statements) nor any error of omission (non disclosure of relevant facts). Check Your Progress 19.

shareholder and holder of shares are used interchangeably and at times called synonymous. Shareholder Is a member. a subscriber to the memorandum is member. Does not become a member until he apples for registration. Who agrees in writing to become member and whose name appears in the register of members.when companies have resorted to red herring prospectus are Jet airways.2 Definition a) b) c) The subscribers to the memorandum.12. 12. which does not have complete particulars on the price of securities offered and quantum of securities offered. No.1 Introduction Persons who collectively constitute the company as a corporate entity are members or shareholders. Self-Learning Material 171 .5. 2000. Suzlon. He is not a member as his name is struck off the register of members. 12.6. Examples .6. 3. Who holds equity share capital and whose name is entered as beneficial owner in the records of the depository. Any complaint about violations regarding the prospectus should be made to SEBI which is now vested with powers to inquire into such complaints and punish those who are found guilty. has made SEBI as the administrative authority. and Oriental Bank of Commerce. Notes 12.6. Maruti Udyog. No shares are allotted to a subscriber to the memorandum.4 Distinction between Member and Shareholder The words member. 1. Person who owns a bearer share warrant is a share holder. A legal representative of a member is a shareholder.5.6. But there are some differences between member and shareholder and they can be summarised as follows: S.3 Pre-Requisites for Becoming a Member a) b) The agreement in writing to take shares of the company.6 Membership 12. in relation to prospectus. 12. 12. Member May not be a shareholder because the company may not have a share capital.10 Red Herring Prospectus A red-herring prospectus is a prospectus. The registration of name in the register of members. 2.11 Services and Exchange Board of India (SEBI) -The Administrative Authority The Companies (Amendments) Act. 4.

7 Rights of a Member The various rights of a member can be grouped under the following categories: a) b) Statutory .Given by various provisions of the Act. the memorandum and articles the position of certain persons who may become a member of a company is as follows: a) Minor: As a minor is not competent to contract. President of India.Given by virtue of the contract as provided in the memorandum or articles. Trade Union or Society: A registered trade union or a society can become member of a company. A person’s name may be registered in any of the following ways: i. Date at which each person was entered in the register as a member.8 Register of Members34 A company shall keep a register of members and enter therein the following particulars: a) b) c) 172 Self-Learning Material Name. Shares held by each member and the amount paid up on those shares. Membership by Application and Registration: A person who agrees in writing to become a member and whose name is entered in the register of members is a member of the company. Foreigner: A foreigner may become a member of a company subject to the provisions of the Foreign Exchange Management Act. address and the occupation of each member. .33 Insolvent: An insolvent may be a member of a company so long as his name appear in the register of members.6. and hence he cannot be a member of a company. minor can become member. an agreement by a minor to take shares is void. By application and allotment ii. Contractual or otherwise . if so authorised by its articles. By transfer iii.6 Modes of Acquiring Membership A person may become a member of a company in any of the following ways: a) b) Membership by Subscription: The subscribers to the memorandum of association are deemed to have agreed to become its members. Governor of a State or Collector of a District: Whereas President of India and Governor of a state may hold shares in their official position but the Collector of a district cannot become a member of a company.12. Partnership Firm: A partnership firm is not a legal person and as such it cannot be a member of a company. b) c) d) e) f) g) 12. Company: A company may. 1999.6. he is a member and is entitled to vote even though his shares vest in the Official Receiver or Assignee. In case of fullypaid shares.6. become a member of any company. By transmission 12. if he acquires the shares by transfer or transmission. However.5 Who may become a Member? Notes Subject to the provisions of the Act. the partnership firm may hold shares in a company in the Indvidual or joint names of partners.6. 12.

What are the prerequisites for becoming a member? 27.”36 Share may also be defined as ‘Interest in the company entitling the owner thereof to receive proportionate parts of profits. According to the Act “ ‘Share’ means a share in the share capital of a company. These units are called shares. 2. Notes 12. Shares are forfeited by the company.7. May not be fully paid up.7. Is adjudged insolvent. 3.1 Meaning of Share The capital of a company is divided into certain indivisible units of a fixed amount. Surrenders his shares. Self-Learning Material 173 . What is a ‘Red Herring Prospectus’? 26. Shares are sold by the company to enforce its lien.7. and includes stock except where a distinction between stock and share is expressed or implied. Dies. It specifies the shares held by a member and is prima-facie evidence of the title of member to the shares.2 Meaning of Share Certificate A share certificate is issued by a company under its common seal. Check Your Progress 25. What are the contractual rights of a member? 12. No. if any. 12. 12. It may be transferred or split up into fraction of any amount. Always fully paid up.7 Share and Share Capital 12. and of a proportionate part of the assets of the company upon liquidation. Transferable in fractions. Rescinds the contract of membership on fraud or misrepresentation. 12.7. Each share is distinguished by an appropriate number. Stock can be validly issued only when shares are fully paid up. 12.d) Date at which any person ceased to be a member. Shares have been redeemed by the company. Transferable in round numbers.4 Difference Between Share and Stock S.6. Who all are competent to become a member? 28. 1.3 Meaning of Stock Stock is the aggregate of fully paid up shares. Share Has a nominal value. Stock Has no nominal value. without regard to the original face value of share.6. consolidated and divided for the convenient holding into different parts.10 Termination of Membership A person’s membership ceases when he/his: a) b) c) d) e) f) g) h) Transfers his shares.9 Index of Members35 A company with more than fifty members shall keep an index of members.

Redeemable or irredeemable: Redeemable preference shares are issued by a public limited company. 12.8 Share Warrant A public company limited by shares. Notes 4. Participating or non-participating: Participating preference shares are those shares which are entitled to a fixed preferential dividend and. 12. 12. to be redeemed either at a fixed date or after a certain period of time during the lifetime of the company. What is a stock and how it differs from a share? 31.37 174 Self-Learning Material . Share Can be issued directly. A cumulative preference share confers a right on its holders to claim fixed dividend of the past and the current year out of future profits. 5.7. with the previous approval of the central government. Stock Cannot be issued directly. With differential right as to dividend. May be different equal denomination. Has a distinctive number.7.7 Types of Preference Shares a) Cumulative or non-cumulative: With regard to the payment of dividends. with respect to any fully paid up shares. b) c) d) Check Your Progress 29. voting or otherwise. 6. How many types of shares are there? 12. No.S.5 Types of Shares There are two types of shares: a) b) Preference share. preference shares may be cumulative or non-cumulative. The fixed dividend keeps on accumulating until it is fully paid.6 Characteristics of Preference Shares Preference shares have two characteristics: a) b) They have preferential rights to be paid dividend during the life time of company. No such number. The shares become transferable by mere delivery of the share warrant. in addition carry a right to participate in the surplus profits along with equity shareholders. Convertible or non convertible: Convertible preference shares are those which would be convertible into equity shares after a specified period. With voting rights. They have preferential right to the return of capital when the company goes into liquidation. if so authorised by its articles. may issue.7. Conditions for issue of such shares are laid down in Section 80 of the Act. This type of share can be further divided into: i. Equity or ordinary share. All shares of a class are of denomination. Can a foreigner become a member of a company? 30.7. a warrant stating that the bearer of the warrant is entitled to share specified therein. or ii.

How can the transfer of shares be refused by the company? 34. He is a member. Dividend is paid to the holder of a share certificate by the issue of a dividend warrant. Holder can present such a petition. 10. Only for fully paid up shares. Provision in articles and approval from central government. 4. Dividend is payable to the holder of share warrant on presentation of the relevant coupon attached to the share warrant. either to register the transfer or to send notice of its refusal to register the same. Not so considered. unless the articles so provide. For transfer of shares. No. By usage-a negotiable instrument. No stamp duty payable on transfer. What is a share warrant. 3. Appropriate stamps are to be affixed on the transfer deed. 33. Transferred by mere delivery. 9. Some of the important aspects of the Act relating to transfer of shares are: a) b) Time Within Which Transfer Must be Registered: Is within two months of the application of transfer. such power must be exercised by a resolution of the Board. Forged Transfer: An instrument on which the signature of the transferor is forged is called a forged transfer. 5. This period of two months shall reckon from the receipt of the notice of such refusal. 12. shall record the transaction.7. 6. Holder is not a member of a company. For all shares. Transfer Instrument Must be Valid and Proper: A proper instrument of transfer is lodged with the company by the buyer with valid signature of the seller. The Board must act in the interest of the company and bonafide.7. It is a statutory obligation and none is necessary. Refusal of Transfer: Where the articles of a company give power to the board to refuse registration of a transfer of shares. Share Warrant Issued only by public companies. 7. Does not constitute share qualification of a director.9 Distinction Between Share Warrant and Share Certificate Notes S. Appeal Against Refusal to Register: The transferor or transferee may appeal to the Tribunal (NCLT) against any refusal of the company to register the transfer or against any failure on its part within a period of 2 months. Check Your Progress 32. The company after satisfying the validity of instrument of transfer. Holder cannot present a petition for winding up. Stamp duty is payable on tranfer of shares. When the transfer of shares is called Forged transfer? c) d) e) Self-Learning Material 175 . Share Certificate Issued by public and private companies. 8. It does. 1. 2. A forged transfer can never confer ownership upon the transferee thereof.10 Transfer of Shares One of the important features of a company is that its shares are transferable.12.

7. Free Reserves: In case shares are bought back out of free reserves then an equal sum shall be transferred to capital redemption reserve account. Forfeiture of shares must be exercised: a) b) c) d) In accordance with articles.14 Surrender of Shares Surrender of shares means voluntary return of shares by the shareholder to the company for cancellation. iii. b) Conditions for Buy Back: No company shall purchase its own shares unless: 176 Self-Learning Material . 12.7. 12.7. The relevant provisions are: a) Sources to Buy Back i. Proceeds of Any Shares or Other Specified Securities: However no buy back shall be made out of the proceeds of an earlier issue of the same kind of shares/securites.15 Buy-Back of Shares by a Company Section 77(1) of the Act provides that a company limited by shares or a company limited by guarantee having a share capital cannot buy its own shares except when reduction of capital is effected. Check Your Progress 35. The Companies (Amendment) Act.7. Bonafide and in good faith. Notes f) Transfer of Shares Under Depository System: Is governed by the provisions of the Depositories Act. Is a register mandatory to be maintained by a company in buyback? ii. 1996.7. 12. 12.11 Transmission of Shares Transmission of shares takes place: a) b) c) When the registered shareholder dies. at any time. 12. After passing a resolution for forfeiture.13 Forfeiture of Shares A company’s articles usually contain a power for it to forfeit the shares of a member who fails to pay calls within a certain time after they fall due. and it goes into liquidation. Where the shareholder is a company. When he is adjudicated an insolvent. However. 77AA and 77B (effective from 31-10-1998) and as amended by the Companies (Amendment) Act 2002 (effective from 2310-2001) and the guidelines issued by SEBI and the Department of Company Affairs allow companies to purchase their own shares. Does a company have a power to forfeit the shares? 36.12 Nomination of Shares Every holder of shares or debentures may. The nomination shall be in the prescribed form and lodged with the company. After giving a proper notice. There is no provision for surrender of shares either in the Act or in Table A. vide sections 77A. This can be used for issue of fully paid bonus shares. Securities Premium Account. the articles of some companies may allow surrender of shares as a short cut to the long procedure of forfeiture. nominate. What can be the sources of a buyback? 37.however genuine the transaction may appear. 1999. a person to whom his shares or debentures shall vest in the event of his death.

ii. The class of security of buy back. Self-Learning Material 177 f) g) e) . Destruction of the Securities: The company shall extinguish and physically destroy the securities so bought back within seven days of completion of buy back. c) Notice of the Meeting: The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating: i. Sources of Buy-Back: The buy back may be: ii. v. iii. ii. h) Maintenance of Register: The company shall maintain a register of the: i. if any. Such buy back is authorised by a Board’s resolution. A special resolution is passed. Securities so bought. as per guidelines issued by SEBI. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. Shares/securities are fully paid up. This declaration is to be signed by at least two directors of the company one of whom shall be the Managing Director. The necessity for the buy back. vii. For unlisted shares guidelines can be prescribed by the central government. The amount to be invested. d) i. Notes a. iv. iii. Bonus shares. The declaration of solvency states that the company is capable of meeting its liabilities and will not be rendered insolvent within one year of the date of declaration adopted by the Board. e) Declaration of Solvency: A declaration of solvency is to be filed with the Registrar and SEBI (for listed companies only). Conversion of warrants. vi.i. No offer of buy-back is made within one year of the preceding year. For listed shares of companies. iv. The time limit for completion of buy back. Not applicable if the buy back is less than 10% of the total paid up capital and free reserves of the company. From odd lots. the company shall not make further issue of the same kind of shares/securities within a period of six months except: i. A full and complete disclosure. v. In any financial year not to exceed 25% of its total paid up equity capital in that financial year. Conversion of preference shares or debentures into equity shares. The buy-back is or less than 25% of the total paid up capital and free reserves of the company. From the open market. iv. The central government may prescribe a higher ratio for a class or classes of companies. The buy back is authorised by its Articles. The ratio of debt owed by the company is not more than twice the capital and its free reserves. ii. Stock option schemes or sweat equity. b. iii. Further Issue of Shares: On completion of buy back of shares/securities. iii. From the existing security holders on a proportionate basis. iv.

Consideration paid. In case such company has not complied with provisions of: Section 159. iv.7. How many types of share capital are there? 40. 12. iii. iv. Filing a Completion Return: A company shall file a completion return within thirty days of completion of buy back with the Registrar and SEBI (for listed companies) with particulars as prescribed. i. and the class of directors or employees to whom such equity shares are to be issued. Notes i) iii.000 or imprisonment upto to 2 years or both. redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of any term loan.17 Classification of Share Capital Share capital can be classified. if any. Issued by the company to employees or directors at a discount. after commencement of business. to issue sweat equity shares? 39. Is authorised by special resolution ii. Through any investment company or group of investment companies.ii. iv. (Annual return to be made by company having share capital) Section 207. Dates of cancellation. How long shall a company wait. 50. If a default by the company in repayment of deposit or interest payable thereon. based on usage as follows: 178 Self-Learning Material . Through any subsidiary company including its own subsidiary company. extinguishing and physically destroying of the securities. The resolution specifies the number of shares. (Penalty for failure to pay dividend within 30 days) and Section 211. For consideration other than cash for providing know how. Other particulars as prescribed. a person is imposed a fine upto Rs. ii. the consideration. Not less than one year has at the date of the issue elapsed since the date on which the company was entitled to commence business. ii. current market price.16 Sweat Equity Shares38 a) Meaning: The expression ‘sweat equity shares’ means equity shares: i. The sweat equity shares of a company whose equity shares are listed on a recognised stock exchange.7. are issued in accordance with the regulations made by SEBI. (Form and content of balance sheet and profit and loss a/c) j) k) 12. Making available rights in the nature of intellectual property rights or value additions. or interest payable thereon to any bank or any financial institution is subsisting. iii. b) Conditions for Issue: i. Penalties: In case of any default. What is alteration the capital? iii. Check Your Progress 38. Prohibition for Buyback: No company shall directly or indirectly purchase its own shares/ securities.

Conversion: Of fully paid shares into stock.19 Alteration of Capital a) b) c) d) e) Increase: By issuing new shares. may by special resolution. if so authorised by its articles. Registered Capital Issued Capital Subscribed Capital Called-up Capital Paid-up Notes 12.Classification of Share Capital Based on Usage Nominal. The creditors are entitled to object where the reduction of share capital is involved. Cancellation: Of shares which have not been taken up.20 Reduction of Capital A company limited by shares. By paying off or returning capital which is in excess of the wants of the company.7. 12. Self-Learning Material 179 . Write off or cancel capital which has been lost or is not represented by available assets.7.18 Kinds of Share Capital a) b) Preference share capital Equity or ordinary share capital 12. A combination of the preceding methods. which is to be confirmed by the Tribunal (NCLT) reduce its share capital in any of the following manner: a) b) c) d) e) a) By reducing or extinguishing the liability of members for uncalled capital. Authorised. Consolidation: By division into shares of larger amount. Sub-division: Into shares of smaller amount.7. Pay off paid-up capital on the understanding that it may be called up again.

Directors act as agents and this power is subject to two limitations: i. having a share capital.8. Loans.2 Meaning of Loan Loan includes debentures or any deposit of money made by one company with another company. A public company. A part of this requirement is met by issue of shares. Redeemable vi. Debentures and Investments Notes 12.12. for the rest the company has to resort to public borrowing. Irredeemable or perpetual. Kinds of debentures: Debentures may be of the following kinds: i. not being a banking company. As contained in the memorandum or articles. It is a movable property.8. iv. the articles provide as to how and by whom these powers will be exercised. A non-trading company requires express powers to borrow. v.3 Debenture a) Definition: According to the Act. Where the memorandum authorises the company to borrow. It also provides for the repayment of principal and interest at specified date(s). Borrowing is incidental to trading. bonds. ii. Exercise of Borrowing Power and Limitations: The power to borrow is exercised by the directors. Who has the power to borrow? 42. Secured iv. b) Check Your Progress 41. A trading company has implied power to borrow unless prohibited by its memorandum or articles. The exigencies of commerce render such a power necessary. 180 Self-Learning Material . What do you understand by investments? 44. reserves not set apart for any specific purpose) unless prior sanction is obtained in general meeting. Bearer or unregistered ii. and any other securities of a company. b) ii. What is a ‘Loan’? 43. What is the significance of a unanimous board resolution? c) iii. It usually specifies the date of redemption. It generally creates a charge. Statutory Limits: No borrowing is permissible beyond the aggregate of the paid up capital of the company and its free reserves (i. 12. This power is taken in its memorandum or articles. cannot exercise borrowing power unless certificate to commence business is obtained by it. Unsecured or naked v. stock. It is of a series but can be a single debenture. It is issued by the company and is in the form of a certificate of indebtedness. vi. whether constituting a charge on the assets of the company or not. Registered iii.8 Borrowings.e.8. 12.39 Characteristic Features of a Debenture Are: i. “ ‘debenture’ includes debenture.1 Borrowing Powers of a Company a) Introduction: A company needs money to finance its activities. A debenture holder has no right of voting in company’s meetings.

iv. except an investment company. Register of investments not held in company’s own name is to be maintained. whichever is earlier. or to any other person. debentures or other securities. Convertible debentures can be fully or partly convertible. Investments. iii. The purpose of the investment. b) ii. by any body corporate.vii. ii. Loan at Bank Rate: No loan to any body corporate shall be made at a rate of interest lower Self-Learning Material 181 e) . 12. A resolution is passed in the meeting of the Board authorising to give guarantee. Make any loan to any other body corporate.8. or provide security. b) Guarantee by the Board: The Board may give guarantee. iii. iv. Notes 12. without being previously authorised by a special resolution. Certificates or letters of allotment are to be in the custody of the company. would include any property or right in which money or capital is invested. in a general meeting of the company or the annual general meeting held immediately after passing of the board resolution. c) Notice: Of such resolution shall indicate clearly. exceeding 60% of its paid up share capital and free reserves or 100% of its free reserves. Special sources of funding and such other details.4 Investments a) Meaning: The word ‘investments’ in its natural connotation. i. ii. Rules for Investments: Some of the rules for investments are: i. d) Unanimous Board Resolution: No loan or investment shall be made or security given by the company unless the resolution sanctioning it is passed at the meeting of the board with the consent of all the directors present at the meeting and the prior approval of the public financial institution where any term loan is subsisting. directly or indirectly: i. The particulars of the body corporate where loan. Give any guarantee. Convertible or non-convertible. loan.8.5 Inter Corporate Loans and Investments40 a) Ceiling on Loans.: No company shall. Acquire by way of subscription. security or guarantee. The specific limits. ii. iii. Investments are to be held in company’s own name. Guarantees. There exist exceptional circumstances which prevent the company from obtaining previous authorisation by a special resolution passed in a general meeting for giving a guarantee. whichever is more. if: i. The resolution of the board under (i) is confirmed within 12 months. v. Qualification shares are to be in respect of nominee director or nominee holders. etc. in connection with a loan made by any other person to. Holding shares in a subsidiary company may be in the name of nominee. The word ‘investments’ in a limited sense would mean the investing of money in shares. stock. is obtained. iii. guarantee or security to be given.In case the limit is exceeded special resolution is required. purchase or otherwise the securities of any body corporate.

iii. the company and every officer of the company who is in default shall be punishable with imprisonment which may extend to two years or with fine which may extend to Rs. ii. or provide a loan made by any person to. iv. iii. or a housing finance company in the ordinary course of its business. other than the provision relating to keeping of a register. ii.000. ii. Acquire. guarantee given or security provided by it in relation to any body corporate namely: i. 182 Self-Learning Material . If default is made in complying with the provisions of this section. Entries to be made chronologically within seven days of transaction. the securities of its wholly owned subsidiary. To any loan made by a holding company to its wholly owned subsidiary. To any investments made in shares allotted in pursuance of Section 81 (1)(A) (Rights issue). or to any other person by any body corporate. The amount. by way of subscription. iii. Extracts or copies can be taken. purchase or otherwise. ii. Register shall be kept at registered office and open for inspection as the register of members. h) Other Rules About Register: i. A banking company. Make any loan to any body corporate. stock. Notes f) Not Applicable to a Company in Default of Public Deposits: No company which has defaulted in complying with Section 58A (Public deposits) shall directly or indirectly: i. terms and purpose of the investment or loan or security or guarantee. 50. Give any guarantee. Not Applicable: Nothing contained in this section (372A) shall apply: i. A company whose principal business is the acquisition of shares.than the prevailing bank rate. i) j) Guidelines: Central government may prescribe guidelines for the purpose of this section. The name of the body corporate. or of providing infrastructural facilities. or a company established with the object of financing industrial enterprise. any guarantee given or any security provided for any investment made by: a. To any loan made. g) Keeping of a Register: Every company shall keep a register showing the following particulars in respect of every investment or loan made. debentures or other securities. iv. Penalties: i. A private company. purchase or otherwise the securities of any other body corporate till such default is subsisting. unless it is a subsidiary of a public company. k) To acquisition by a holding company by way of subscription. iii. v. The date on which the guarantee has been given or security has been provided in connection with the loan. or an insurance company. c. b. To any guarantee given or any security provided by a holding company to its wholly owned subsidiary. The date on which the investment or loan has been made.

the articles may fix 6 as the minimum and 10 as maximum. by whatever name called”.1 Definition of Director According to the Act. Notes Check Your Progress 45.5 Number of Directorships A person cannot hold office at the same time as a director in more than 15 companies. 2 Public Company 3 12. What penalties may be attached to the company and its each officer.9. iii. through whom a company acts and does its business. They are the brains of the company. “ ‘director’ includes “any person occupying the position of director.4 Minimum and Maximum Number of Directors Private Company Minimum * Maximum * * Both minimum and maximum number of directors may be as provided in the articles.000 and also with a further fine which may extend to Rs.9. Self-Learning Material 183 .3 Who may be Appointed as Director? No body corporate. Imprisonment is proportionately reduced. who is found of violating legal provisions relating to intercorporate loans and investments? 46. If default is made in complying with the provisions relating to keeping of a register. 500 for every day after the first day during which the default continues. iv. the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 12. professional or share qualifications. 12. What is the nominal value of qualification shares? 12.9.41 A company is an artificial legal person and the directors as a body endow the artificial legal person with human face that can act and react. Articles may provide for any qualifications. Board of directors or ‘Board’ in relation to a company. They are collectively known as board of directors. Only an individual can be appointed. if loan is repaid in full. 12. are termed as directors. A director is a person having control over the direction. conduct of a company. when loan is paid in part. No punishment of imprisonment.9 Company Management and Administration 12. Are there any professional qualifications required to become a director? 48. For example.6 Qualifications for Directors a) b) The Act prescribes no academic.2 Who are Directors? The persons.ii.9. Who cannot become a director? 47. 5. means the board of directors of the company. 12.9.9. association or firm can be appointed director of a company.

ii. A person who has been convicted by a court of an offence involving moral turpitude and sentenced to imprisonment for six months. A private company which is not a subsidiary of a public company may. and a period of five years has not elapsed from the date of the expiry of the sentence. An undischarged insolvent. In other words only one-third of the total number of directors can be non-rotational directors. A director disqualified under (g) above shall be ineligible for appointment as a director of any other public company only and this disqualification shall last for 5 years. 5000.7 Disqualifications of Director The following persons are disqualified for appointment as director of a company: a) b) c) d) A person of unsound mind. 12. e) f) g) ii.4. the subscribers to the memorandum. Has not filed the annual accounts and annual returns for 3 financial years commencing on and after 1.1999. iii. 4.9. 5000 or one share where its value exceeds Rs. Share warrants will not count for this purpose. shall be deemed to be the first directors of the company. Qualification shares must be taken within 2 months after appointment. or in the manner provided therein. provide for additional grounds. A person who is a director of a public company which: i. A director who has been removed by the central government shall not be a director for five years. Note: 1. A person who is disqualified for appointment as directed by an order of the Tribunal (NCLT) under section 203 of the Act (which deals with power of the Tribunal to restrain fraudulent person from managing company). by its articles. Appointment of Directors by Company: The directors must be appointed by the company in general meeting. The disqualifications mentioned in (d) and (e) above may be removed by the central government by a notification in the Official Gazette.8 Appointment of Directors Directors can be appointed in the following ways: a) First Director: The first directors are usually appointed by name in the articles. 3. Has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more. A person whose calls in respect of shares of the company held for more than 6 months have been in arrears. Nominal value of qualification shares must not exceed Rs.9. 2.c) Notes Where share qualification is fixed by articles then the Act42 provides: i. 12. Two-third of the total number of directors must retire by rotation. A person who has applied to be adjudged as an insolvent and his application is pending. Appointment of Directors by the Board: The board of directors can exercise the power to appoint directors in the following three cases: b) c) 184 Self-Learning Material . When the articles do not provide for the appointment of first directors.

Thus the quota will be 101 calculated as follows: e) 600 +1 = 101 Votes 5+1 ii. Check Your Progress 12. The term ‘small shareholder’ means a shareholder holding shares of nominal value of Rs. By Tribunal (NCLT): Where an application has been made to the Tribunal (NCLT) against oppression and mismanagement of company’s affairs. Who is a ‘small shareholder’? 52. nominate a director to represent their interest on the board.e. foreign collaborators. Single Transferable Vote: A quota of votes is fixed. 49. financial institutions. By Central Government: The central government has the power to make reference to the Tribunal (NCLT) against any managerial personnel. Does central government have the power to remove a director? If yes. his prior written consent is required to be signed and filed with the Registrar and the Company. then how? 12.. When can board of directors appoint the directors of a company? 51. if there are 1000 shares and five directors to be elected. As a result. the Tribunal (NCLT) may order the b) c) Self-Learning Material 185 . the Act43 gives an option to companies to appoint directors through a system of proportionate representation by any of the following methods: i. 20. On the findings of the Tribunal. Now assuming that the minority holds 20% of shares. A person gets elected if he gets the required number of votes fixed as quota. The notice must disclose the ground on which the director is proposed to be removed. Alternate directors. Thus.10 Removal of Directors Directors can be removed in the following ways: a) By Shareholders: Shareholders have the option to remove the directors by passing an ordinary resolution. Thus this minority shareholder can elect one director. Company receives a special notice for the removal of the director before the expiry of his term of office. the central government may remove the director. the total number of votes cast would be equal to 5000. or other lenders. etc. Appointment by Small Shareholders: A public company having a paid-up capital of 5 crore rupees or more.9 Consent for Appointment Before a person is appointed as a director. f) g) Appointment by Central Government: The central government can appoint directors on an order passed by the Tribunal (NCLT).9. Appointment of Directors by Proportional Representation: Ordinarily. 200 shares. Notes ii. Cumulative Voting: The total number of votes cast would be equal to the total number of shares multiplied by the number of directors to be elected. with a request to inquire into as to whether or not such a person is fit and proper person to hold the office of director. the total votes which the minority can cast in favour of one or more candidate would be equal to 200 x 5 = 1000. To enable the minority shareholders to have a proportionate representation on the board. i. holding companies.9. directors are appointed by simple majority vote. A candidate getting 1000 votes should be declared elected. Filling up the casual vacancy.000 or less. shareholders controlling 51% or more votes may elect all directors and the minority as high as 49% may find no representation on the board. Director has a right to make representations.i. Can a person of unsound mind become the director of a company? 50. Additional directors. and one thousand or more small shareholders may have a director elected by such small shareholders. iii. he is called a nominee director. d) Appointment of Directors by Third Parties (Nominee Directors): When the government. Suppose votes cast are 600 and there are 5 seats.

iv. Notes 12. The power to issue debentures. The power to invest funds. which is that they are really commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. 186 Self-Learning Material . However. To fill casual vacancy in board.11 Resignation by Directors There is no express provision in the Act relating to resignation of directors. managing partner or as employee but he is none of them. two formalities are to follow: First. and sometimes they have been called managing partners.R. A director acts as an agent. indirectly acknowledges this right as the Act stipulates that no director is entitled to any compensation if he resigns his office.termination of the agreement of the company with the director. or by the memorandum or articles. The power to make loans.14 Power to be Exercised by Resolutions Passed at Board’s Meeting The board shall exercise the followings powers by means of resolution passed at board’s meeting: a) b) c) d) e) f) g) The power to make calls. ii. it dos not matter much what you call them so long as you understand what their real position is. A director cannot withdraw his resignation without the consent of the company.9. the affected director may face some difficulty. Sanctioning of a contract in which a director is interested. a return to be filed with the Registrar within 30 days of the resignation becoming effective. whether by the Act.” 12.9. this fact is to be entered in the register of directors. a trustee. iii.This will cover the following: i. The Act does not define their position clearly. Recommend rate of divided at the Annual General Meeting. as the company is authorised to exercise and do. to be exercised by the company in general meeting. To make political contribution. however.9. the board cannot exercise any power or do any act or thing which is directed or required. Jessel has succinctly put the position of a director in these words: “Directors have sometimes been called as trustees or commercial trustees. 12. The Act. Resignation to be valid must be addressed to the company. M. 12. Second. Others . They stand in a fiduciary position towards the company in respect of their powers and capital under their control. or any other Act. When a director resigns. When the company does not comply with the second formality.13 Powers of the Board of Directors The Board of Directors of a company shall be entitled to exercise all such powers. The power to borrow money otherwise than on debentures. The power to buy-back of shares.12 Legal Position of Directors It is difficult to state the exact legal position of a director.9. and to do all such acts and things.44 Articles of a company may provide for resignation of directors.

19 Managerial Remuneration The total managerial remuneration payable by a public company or a private company which is subsidiary of a public company to its directors (or manager) in respect of any financial year must not exceed eleven per cent of the net profits of any financial year. can only act through some human intermediary. 12. 12.1 Introduction A company being an artificial legal person. lease or disposal of the undertaking.10 Company Meetings and Resolutions 12. Duty to participate in committees of the board like Audit Committee or Investor’s Grievance Committee.18 Managing Director a) b) c) Meaning: A director who is entrusted with substantial powers of management which would not otherwise be exercisable by him. 53.9. Where the Board becomes incompetent to act. What are the limitations with regard to a director’s power? Notes Check Your Progress 12. or if there is more than one such director.10.17 Limitation on the Powers of Director a) b) c) Where the director’s actions are found to be malafide.16 Duties of Directors Some of the duties of directors are: a) b) c) d) e) Duty of good faith. Deadlock in the board. Borrowing monies exceeding the aggregate of the paid-up capital and free reserves of the company. The various provisions of the Act and rules empower members to do certain things.9.15 Powers to Be Exercised by the Company in General Meeting a) b) c) d) e) Sale. For a whole time director or a managing director. ten per cent for all of them taken together. Duty to disclose interest. Contribution to charitable and other funds. Make investment of the amount of compensation received. Duty to attend board meetings. What power does the board possess through resolutions? 55. 12. Can a director choose to withdraw his/her resignation? 54. Number of companies: Of which one person may be appointed Managing Director is two. Tenure of appointment: Is five years but eligible for re-appointment for another term of five years.9. 12.9.12. Showing any concession regarding payment of debts. the remuneration shall not exceed five per cent of the net profits for one such director. Duty to take reasonable care. All decisions of Self-Learning Material 187 .9.

Show of hands v. Quorum: The quorum is generally laid down in the articles.the company are taken in meetings. Division iv. The articles can not provide for a smaller quorum. Chairman of the Meeting: Every meeting is presided over by the chairman who is to conduct the proceedings of the meeting properly. Poll (According to the number of shares held by a member. c) d) e) 12. His main role is to maintain order and decorum in the meeting.3 Kinds of Meetings The kinds of meetings of a company are shown below: Meetings of a Company Shareholders Directors Creditors and Debenture Holders General Meetings Class Meetings Statutory Meetings Annual General Meetings Extra-ordinary Meetings 188 Self-Learning Material . These minutes shall be evidence of the proceedings recorded therein. A proxy can only vote on a poll. Acclamation (By cheering or clapping) ii. Voice vote iii. An agenda is the statement of business to be conducted in a meeting. Voting: To ascertain the sense of the house the chairman of the meeting can use any of the following: i. unless the articles may provide otherwise. the quorum is 5 members for public and 2 members for private company. In the absence of any provision in the articles. It must specify the date.10. The chairman is either the chairman of the board or elected for every meeting.10. Notice of Meeting Must be Proper and Adequate: For general meetings at least 21 clear days notice must be given to every member and auditor of the company. say permitting a proxy to vote on a show of hands also) f) g) Agenda: Every general meeting has an agenda to be sent to every member. legally constituted and properly conducted. Ballot (which can be open or secret) vi. Notes 12. time and place of meeting.2 General a) b) Requisites of a Valid Meeting: It must be duly convened. Minutes: The decisions taken in a meeting are recorded as minutes of the meeting.

5 Annual General Meeting (AGM) a) b) c) Which company to hold: Every company either public or private.10. Notice: At least 21 days notice is to be given. total shares allotted. 2500 per day.6 Extraordinary General Meeting (EGM) All general meetings other than the AGM shall be EGMs. 5000 and is also a ground for winding up. What is the maximum number of companies a person can associate with as MD? 57.10. In what ways a member can vote? 59. First AGM: May be held within 18 months from the date of incorporation. an abstract of receipts and payments. vi. brokerage and commission. directors. i. Notice: 21 days. Business to be transacted: Ordinary business like consideration of annual accounts. Check Your Progress 56. Subsequent AGM: There must be one meeting held in each calendar year.000 or in case of continuing default Rs. e. This meeting is also not required to be held by a public company not having share capital or has unlimited liability or a government company. What is the notice period for a statutory meeting? 60. iv. 50.e. In case of default: Penalty is Rs. What is a ‘Motion’? 12. Who presides the meeting in a company? 58. Its contents include. The gap between two AGMs must not be more than 15 months. removal of a director/auditor. Extension of time: Registrar can give extension time upto a maximum of 3 months. Business to be transacted: All business transacted in EGM is called special business and accompanied by an ‘Explanatory Statement’. When Held: Only Once in the life time of the company. It is to be held within a period of not less than one month but not more than six months from the date the company is entitled to commence business. When to be held: Every calender year. This period can be extended to 18 months by the Registrar. Not Required to be Held: A private company is not required to hold a statutory meeting. Penalty provided is Rs.g.10. once annually. First AGM must be held not later than 9 months from the date of closing of financial year. total amount of cash received. What business has to be transacted in AGM? 61. v. Meeting must be held not later than 6 months from the close of the financial year. Notes b) c) d) e) f) 12. Default: Central government can give directions as it thinks expedient. ii.12. This is the first meeting of the shareholders. details of contract. Some of the points relating to EGM are: a) b) When to be convened: For transacting some urgent or special business that may arise between two AGMs.4 Statutory Meeting a) Object: The main purpose is to enable the members to know at an early date the financial position and prospects of the company and also to provide them an opportunity of discussion on various matters arising out of promotion and formation of a company. Self-Learning Material 189 . appointment of directors and auditors or any special business may be transacted. declaration of dividend. iii. Statutory Report: Is presented in this meeting. Gap between two AGM: i.

the date.10. time and place of meetings.c) Notes Who may call: An EGM may be called by: i. 12. with or without amendment. is called a resolution. Should be positive in terms and should always be in writing. by members present should not be less than three times the votes cast against the resolution. if the board does not call the meeting within 45 days of the deposit of a valid requisition. ii. Resolutions requiring special notice c) d) What is an Ordinary Resolution: A motion passed by simple majority of the members voting at a general meeting. The Tribunal (NCLT). Should not be withdrawn before consent. by whatever means. The requisitionists themselves. Duly proposed by any member in a meeting.45 All reasonable expenses incurred by the requisitionists by reason of the failure of the board to call a meeting shall be repaid to the requisitionist by the company. iii. Some of the matters for which special resolution is required are to alter objects clause of memorandum or to alter articles. c) d) 12. whichever is higher. memorandum and articles. if the requisitionists are the holders of 1/10 of total voting power. Types of Resolution: i. In other words. Special Resolution: The votes cast in favour. No form or period of notice is laid down.8 Motion a) b) Meaning: A proposal under consideration by members in a meeting before it is voted upon. Meeting must be held within 3 months of the date of deposit of requisition. Ordinary resolution ii.9 Resolution a) b) Meaning: Any motion voted upon and agreed to in a meeting and entered in minutes.10. Quorum: 1/3 of the total strength or two. Rules as to Motion: The following are the rules as to motion: i.10. a motion when passed.7 Board Meeting a) b) When to hold: Atleast once in every three calendar months and 4 meetings every year. Passing of resolution by circulation is permissible. 12. iv. iv. Special resolution iii. The notice must state. Within power. Comply with the provisions of the Act. scope and relevant to business. Intention as special resolution should be specified in the notice or intimation of the meeting. ii.46 Notice: To be given to every director in writing. The directors on requisition. Usually a week’s notice is sufficient. d) e) An institutional shareholder can requisition an EGM. v. The board on its own. iii. 190 Self-Learning Material .

ii. buy-back of own shares.10. alteration in the object clause of the memorandum. Books of accounts should necessarily give a true and fair view of the state of affairs of the company. Examples . All sales and purchases of goods by the company. Note: Postal ballot includes voting by electronic mode. Books are to be kept on accrual basis and as per double entry system of accounting.11. However. For any other default fine upto Rs. or declaration of identity of the shareholder. imprisonment upto 6 months or fine or both.000.10 Passing of Resolutions by Postal Ballot47 a) Conditions of Applicability: i.D. Self-Learning Material 191 . Send a notice to shareholders along with the draft resolution and shareholders to send their vote within 30 days of posting of the letter.2 Books of Account Every company is required to maintain proper books of account with respect to: a) b) c) d) e) All receipts and expenditure of money. 50.1 Introduction The Act contains a number of provisions relating to accounts and audit designed to ensure that members of a company are furnished with all the necessary information relating to its affairs. sale of the undertaking of the company. Notice to be sent by registered post. Books are to be kept at the registered office. ii. 12. Some of the subjects so declared are. labour or other items of cost as may be prescribed by the central government. The assets and liabilities of the company.appointing an auditor other than the retiring one. b) Penalties: i. Listed public company shall get any resolutions passed by postal ballot on subjects so declared by the central government.e) Resolution Requiring Special Notice: Notice of the intention to move the resolution should be given to the company not less than 14 clear days before the meeting at which it is to be moved. Every three months summarised accounts of all branch offices-in or outside India. In case of a company engaged in production. 12. removing a director before expiry of period of his office. Notes 12. A. such particulars relating to utilisation of material. or by any other method as prescribed with a pre-paid postage envelope. manufacturing or mining activities.11. a company may keep books at any Note: 1. iii.11 Accounts and Audit 12. For fraudulently defacing or destroying the ballot paper. without giving away any information which would be detrimental to the interests of the company. processing. 2. 3.

5 Authentication of Accounts Every balance sheet and profit and loss account of a company (except a banking company) shall be signed on behalf of the board. 12. 1947. Partner/employee of an officer or employee of the company. and by not less than two directors.11. if any. 1000 or guarantor or who had given security in connection with the indebtedness of any third person.11. A shareholder has no statutory right to inspect books of account. How long the books of accounts shall be preserved? 65.11.9 Disqualifications of an Auditor The following entities or persons are disqualified to be appointed as an auditor of a company: a) b) c) d) A body corporate.7 Filing of Annual Accounts Every company is required to file with the Registrar three copies of annual accounts within thirty days from the date they were laid before the company at the AGM. Indebted to the company for an amount exceeding Rs.48 12. Who can inspect the books of account? 64. They are adopted in the AGM. shall be sent to every member of the company. They are approved by the board.11. not less than 21 days before the meeting (AGM).6 Circulation and Adoption of Annual Accounts A copy of annual accounts (Balance sheet and profit and loss account) auditors report. An officer or employee of the company. However. After approval and signature.11. 12. before signing. they are handed over to the company’s auditor for his report. In such an event.8 Who can be an Auditor? A person is qualified to be an auditor of a company if he is a practicing chartered accountant within the meaning of the Chartered Accountants Act. 192 Self-Learning Material .11.Notes other place in India as the board of directors may decide. by its manager or secretary. one of whom shall be the managing director. where there is one.3 Inspection of Books of Account Check Your Progress 62. if the articles specifically provide for such a right then he can inspect. Authorised officers of SEBI (for listed companies only). 12. the company has to file full particulars with the Registrar within 7 days of such decision. How many types of resolutions are there? 63.4 Preservation of Books of Account Books of account of every company are to be preserved for a period of eight years. 12. 12. Who can be an auditor? Books of account and other books are open for inspection by: a) b) c) d) Any director The Registrar Authorised officers of the central government. 12.11. and director’s report.

To make report to members.11. iv. Transactions of the company. Loans and advances made by the company. 12. To visit branch offices and right to access to books. Notes ii. Receipt of cash for shares allotted. Self-Learning Material 193 .14 Auditor’s Report a) Obligations to make an inquiry relating to: i. Prospectus. iii. 2000 (viz. iii. ii. The company’s subsidiary. 1412-2000).13 Duties of Auditor His duties are: a) b) c) Acquaintance with the Act. Statutory report.12 Rights of Auditor The rights of an auditor are: a) b) c) d) e) Access to books. Assistance in investigation. Others: i. Personal expenses charged to revenue account. if not then by the company in general meeting. memorandum and articles.11 Tenure of Appointment An auditor is appointed from the conclusion of one AGM until the conclusion of the next AGM. 12. iv. accounts etc. f) A person holding any security carrying voting rights of that company after a period of one year from the date of commencement of the Companies (Amendment) Act. 12. To receive notice of general meeting and to attend.11. Its holding company.11.11. Following accounting standards. 12. To receive remuneration on completion of his work.e) Disqualified for appointment as auditor of any body corporate which is: i. A subsidiary of its holding company.. 12. ii. To obtain information and explanation. accounts and vouchers.11. Subsequent Auditor: Is appointed every year by the members in AGM by passing an ordinary resolution.10 Appointment of Auditor a) b) First Auditor: Is appointed by the board. or iii.

If the board does not accept the recommendation. The central government has already constituted NACAS.52 Briefly the facts in this case were that two minority shareholders alleged that directors and solicitors of the company were guilty of fraudulent acts which resulted in loss to the company. Auditor’s report of branch office. The terms of reference shall be specified by the board. not audited by him. 5 crores.15 Cost Audit49 It is also a part of audit to verify the costs of manufacture or production of an article on the basis of accounts as regards utilisation of material or labour or other items of cost. it shall record the reasons there for and communicate such reasons to the shareholders. shall be binding on the board. Balance sheet and profit and loss account are in agreement with books of account. Its composition shall be disclosed in the annual report. iii.12. Compliance of accounting standard. v.11. 12.16 National Advisory Committee on Accounting Standard (NACAS)50 The central government may constitute NACAS. Harbottle. vi. This is a committee of the board.17 Audit Committee51 Some of the provisions relating to audit committee are: a) b) c) d) e) f) g) Applicable to every public company having paid up capital of not less than Rs. maintained by the company. Obtained all information and explanations. iv. Accounts render true and fair view of the affairs of the company. Such an audit shall be conducted by a cost accountant within the meaning of the Cost and Works Accountant Act. They decided to take action for damages against the directors. h) 12. ii.b) Notes Matters that are to be stated in the auditor’s report: i. It shall have authority to investigate into any matter specified in section 292A of the Act or referred to by the board. The recommendations on any matter relating to financial management including the audit report. 1957. 12.1 The Principle of Majority Rule The management of companies is based on the rule by majority. It shall consist of not less than three directors. The chairman of the audit committee shall attend AGM.11.11. to advise the central government on the formulation and laying down of accounting policies and accounting standards for adoption by companies. Proper books of account have been kept by the company and report from branches received. 12.12 Prevention of Oppression and Mismanagement 12. It shall have full access to information kept by the company. The court dismissed the suit of the minority shareholder on the 194 Self-Learning Material . The principle of majority rule is often described as the rule in Foss v. like any democratic set up.

Lord Cooper has given the meaning of the term as “The essence of the matter seems to be that the conduct complained of should. As on date. Hence. Notes Check Your Progress 66. 12. The oppression must be of continuing nature.5 Relief from Oppression and Mismanagement In case of oppression of members and mismanagement of company.12. the powers are exercised by courts or Company Law Board. What is termed as oppression? 12. and not the minority shareholders. 12. The central government. The majority rule has many inherent advantages like: a) b) c) If a company has suffered any financial loss. The Tribunal (National Company Law Tribunal (NCLT)) for winding up. What are the main provisions for the audit committee? 69.ground that the acts of the directors were capable of confirmation by the majority of shareholders and held that the proper plaintiff for wrongs done to the company is the company itself.6 Application to NCLT and Relief by it A requisite number of shareholders can apply for appropriate relief to NCLT. at the lowest.12. NCLT may give relief if it is of the opinion that the company’s affairs are being conducted: a) In a manner prejudicial to public interest. The central government is in the process of formation of NCLT. How are the auditors appointed? 67. If every individual member were given unfettered right to decide there would be endless litigation.12.4 Conditions Precedent for Mismanagement The affairs of the company are being conducted or such affairs are likely to be conducted in a manner which is: a) b) Prejudicial to public interest. Prejudicial to the interest of the company. Self-Learning Material 195 . and as such the company could act only through its majority shareholders. The Tribunal (National Company Law Tribunal (NCLT)). in this section NCLT or Tribunal has been used.54 The complaining member must show that he is suffering from oppression in his capacity as member and not in any other capacity.53 12.12.12. it is the company and not the minority shareholders who can sue.2 Exceptions to the Majority Rule There are many exceptions to the majority rule.3 Meaning of Oppression The term ‘oppression’ has not been defined in the Act. a requisite number of shareholders can apply for appropriate relief to: a) b) c) Note: The powers of the court or Company Law Board are transferred to the National Company Law Tribunal (in short NCLT) by the Companies (Amendment) Act 2002. There is a need to preserve right of majority to decide.where prevention of oppression and mismanagement is applicable. What is NACAS and what does it do? 68. One of them is . 12. involve a visible departure from the standards of their dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely”.

12.7 Who can Apply for Relief55 Requisite number of members should sign on the application: a) Company having share capital: i. 12.9 Acts held as Oppressive The court has held following acts as oppressive: a) b) c) d) e) f) g) h) i) Not calling a general meeting and keeping shareholders in dark. Issue of further shares benefiting a section of the shareholders.12. A legal representative of a deceased member. Besides members the following can also apply: i. Failure to distribute the amount of compensation received on nationalisation of business of company among the members. Transfer of shares held by company to some shareholders otherwise than by making an offer to all. The central government or any person authorised by the central government. iii. ii.12. ii. If sale of assets is made by a company to some of its directors and simultaneously giving them loan to purchase the same. c) . inefficient careless conduct of a director. 12.8 Notice of Application to be Given to the Central Government The notice of every application made to the Tribunal (NCLT) under sections 397/398 of the Act for the prevention of oppression or mismanagement must be given by the Tribunal (NCLT) to the central government. Trustees of a shareholder/member.b) Notes In a manner oppressive to any member(s). Depriving a member of the right to dividend. Not declaring dividend when company is making loss.12. and not allowing board to perform its functions. 12. Non-maintenance of statutory records and not conducting affairs of the company in accordance with the Act. 12. whichever is less. Not less than 100 members or 1/10 of the total number of its members. By any member(s) holding not less than 1/10 of the issued share capital. The central government can make any representation which the Tribunal will consider before making a final order. where required to be distributed. b) c) Company not having share capital: 1/5 of the total number of member of the company. Countermanding decision of the board who controls majority voting power.10 Acts held as not Oppressive The court has held the following acts as not oppressive: a) b) 196 Self-Learning Material An unwise. Non-holding of the meeting of the directors. Allotment of shares by directors in a manner by which majority of shareholders is reduced to minority.

Some of the powers are: a) b) c) d) e) f) The regulation of conduct of the company’s affairs in future. Continuation of managing director in office after the expiry of his term. c) Removal of secretary by majority decision of the board unless it is shown that the removal has prejudicially affected the interest of the company or public interest. Who can apply for relief from oppression & mismanagement? 72. What is known as amalgamation? 12. Termination. Setting aside of any transfer. Arrangement with creditors in company’s bonafide interest. Purchase of shares or interest of any member of the company by other member or by the company. it cannot be that it is mismanaged. Violation of the condition of the company’s memorandum. Reduction of the share capital. Increasing the voting rights of the share held by the management.13 Acts held as not Mismanagement a) b) Building up of reserves. 12. d) e) Removal of the director and termination of the works manager’s service. Merely because company incurs loss.d) e) f) g) Failure to maintain proper records of the company. Drawing remuneration by a director to which he is not legally entitled. Illegal constitution of the board of directors. 12. Which authorities deal with oppression & mismanagement? 71. delivery of goods. Operation of bank account by an unauthorised person.12. 70. setting aside or modification of any agreement between the company and the managing director/director/manager. payment. Diversion of the funds to benefit the majority. setting aside or modification of any agreement between the company and any third party. Gross neglect of interest of the company by sale of its only assets. execution or other acts relating to Self-Learning Material 197 . Sale of assets at low price and without compliance with the Act.12.11 Majority can also Apply for Relief Relief can be granted if the application is made by majority shareholders who have been rendered completely ineffective by the questionable acts of a minority group.12. Negligence and inefficiency in managing the affairs of the company.12 Acts Held As Mismanagement a) b) c) d) e) f) g) h) i) j) Serious in-fight between the directors. Termination.14 Powers of the Tribunal (NCLT) The Tribunal (NCLT) has all the necessary powers to end oppression as well as mismanagement. Notes Check Your Progress 12. Violation of statutory provisions and those of articles.12. Advance of loans without execution of a document.

A company has an implied power to compromise/ arrangement. A certified copy of 198 Self-Learning Material . including shareholders and the central government.15 Power of the Central Government The central government has also the following powers: a) b) Power to prevent oppression or mismanagement.12. Power to remove managerial personnel. Notes g) h) Any other matter considered just and equitable. An arrangement embraces a far wider class of agreements than a compromise. 12. It means settlement or adjustment of claims in a dispute by mutual concessions. According to the Act. “the expression arrangement” includes a reorganisation of the share capital of the company by the consolidation of shares of different classes. Creditors agreeing to receive in part payment of the claims and the balance in shares or debentures of the company. the company or any creditor or member may apply to the NCLT (Tribunal) for compromise.2 Meaning of Arrangement The term ‘arrangement’ is of very wide import.56 An arrangement may also involve: a) b) c) Debenture holders being given an extension of time for payment.3 Compromise and Arrangement When a company has a dispute with members or creditors. a scheme of compromise may be drawn up. where there is no dispute and there is need for readjusting the rights or liabilities of members or creditors the company may resort to a scheme of arrangement with them. Proper notice of meeting and full particulars of the scheme is given to all interested parties. NCLT sanctions the compromise if it is approved by a majority representing 3/4th in value of creditors/members at the meeting. If the members are required to give up their rights entirely. it will not be a compromise. All modes of re-organising share capital.13. can properly form part of an arrangement with members. Arrangements. Reconstruction and Amalgamation 12. Any scheme which is fair and reasonable and made in good faith will be sanctioned. Preference shareholders giving up their rights to arrears of dividends or agreeing to accept a reduced rate of dividend in the future. When a proposal is made.property.13 Compromises. 12. Compromises/arrangements can be discussed under the following two heads: a) Compromise/arrangement when the company is a going concern .13. Prevent the change in the board. 12.This can be done between a company and its creditors or any class of them or between a company and its members or any class of them.13.1 Meaning of Compromise Compromise is a term which implies existence of a dispute such as relating to rights. NCLT then calls a separate meeting of each class of creditors/ members. or by the division of shares into shares of different classes or by both these methods. Meeting is held and conducted as NCLT directs. 12. But.

iv. v. vi. Notes Note: The powers of court are transferred to the National Company Law Tribunal (NCLT). vii. viii.13. reconstruction implies the carrying on of an existing business in some altered form. if applied for. Meeting of members or creditors. Appeal. ii. Hence in this section Tribunal or NCLT is used. under an arrangement by which the shareholders of the old company are entitled to receive some shares or other similar interest in the new company. Meaning of Amalgamation: This term is not defined in the Act. It implies combination of two or more companies or the business of two or more companies into one company or into the control of one company. He may exercise the powers of compromise/ arrangement with the sanction of the NCLT. iii.NCLT’s order is filed with the Registrar. The central government is in the process of formation of the Tribunal. so that persons interested in the business may remain substantially the same. the powers are exercised by courts.amalgamation/reconstruction may take the form of take-over or merger. 12. If the NCLT is satisfied that the compromise/arrangement cannot be worked satisfactorily it may make an order for the winding up of the company. For reorganisation. and not merely the continuance of one concern.4 Reconstruction and Amalgamation Arrangements and compromises can take place for the purposes of reconstruction and amalgamation of companies. ii. Tribunal’s sanction. Resolution by three-fourth majority. Take-over and Merger: Distinction . Stay of suit. In case of voluntary winding up the sanction of a special resolution of the company is necessary. Copy of the Tribunal’s order to be filed with the Registrar. Forms of Reconstruction/Amalgamations: A reconstruction/amalgamation may take any of the following forms: Self-Learning Material 199 c) d) e) . An appeal lies to the Appellate Tribunal. b) Compromise / arrangement during the winding up of company . In a take-over the direct or indirect control over the assets of the acquired company passes to the acquirer. A reconstruction is made for any of the two purposes: i. a) Meaning of Reconstruction: When a company transfers the whole of its undertaking and property to a new company. Binding on all members and creditors. The procedure to be followed is summarised below: i. then only the order has any effect. Application to the Tribunal. b) To enlarge the operations of the company. Difference Between Amalgamation and Reconstruction: Amalgamation involves the blending of two or more concerns. in short Tribunal by the Companies (second amendment) Act.Liquidator may apply to the NCLT for compromise/arrangement. in a merger the shareholding in the combined enterprise will be spread between the shareholders of the two companies. NCLT has the power to supervise the carrying out of the compromise/arrangement. 2002. As on date.

Who presents the petition for compulsory winding up of a company? 12. ii. *Note: The powers of court are transferred to the National Company Law Tribunal by the Company (Amendment) Act. By a scheme of arrangement. What are the modes of winding up? 74.14. As on date. collects its assets. with such property. another company. authorities and privileges and with such liabilities. The amount of compensation is to be assessed by the central government and has to be published in the Official Gazette. or whose shares have been acquired by.5 Amalgamation of Companies in National Interest (Section 396) Where the central government is satisfied that it is essential in the public interest that two or more companies should amalgamate. and its effect? 75. ii. Notes f) By sale of undertaking. the powers are exercised by courts. To see that the scheme is reasonable and fair. 12. An administrator. Duties of the Tribunal (NCLT) with respect to Reconstruction/Amalgamation: i.i. Besides. The books and papers of a company which have been amalgamated with. interests.1 Meaning of Winding up Winding-up of a company represents the steps for the last stage in its life. must not be disposed of without the prior permission of the central government. The central government is in the process of formation of this Tribunal. To see that the scheme is designed to overcome difficulties and re-establish the business. To ascertain the wishes of the members. iii. called liquidator. These modes are: a) b) Compulsory winding-up under orders of the National Company Law Tribunal (NCLT)*. It means a proceeding by which a company is dissolved. 2002. rights. even a solvent company can be wound-up.2 Modes of Winding up There are two modes of winding-up. 200 Self-Learning Material . 12. Voluntary winding-Up.13.B Gower. Check Your Progress 73.14 Winding up of a Company 12.14. According to Prof. duties and obligations as may be specified in the order. powers. pays its debts and finally distributes any surplus among the members in accordance with their rights”. What is the stipulated period for commencing business activities after incorporation. is appointed and he takes control of the company. “Winding-up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members. then the central government may order the amalgamation of those companies into a single company with such constitution. L.57 Winding up of a company differs from insolvency of an individual in as much as a company cannot be made insolvent under the insolvency law. By sale of shares. iii.C. Hence in this section Tribunal/NCLT has been used. Any member or creditor who stands to lose by the amalgamation is to be given compensation.

61 iv. They are entitled to appear and be heard in support of or in opposition Self-Learning Material 201 . The Supreme Court of India has ruled that the workers of a company cannot prefer a winding-up petition against a company.3 Grounds for Winding up by the Tribunal (NCLT)58 A company may be wound up by the Tribunal on the following grounds: a) By the company passing a special resolution: This ground may not be resorted to very much as the members may prefer to go for voluntary winding up as the same may be more economical and speedier.such companies are commonly called as ‘fly-by-night’ companies. The Registrar. If the Tribunal is of the opinion that the company should be wound up as it has become sick and is unlikely to become viable in future. When the main object of the company has substantially failed. Tribunal is of the opinion that it is just and equitable: The Tribunal may order winding up under this clause in the following cases: i. decency or morality. The NCLT may instead of making a winding up order direct that the statutory meeting be held or the statutory report be delivered.e.14. the security of the state.12. If the company has acted against the interests of sovereignty and integrity of India.59 ii.14. The central government or state government. Default of company’s filing its balance sheet and profit and loss account on annual return for any five consecutive financial years. Failure to commence business within a year from the date of incorporation or suspension of business for a whole year: The suspension must be of entire business and not a part of it. Notes b) c) d) e) f) i) 12. The official liquidator. i. Any person authorised by the central government. Any combination of creditor. Reduction in membership below the minimum required: The minimum number is 7 for a public company and 2 for a private company. Any creditor. When there is a complete deadlock in the management of the company. Inability to pay its debts of Rs. public order. v. g) h) When there is oppression of minority shareholders. Default in holding statutory meeting or in delivering statutory report to the Registrar: This clause is not applicable for a private company. Where there is a mismanagement and there is no practical possibility of remedying it. Any contributory.4 Who may Petition for Winding-up62 A petition for the compulsory winding-up of a company may be presented by: a) b) c) d) e) f) g) h) The company. The company carries on business for more than 6 months while the number is so reduced. When the company is a ‘bubble’.60 iii. company or contributory acting jointly or separately. 1 lakh : What is important to note that the company must be commercially insolvent. it never had any business . friendly relations with foreign states.

6 Consequences of Winding-up Order by the Tribunal The important consequences of the winding up order by the Tribunal are as follows: a) b) c) d) e) f) g) h) i) Intimation to be sent to the official liquidator and the Registrar. If not. To arrest an absconding contributory. 12. Winding-up order is deemed to be notice of discharge for employees. 12. To set-off claims. 12. Official liquidator is normally the liquidator. debtors and creditors with their addresses. workmen and other employees and any outstandings to them and such other details as the Tribunal may direct. . To make calls. the limitation remains suspended in favour of the company till one year after the winding-up order is made. To order public examination of promoters. The statement of affairs shall include details like names and addresses of directors.14. Suits stayed unless the Tribunal gives leave to continue.8 General Powers of the Tribunal in Compulsory Winding-up a) b) c) d) e) f) g) h) i) j) k) l) m) 202 Self-Learning Material To stay winding-up. Board’s powers come to an end. Notification of order in the Official Gazette. To adjust the right of contributories.14. Filing of winding up order with the Registrar within 30 days.63 Notes 12. To exclude creditors not proving on time. On the commencement of winding-up. etc. To order the dissolution of the company. then liquidator is selected from a panel.7 Action by the Tribunal a) b) Statement of Affairs to be made available to the liquidator.14. To order costs.14. a statement of affairs is to be filed by the company.to the winding-up petition. location of assets of the company and their value. company secretary. Tribunal may direct for the constitution of a Committee of Inspection. To settle the list of contributories.5 Statement of Affairs to be Filed on Winding-up64 Every company is to file with the Tribunal a statement of its affairs along with the petition for winding up. To order payment into bank of money’s due to the company. To require delivery of property to the liquidator. When the company is opposing a petition for winding up. Order operates in the interests of all creditors and contributories. directors. To summon persons suspected of having the property of the company.

To sell the immovable/movable property of the company. liability or debt. To summon meetings of creditors and contributories. Notes 12. To compromise any call. ii. iii. Claim in the insolvency of any contributory.9 Duties of Liquidator Liquidator has the following duties: a) b) c) d) e) f) g) h) i) j) To conduct proceedings in winding-up. On status of company. To raise money on the security of the company.Voluntary winding-up has the following effects: i. iii. compromise or settle with any class of creditors. ii. iv. iii.14. make any bill of exchange in the name of the company. Creditor’s voluntary winding-up Effects of voluntary winding-up . vii. To keep statutory books. viii. b) Member’s voluntary winding-up ii. execute all deeds. b) Exercisable without the sanction of the Tribunal: i. iv. Board’s powers to cease on liquidator’s appointment.There are two types of voluntary winding up: i. To do all such other things as may be necessary for the winding-up of the company. To obtain directions from the Tribunal. To pay. accept. Central government’s control of liquidator. receipts and other documents. 12. Effect on company’s employees.14. To carry on the business of the company. Inspect the records and returns of the company with the Registrar.11 Voluntary Winding-up a) Kinds .12. To get accounts audited.14. iv. Corporate powers to continue until dissolution. vi. To make a report.10 Powers of the Liquidator a) Exercisable with the sanction of the Tribunal: i. To appoint advocate. To comply with directions of the creditors or contributories or the Committee of Inspection. To take custody of company’s property. Draw. To institute or defend any suit in the name and on behalf of the company. Do all acts. Self-Learning Material 203 . v. Appoint any agent. ii. v. attorney. Information as to a pending winding up.

Duty of a liquidator to call meeting of a company and creditor at the end of each year. iv. 3. conditions to be satisfied: The following two conditions are to be satisfied in members voluntary winding-up: i. e) Provisions applicable to members voluntary winding-up: i. 2. Duty of liquidator to call a general meeting at the end of each year. Shareholder’s resolution to be passed. ix. iii. iv. vi. What power does a liquidator can exercise irrespective of sanction by the Tribunal? 77. ii. Final meeting and dissolution. Creditors have choice over members. Notice of appointment of liquidator to be given to the Registrar. No meeting of members is necessary. Declaration of solvency to be made.12 Difference Between Member’s and Creditor’s Voluntary Winding-up Sl. ii. . Power of liquidator to accept shares etc. Powers to fill a vacancy in the office of a liquidator. No. No Committee of Inspection. Board’s powers to cease on appointment of a liquidator. Meeting of creditors. Alternative provisions as to annual and final meeting in case of insolvency. Board’s power to cease on appointment of a liquidator. Notes c) Avoidance of transfer of shares. Check Your Progress d) 76. 1. Such a Committee may be constituted. Members appoint the liquidator. Appointment of liquidator. Power of liquidator to accept shares etc. Fixing of liquidator’s remuneration. x. 4. ii. Final meeting and dissolution. Creditor’s Voluntary Winding-up No such declaration is required. v. viii. Give differences between members and creditors voluntary winding-up.v. viii. Provisions applicable to creditors voluntary winding-up: i. v. as consideration sale of company’s property. iii. Members voluntary winding-up. Power to fill a vacancy in the office of liquidator. 12. Meeting of members and passing a resolution is required. vii. Appointment of a Committee of Inspection. 204 Self-Learning Material Member’s Voluntary Winding-up Director’s declaration of solvency is a must. as consideration for sale of company property. How many types of voluntary winding up are there? 78. Members have dominating control. Appointment of liquidator. vi. Creditors have dominating control.14. Notice of resolution to be given to the registrar. vii. Duty of liquidator to call creditor’s meeting in case of insolvency. ix. 5.

2000 and twice in 2002. 12. Thereafter Securities and Exchange Board of India (SEBI) appointed a Committee under the chairmanship of Kumar Mangalam Birla. In the last two to three decades it has become a buzzword. This committee submitted its report and associated ‘Code of Best Practices’ in December 1992. With a view to prevent the recurrence of business failures. the central government (Ministry of Company Affairs) appointed an expert committee under the chairmanship of Dr Jamshed J Irani in December 2004. Creditor’s Voluntary Winding-up Sanction of the tribunal of the committee of inspection or of meeting of creditors. 12. Confederation of Indian Industries (CII) appointed a National Task Force headed by Rahul Bajaj.15. In April 2002 Ganguly Committee report was made for improving corporate governance in Banks and Financial Institutions. This committee submitted its report on 7 May 1999. Some of the recommendations of these various committees were given legal recognition by amending the Companies Act in 1999. who submitted a ‘Desirable Corporate Governance in India . It was for Sir Ronald Hampel (the chairman of ICI) Committee on Corporate Governance to assess the import of Cadbury’s recommendations and developing further guidance. SEBI implemented the report by requiring the Stock Exchanges to introduce a separate clause 49 in the Listing Agreements. Cadbury Committee was constituted to draft a Code of Best Practices for the U.15.65 SEBI thereafter revised clause 49 of the Listing Agreement.2 Historical Evolution of Corporate Governance A spate of scandals and corporate collapses in the late 1980s and 1990s led shareholders and banks to express concern about the safety of their investments. No. Notes 6. The Committee submitted its report to the Central Government on 31 May 2005. Narayan Murthy. Member’s Voluntary Winding-up Liquidator exercises some of his powers with the sanction of a special resolution of members. had significant influence on India. This committee submitted its report to SEBI on 8 Feb.1 Introduction Corporate governance was a relatively unknown subject to the public till about 1980’s. With a view to gear company law for competition with business in developed countries. All these developments with regard to corporate governance led Turnbull Guidelines in September 1997. Corporations. Finally SEBI appointed another committee on Corporate Governance under the chairmanship of N.a Code’ in April 1998 containing 17 recommendations. Containing 19 Mandatory and 6 non-mandatory recommendations. Thereafter there was Richard Greenbury (Mark and Spencer chief) Committee on Director’s remuneration.Sl. which has come into force with effect from 01 January 2006. Corporate failures of Bank of Credit and Commerce International (BCCI). London Stock Exchange in May 1991 set up Cadbury Committee under the Chairmanship of Sir Adrian Cadbury. R. With outbreak of corporate scams in various countries the need for corporate governance has come to the fore.K.K. This committee submitted its report on 23 December 2002. The central government (Ministry of Finance and Company Affairs) appointed a Committee under the chairmanship of Mr. These developments in U.15 Corporate Governance 12. Naresh Chandra on Corporate Audit and Governance. Robert Maxwell’s Mirror Group’s News International arose out of poor governance practices.66 The Central Government had announced that the company law would be extensively revised based on Self-Learning Material 205 . 2003.

Every company may have its own governance style.A review of various definitions and views brings out that in its simplistic form corporate governance is an umbrella term encompassing various issues concerning senior management. there are some fundamental principles of corporate governance. Despite uniqueness of styles. What is the principal of corporate governance say about External audit? e) f) 12. values and morals of a company and its directors”. 206 Self-Learning Material . shareholders and other corporate stakeholders. OECD has defined the corporate governance to mean “a system by which business corporations are directed and controlled”. To enhance the effectiveness in the service of the real economy. Wolfensohnn. To improve the efficiency of the capital markets. “Corporate governance is about promoting corporate fairness.Notes Dr Irani’s Committee Report. “Corporate governance is the process by which corporation is made responsive to the rights and wishes of stakeholders”. that are considered most appropriate to enhance its wealth generating capacity.K) has defined corporate governance as “(it is) the system by which companies are directed and controlled”. chairman of ITC. Corporate governance has been defined in many different ways by scholars and agencies. board of directors. both Cadbury Committee and Rahul Bajaj Committee had stated that there is no unique structure of corporate governance in the developed world. Corporate world is awaiting the changes to be made in company law. corporate governance refers to the structure. These principles are given below: a) Ethics: A company must observe ethical standards. 12. Some of these definitions/meanings are given below: a) b) c) d) e) f) Simply stated. To create a trust in the corporate and in its abilities. What does ‘oversight’ mean? 81. To promote business development.15.15. Cadbury Committee (U.5 Fundamental Principles of Corporate Governance Governance style may be as different as the nature of companies. President of World Bank. Salim Sheikh and William Ress in their treatise ‘Corporate Governance and Corporate Control’ stated that “corporate governance is also concerned with the ethics. As per James D. g) 12. Parliament had passed the Companies (Amendment) Act. systems. transparency and accountability. For this reason. and processes in a corporation. To exercise effective control on corporate affairs by the board at all times. Check Your Progress 79. According to Ada Demb and Friedrich Neubauer. According to Y C Deveshwar.15. 2006 which envisages implementation of a comprehensive e-governance system through the much-touted MCA-21 project. The main objectives of good corporate governance are: a) b) c) d) To promote a healthy environment for long-term investment. There is no ‘one size fits all’ structure for corporate governance. corporate governance is about ‘performance as well as conformance’. What is transparency? 80. Deviation from ethical principles corrupts organisational culture and undermines stakeholder value.3 Meaning of Corporate Governance The concept of corporate governance has been used in different perspectives. It started as maximising shareholder’s wealth and then expanded to maximising all stakeholders wealth.4 Objectives of Corporate Governance Good governance is integral for the existence of a company.

External Audit: It must be independent and penetrating. Drawn from diverse fields: Corporate governance is drawn from diverse fields like laws. b) c) d) e) f) g) In conclusion. the shareholder’s value was destroyed because it did not share its setbacks with the shareholders. ethics. politics.15. economics. In India company law has been amended to include better corporate practices like audit committee. Professional and competent directors: The key to good corporate governance is a well functioning. Accountability: It signifies that the Board of Directors are accountable to shareholders and management is accountable to the Board of Directors. Infosys. Whistle Blower Policy: Companies should adopt a policy for Whistle blowers. Empowerment: It unleashes creativity and innovation throughout the organization by truly vesting decision-making powers at the most appropriate levels in the organisational hierarchy. better governance by having a professional management but best corporate governance is achieved by following ethical practices and principles. Mere law is not sufficient: Corporate governance goes far beyond company law. Transparency leads to appropriate disclosures without endangering company’s interest. Many Indian companies like ITC. Self-Learning Material 207 . Trusteeship: There exists the principle of trusteeship on the Board of Directors who must act to protect and enhance shareholders and other stakeholders value. In the case of Enron. The board should have a core group of professionally acclaimed and accredited non-executive directors. This was specifically recommended by Narayan Murthy Committee. India has also evolved its own accounting standards which are required to be followed by all companies. Strict implementation of the law is essential. No single definition: It is a dynamic concept and can be defined in many ways. and shareholders. etc. director’s responsibility statement. Oversight: It means the existence of a system of checks and balances.6 Conclusions a) Practice prevalent in different modes: Corporate governance is a practice which is being followed by the corporates all over the world. Notes c) d) e) f) g) h) i) j) 12. Mahatma Gandhi had advocated this principle. informed Board of Directors. Regulatory Regime: There must be an appropriate regulatory regime to back these obligations. It is not defined in only one manner. it can be said that minimal corporate governance can be achieved by following the law. It should prevent misuse of power and facilitate timely management response to change and risks. Fairness to all Stakeholders: It involves a fair and equitable treatment of all stakeholders who participate in the corporate governance structure. management.b) Transparency: It involves the explaining of company’s policies and action to those to whom it owes responsibilities. voting by postal ballot. Accounting standard: In all the developed countries accounting standards have been devised and followed. finance. Grasim have been evaluated and awarded corporate governance rating by agencies like CRISIL or ICRA. Each country may adopt its own form of corporate governance. Accountability provides impetus to performance. Evaluation: Corporate governance can now be evaluated and corporate governance rating has come to stay.

This certificate is conclusive as to all the requirements of the Act with respect to registration have been duly complied with. On the basis of liability of members companies are classified into limited by shares. Now. To get the certificate to commence business. These documents are filed with Registrar of Companies (ROC). Formation of a Company The whole process of formation of a company may be divided into four stages namely i) promotion. statutory companies and registered company. a private company has minimum two and maximum fifty whereas the minimum number in a public company is seven and maximum is limited by number of shares. the facade of corporate personality might have to be removed to identify the persons who are really guilty. and iv) commencement of business. The court may lift the corporate veil under a) statutory provisions. 1956 or under any of the previous company law”. courts have lifted corporate veil. 2. vi) Non-payment of tax.Separate legal entity. 7. This is known as ‘lifting the corporate veil’. iii) Fraudulent Conduct of business. A public company has to raise capital and for this purpose issue a prospectus if subscription of capital is sought from public or issue a statement in lieu of prospectus when share capital is sought to be arranged through friends and relatives. A company is characterised by the features like 1Incorporate association. 6. viii) Liability of promoters for preincorporation contracts.Summary Notes Meaning and Nature of a Company A ‘Company’ implies an association of persons for some common object(s). A Company under the Act is defined to mean a “company formed and registered under the Companies Act. and iv) others like where company is avoiding welfare legislation or where company is mere sham or cloak. 8. ix) Directors with unlimited liability.Promotion denotes preliminary steps taken for the purpose of registration of the company. i) For determining the enemy character of a company. foreign company. iii) floatation. ii) Misrepresentation in prospectus. issues the certificate of incorporation.Can hold separate property. vii) Liability of Ultra-vires act.Artificial legal person. v) Mis-description of name. Under judicial interpretations. holding and subsidiary company and producer company. A private company can commence its business on receipt of certificate of incorporation. Based on number of members. The persons who undertake these steps are called promoters. Under statutory provisions these are included i) Reduction in membership. a public company can commence its business. 90% of the entire issue on complying with some other formalities. a public company must have received the minimum subscription viz. ii) For the benefit of revenue. Lifting the Corporate Veil At times. iv) Failure to return application money. 3.Transferable shares. ii) registration.Limited liability.Common seal. ROC grants the certificate to commence business. The promoters of the company prepare memorandum and articles of association and other necessary documents. iii) For prevention of fraud and improper conduct. 5. and b) judicial interpretation. and x) Holding subsidiary company. Other type of companies are government companies. 9Capacity to sue and being Companies can be classified on the basis of mode of incorporation into chartered companies. ROC after scruitinising these documents and on being satisfied that they are in order. 208 Self-Learning Material . limited by guarantee and unlimited. 4.Perpetual succession.

signed and registered with the registrar. This relief under indoor management is not available where the outsider has knowledge of irregularity or in case of forgery or even negligence. shares and stock. or any other statute. A prospectus means any document described or issued as prospectus and includes any notice.000 or both. except the subscription clause can be changed by following the procedure provided in the Act. This is also required to be filed with the Registrar. This doctrine of indoor management provides that the persons dealing with the company are not bound to inquire into the regularity of internal proceedings. frank and honest disclosure of all facts. the liability. Public financial institutions and scheduled banks have been allowed to file ‘shelf prospectus’ which will remain valid upto one year.Memorandum of Association Memorandum of association of a company is an important document. SEBI acts as the administrative authority in relation to any complaints relating to prospectus. The memorandum and articles when registered are public documents and can be inspected by anyone on payment of a nominal fee. Notes Articles of Association The articles of association of a company are its bye-laws or rules and regulations. advertisement or other documents inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of a body corporate. There should not be any errors of commission or omission i. no mis-statements. It defines as well as confines the powers of the company. Any action beyond this are Ultra-vires (beyond the powers of the company) and hence void. the name of the state in which registered office is to be situated. in such a case are required to prepare a draft prospectus known as ‘statement in lieu of prospectus’. It also establishes a contract between the company and the members and between members inter se. A company can only act as per the objects given in the memorandum of association.e. Any misstatements in prospectus entails civil and criminal liability. Where a public company does not invite public to subscribe for its shares. it need not issue a prospectus. and the subscription clause. etc. damages or compensation. rights of shareholders. For this purpose a prospectus is required to be issued. This is known as ‘doctrine of constructive notice’. such institutions and banks need not issue a prospectus every time they offer securities to public. Criminal liability entails imprisonment upto 2 years or fine upto Rs 50. circular. Articles may be altered by passing a special resolution. Thus there is a presumption that any person dealing with company has read and understood these documents. All the clauses of the memorandum. A ‘red herring prospectus’ is a prospectus which does not have complete particulars on the price of securities offered and quantum of securities offered. but arranges to get money from private sources. II and III of Schedule II to the Act. Prospectus A public company normally invites public to subscribe to its share capital. It controls the internal management of the company and defines the powers of its offices. the objects. Articles contain provisions relating to share capital. or it must not be illegal or opposed to public policy and must be in the interest of the company. They only need to file an ‘Information memorandum’ with respect to changes in the financial position. The golden rule of prospectus is that there must be full. Articles are subordinate to memorandum. This doctrine is subject to another doctrine namely ‘indoor management’. The memorandum of a limited company is to contain its name. The prospectus must be dated. Civil liability may include rescission of contract. Thus. Self-Learning Material 209 . The promoters. meetings. directors. An offer document by the issue houses offering shares to the public is known as deemed prospectus. Alterations must not be inconsistent with the Act. Prospectus must contain the information as per Parts I.

or surrender of shares or when he is adjudged insolvent or when the contract is rescinded. A company limited by shares or a company limited by guarantee having a share capital is prohibited from buying its own shares. contain an express power to borrow. Inter corporate loans and advances are subject to various provisions of the Act. a registered society or trade union can become members but a partnership firm (although partners in their individual capacity can become members). however. Loans. There are two types of shares namely preference shares or ordinary shares. official receiver or liquidator cannot become a member. Ordinary or equity shares can now be issued with disproportionate rights as to voting or dividend. The Companies (Amendment) Act. The persons through whom a company acts and does its business are termed as 210 Self-Learning Material . Share capital can be altered or reduced subject to the conditions provided in the Act. convertible or non-convertible . participating or non-participating. Loan includes debentures or any deposit of money by one company with another company. A person’s membership can be terminated in many ways like on transfer forfeiture. The Act divides share capital into two kinds namely preference and equity or ordinary. A public company cannot exercise borrowing power unless certificate to commence business is obtained by it. Debentures may be of many types like registered or unregistered. The transfer instrument must be valid and proper. ‘Investments’ for the purposes of the Act means the investing of money in shares. A company has power to refuse transfer against which appeal can be filed within a period of 2 months. A member does not include a bearer of a share warrant. convertible or non-convertible.Membership Notes A member means a person who has either subscribed to the memorandum or who agrees in writing to become member and whose name appears in the register of members. ‘Stock’ is the aggregate of fully paid shares. allowed purchase of its own shares by a company subject to the conditions laid down in the Act. No borrowing is permissible beyond the aggregate of the paid up capital of the company and its free reserves unless prior sanction is obtained in general meeting. Preferenceshares have preferential rights as to dividend or return of capital when the company goes into liquidation. A member is also called a shareholder except in some cases like the legal heir of a member is a shareholder but not member till his name is entered in the register of the members. Share and Share Capital The capital of a company is divided into a number of indivisible units of a fixed amount. A public company limited by shares. There are provisions in the Act for nomination. consolidated and divided for the convenient holding into different parts. Company Management and Administration The Act defines a director as including ‘any person occupying the position of a director by whatever name called’. stock. secured or unsecured. redeemable or irredeemable. with respect to fully paid shares may issue share warrants. forfeiture and surrender of shares. 1999 has. Share transfer must be effected within two months of the application of transfer. A non-trading company. must. All certificates or letters of allotment must be in the custody of the company.’ A ‘share certificate’ issued by a company specifies the shares held by a member and is prima-facie evidence of the title of member to the shares. Each of these units is known as a ‘share. if so authorised by its articles. A company. Investments made by a company must be made and held in company’s own name. in its memorandum or articles. It may be transferred or split up into fractions of any amount. Debentures and Investments Every trading company has an implied power to borrow. redeemable or irredeemable. debentures or other securities. a foreigner. Preference shares can be of many types like cumulative or non cumulative. This is a bearer document of title to shares specified therein. Borrowings. with previous approval of the central government.

A person can hold directorship. Self-Learning Material 211 . unsound mind etc.ordinary or special. A resolution is any motion voted upon and agreed to in a meeting and entered in minutes. Under the Act. Books of account can be inspected by any director. First auditor is appointed by the board and subsequent auditor by shareholders. The Act also provides appointment of director by small shareholders. First directors are appointed by subscribers to memorandum. Annual accounts (Balance sheet and profit and loss account) are to be sent to every member. These books are to be preserved for 8 years. managing partner or employee. Only an individual can be appointed as a director. as the company is authorised to exercise and do. the board cannot exercise any power or do any act or thing which is exercisable by the company in general meeting. and c) creditors and debenture holders. his prior consent is required to be signed with the Registrar and the company. indebted to the company for over Rs 1000 or disqualified for appointment as auditor of any body corporate which is the company’s subsidiary or its holding company or a subsidiary of its holding company. Minimum number of directors in a private company is two and in a public company three. However. A motion is a proposal under consideration by members in a meeting before it is voted upon. collectively known as Board of Directors. National Advisory Committee on Accounting Standard and for Audit Committee. filed with the registrar and adopted in the AGM. assets and liabilities and summarised account of all branch offices. Accounts and Audit Every company is required to maintain proper books of account with respect to all receipts and expenditure. General aspects of meetings relate to chairman. Managing director is a director who is entrusted with substantial powers of management and his tenure is five years and eligible for reappointment. annual general meeting. notice. The Act also provides passing of resolutions by postal ballot. A valid meeting must be duly convened. The board shall be entitled to exercise all such powers and to do all such acts and things. Directors’ duties include to act in good faith. voting. Balance sheet and profit and loss account are required to be authenticated (signed by atleast two directors). in upto 15 companies. Before appointing a director. sales and purchases. These books are to be kept on accrual basis and as per double entry system of accounting. extraordinary general meeting and class meetings. agenda and quorum. at the same time. should not be less than three times the votes cast against. trustee. to take reasonable care and to disclose interest. Special resolution is when the votes cast in favour. authorised officers of central government and of SEBI. yet he is none of them. Resolutions requiring special notice mean that the notice of intention to move the resolution should be given to the company not less than 14 clear days before the meeting at which it is to be moved. An auditor of a company is a practising chartered accountant. it is called ordinary resolution. Notes Company Meetings and Resolutions Company can only act through persons who take various decisions in meetings. registrar. It is difficult to state the exact legal position of a director. the auditor has certain rights and duties and he is required to submit an auditor’s report. The Act provides no qualifications but enumerates certain disqualifications for directorship like insolvency. When a motion is passed by simple majority of the members voting at a general meeting. legally constituted and properly conducted. Meetings of company can be of a) shareholders. Subsequent directors are appointed by shareholders or by third parties or by the central government. Casual. Shareholders meetings include statutory meeting.directors. Resolutions are of two types . an officer/employee. The Act also has provisions for cost audit. additional and alternate directors are appointed by the Board. central government or the Tribunal (NCLT). Although a director acts as agent. Directors can be removed by shareholders. Maximum number is as provided in the articles. Disqualifications for an auditor entail a body cooperate. b) directors.

There are two modes of winding up: a) b) 212 Self-Learning Material Compulsory winding up or under order of the Tribunal. or the Tribunal / central government for appropriate relief. resolution by 3/4th majority. Compromises. Some of the powers are a) the regulation of conduct of the company’s affairs in future. Voluntary winding up. The Term ‘amalgamation’ implies combination of two or more companies or the business of two or more companies into one company or into the control of the company. An administrator. Arrangements. . Compromise/arrangement during the winding up ofcompany entails that the liquidator may apply to the Tribunal. The notice of every application made to the Tribunal for the prevention of oppression and mismanagement must be given by the Tribunal to the central government. or by any member(s) holding not less than 1/10 of the issued share capital. or by the division of shares into shares of different classes or by both these methods. c) reduction of share capital. meeting of creditors/ members. In case of oppression of members and mismanagement of company. d) termination or modification of any agreement with the director or any third party. a requisite number of shareholders can apply for appropriate relief to the Tribunal for winding-up. One of the exceptions to this rule is where prevention of oppression and mismanagement is applicable. or g) any other matter considered just and equitable. e) setting aside of any transfer of any property. called liquidator is appointed and he takes control of the company. ‘Oppression’ has not been defined in the Act. Relief can be granted if the application is made by majority shareholders who have been rendered completely ineffective by the questionable acts of a minority group. requisite number is 1/5 of the total number of members of the company. The Tribunal has all the necessary powers to end oppression as well as mismanagement. Reconstruction and Amalgamation ‘Compromise’ means settlement or adjustment of claims in a dispute by mutual concessions. under an arrangement by when the shareholders of the old company are entitled to receive some shares or other similar interest in the new company. In case of a company not having share capital. The term ‘mismanagement’ would mean that the affairs of the company are being conducted or such affairs are likely to be conducted in a manner which is prejudicial to public interest or prejudicial to the interests of the company. A reconstruction is made to enlarge the operations of the company or for reorganization. collects its assets. f) prevent the change in the board. binding on all members and creditors. b) purchases of shares by another member. then the central government may order the amalgamation of those companies into a single company. It means visible departures from the standards and a violation of the conditions of fair play. The central government has also the powers to prevent oppression or mismanagement and to remove managerial personnel. ‘Reconstruction’ means when a company transfers the whole of its undertaking and property to a new company. Requisite number of members who should sign such an application in respect of company having share capital is not less than 100 members or 1/10 of the total number of its members. The central government can make any representation which the Tribunal will consider before making a final order.Prevention of Oppression and Mismanagement Notes The management of companies is based on the rule of majority. sanction by the Tribunal. Where the central government is satisfied that it is essential in the public interest that two or more companies should amalgamate. which ever is less. pays its debts and finally distributes any surplus among the members in accordance with their rights. Compromise/arrangement when the company is a going concern involve the procedure for an application to the Tribunal. The expression ‘arrangement’ includes a re-organisation of the share capital of the company by the consolidation of shares of different classes. Winding up of a Company Winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members. Tribunal’s order to be filed with the registrar and is appealable.

one exercisable with the sanction of the Tribunal . or appoint any agent. Any vacancy in the office of liquidator is filled and a final meeting is held where a resolution for the dissolution of the company is passed. ii) Corporate powers to continue until dissolution. to sell the property of the company. g) Default of company’s filing its balance sheet. c) Failure to commence business within a year from the date of incorporation. first Cadbury Committee. vi) Order operates in the interests of all creditors and contributories. and i) When the company has become sick and is unlikely to become viable in future. to set off claims. In India also there were a number of committees which submitted their reports from 1998 to 2005. Liquidator’s main duty is to conduct the winding-up process. to exclude creditors not proving on time. to raise money. to settle the list of contributories. then Kumar Mangalam Birla Committee by SEBI in May 1997. to adjust the right of contributories. 2003.A company may be wound up by the Tribunal on these grounds namely a) By the company passing a special resolution. to order payment into bank of money due to the company. vii) Official liquidator is the liquidator. f) When in the opinion of the Tribunal it is just and equitable. As a result SEBI revised clause 49 of the Self-Learning Material 213 . Voluntary winding-up is of two kinds a) Members voluntary winding-up.firstly a declaration of solvency is made and secondly shareholders resolution is to be passed. and viii) Board’s powers come to an end. ii) Winding up order is filed with the registrar within 30 days. to stay winding up. yet there are some differences in these two types of voluntary winding up.like to carry on business of the company. one lakh. First Rahul Bajaj Committee by CII in April 1998. any person authorised by the Central Government. His powers can be divided into two parts . The central government appointed Naresh Chandra Committee which submitted its report on 23 Dec. Finally SEBI appointed Narayan Murthy Committee which submitted its report to SEBI on 8 Feb. to summon persons suspected of having the property of the company. followed by Hampel and finally Greenbury Committee were constituted. Board’s powers cease on appointment of the liquidator. The consequences of the winding up order by the Tribunal are i) Intimation is sent to the official liquidator and the registrar. He discharges all the functions of the board so long as the company is not dissolved/liquidated. v) Suits stayed unless the Tribunal gives leave to continue. Thereafter. A petition for winding up may be made by the company. h) If the company has acted against the interests of sovereignty and integrity of India. iv) Winding-up order is deemed to be notice of discharge for employees. e) Inability to pay debt of Rs. the registrar. and v) Avoidance of transfer of share. and b) Creditors voluntary winding-up.K. directors etc.. In both types of voluntary winding-ups a meeting of shareholders or creditors is held. Voluntary winding-up has effects i) On status of company.. iii) Board’s power to cease on liquidator’s appointment iv) On company’s employee. Every company is to file with the Tribunal a statement of affairs along with the petition for winding up. a statement of affairs is to be filed by the company. the official liquidator or the central or state government. Besides this the Tribunal has general powers like. iii) The order is notified in the Official Gazette. In U. in April 2002. to make calls. Although both members and creditors can resort to voluntary winding up of a company. b) Default in holding statutory meeting or in delivering statutory report to the registrar. to arrest an absconding contributory. The Tribunal hands over the statement of affairs to the liquidator and may direct the constitution of a Committee of Inspection. to order public examination of promoters. 2002. any creditor. and second exercisable without the sanction of the Tribunal like inspect the records and returns of the company with the registrar. to compromise etc. d) Reduction in membership below the minimum required. Ganguly Committee for Banks and Financial Institutions. Notes Corporate Governance This term has gained importance in the last two to three decades. any contributory. to order costs and to order the dissolution of the company. For discharge of his duties he has certain powers. Liquidator is appointed and notice of his appointment is given to the registrar. In members voluntary winding up two conditions are to be satisfied . A spate of scandals and corporate collapses in the late 1980’s and 1990’s led shareholders and banks to think about the safety of their investments. When the company is opposing a petition for winding up.

must be duly convened. iii) accountability. for a better corporate governance the management has to be professional but the best corporate governance is possible only when ethical principles and practices are adopted. A majority.Notes listing agreement which is effective from 1 Jan 2006. 4. Both of them have been killed in an air crash. and vi) to exercise effective control on corporate affairs by the board at all times. One man company is a perfectly valid company Promoter is neither a trustee nor an agent of the company he promotes but stands in a fiduciary position towards it. 8. 7. A prospectus must state truth and nothing but truth. Practical Problems 1. properly constituted and conducted. ii) transparency. Review Questions True or False 1. Only members can be appointed directors of a company. 2. There is no one cap which fits all sizes. who has been rendered completely ineffective by the questionable acts of a minority group. Every year the auditors are appointed by the board of directors. To amend company law. In a company all shareholders are members but all members need not be shareholders. The property of the company is the property of its members. along with the petition for winding-up. Does this company cease to exist? . 5. 3. ii) to create a trust in the corporate. viii) external audit. iv) trusteeship v) empowerment vi) fairness to all stakeholders viii) oversight. 13. 14. Every company is required to file. Many authors have defined this term in different ways. J. This Committee submitted its report on 31 May 2005. Every meeting. 214 Self-Learning Material Akhil and Bharat were only two members of a private limited company. 12.encompassing the system by which companies are directed and controlled. in order to be valid. The changes in company law are awaited. A board of directors meeting must be held once every two months. cannot complain of oppression or mismanagement. J. Irani. 15. v) to enhance the effectiveness in the service of the real economy. iii) to promote business development. with the Tribunal. The memorandum of association is an unalterable charter of a company. ix) regulatory regime and x) whistle blower policy. It is an umbrella term . The main objectives of good corporate governance are i) to promote healthy environment for long term investment. iv) to improve the efficiency of the capital markets. Compromise implies existence of dispute such as relating to rights. The concept of corporate governance has been used in different perspectives. In conclusion it can be said that good corporate governance is a must but its models vary from country to country and company to company. There are some fundamental principles of corporate governance like i) ethics. 9. 10. 6. Law alone can bring minimal corporate governance. central government appointed an Expert Committee under the chairmanship of Dr. 11. Companies are prohibited from buying their own shares. a statement of its affairs. All investments made by a company must be held by it in its own name.

be authorised to be borrowed. 5. It has been decided to appoint Murali in his place. 2. X rushed to the Tribunal. a director of ABC Ltd. 4. 5. 7. Will X succeed? After a scheme of amalgamation was approved by majority of shareholders and creditors. it was decided to increase the share capital. but others also should share. X would corner all shares and become predominant in the company. The scheme was pending in the Tribunal (NCLT). All the seven signatures on a memorandum of association were forged by a person and a certificate of incorporation was duly obtained. saying that Y and Z wanted to throw him out as director and chairman of the company and they had passed a special resolution to bring about a change in management. Test Questions 1. 10. One director gave a bond to Tara without the authority of any such resolution. It sends notice of the general meeting to all of them. Describe various stages of incorporation of a public limited company. Self-Learning Material 215 . died in a bomb blast. Define a company and explain the features of a company. and a special resolution was passed that the new shares may be offered to about a dozen persons who were not members of the company. which according to them was not fair and reasonable. What remedies are available to Amar against the company? Madhur. 6. Y and Z did not have the money to take up additional shares and feared that in consequence. The meeting was adjourned to March 2004 and then held. Is the company liable on the bond? Amar purchased from Dalal 1000 shares of a company on the basis of prospectus containing wrong statement. So a general meeting was called and it was resolved that the present members alone shouldnot benefit from the prosperity of the company. Subsequently meeting was held in February 2006.” In what cases do the courts ignore this principle? Explain what is meant by a holding company and a subsidiary company. Out of 80 members who are present 20 abstain from voting. Directors of a company were the major shareholders of the company. complaining of oppression. 8. Can the directors refuse to call EGM? There are only two members of a company and both of them are not on speaking terms. Is the certificate of incorporation valid? The directors of a company were authorised by the articles to borrow on bonds such sums of money as should from time to time. 20 members do not attend the meeting. by a resolution of the company in general meeting.2. 7. Distinguish between a public limited company and a private limited company. 3.Z. 8. Will the company be required to call extraordinary general meeting to approve the latter’s appointment as a director? One general meeting was called by a company in December 2003. Is the company liable for any irregularity? A company has 100 members. 3. At a meeting of the Board of Directors. 6. Briefly describe the documents to the filed with the Registrar of Companies prior to incorporation. Can the company be wound up on this ground? Notes 4. Explain the concept of ‘Corporate veil’ and state the circumstances when it can be lifted. How many members should vote in favour of a resolution if it is to be passed as a special resolution? X. X was the chairman of the company. 9. Give examples. some of the members requisitioned an EGM to challenge the exchange ratio. “A Joint stock company is an artificial person created by law with a perpetual succession and a common seal.Y.” Do you agree with this definition of a company? “A company is a legal entity distinct from its members.

What are the conditions required to be complied with for a company to buy-back its shares? Give various classifications of capital and discuss the procedure for reduction of share capital. What are the different types of shares that may be issued by a company? What are preference shares? Explain what is meant by i) Cumulative and non-cumulative preference shares and ii) Participating and non-participating preference shares. What is the statutory limitation to the borrowing power of the directors of a company? Define director. ‘A prospectus must state truth and nothing but truth’. 12.” Explain. 17. 26.9.” Explain. Define ‘share’. 14. 13. Why is it necessary for a company to have a registered office? Can the registered office of a company be changed? “The doctrine of ultra vires is an illusory protection to the shareholders and a pitfull for third parties. ii) cease to be. In what ways may a person i) become. 31. 29. 24. 23. Doctrine of indoor management. What are Articles of Association? How can they be altered? Discuss the limit upon the powers of a company to after or add to the Articles of Association. Explain. Statement in lieu of prospectus. 18. “The Memorandum of Association is the fundamental law or a charter defining the objects and limiting the powers of a company. Doctrine of constructive notice. 22. 27. 11. 19. Shelf prospectus and information memorandum. 16. Define ‘prospectus’. 21. What are the clauses of the memorandum of association of a company? Comment on ‘the memorandum of association is an unalterable charter of a company’. Notes 10. 30. Write short notes on: a. b. Differentiate between memorandum and article of association. 28. 25. 33. Share and stock. What are the qualifications and disqualifications of a director? How are directors appointed and removed? . 32. 216 Self-Learning Material What are the legal requirements which a company must comply with while borrowing? Discuss the provisions of company law regarding inter-corporate loans and investments. a member of company? Distinguish between: a. Do you agree? Explain. When is a company not required to issue a prospectus? What is a prospectus? What are its contents? Is it obligatory for a company to file prospectus or a statement in lieu of prospectus with the Registrar of Companies? “In a company all shareholders are members but all members need not be shareholders.” Discuss. 20. b. Share warrant and share certificate. b. Write a short note on ‘Doctrine of ultra-vires’. Write short notes on: a. 15. Who is a promoter? Discuss his legal position in relation to a company he promotes”.

Explain principles of corporate governance. True 4.” Discuss this proposition with reference to prevention of oppression and mismanagement in a company. Are there any exceptions to this rule? “Majority will have its way but the minority must be allowed to have its say. Who can be an auditor of a company and what are his disqualifications. How is the vacancy to be filled? “The exact position of directors with regard to a company is hard to define. Answers to “True or False” 1. 2. To wind up the company would. 41. unfairly prejudice the minority shareholder. What alternative remedy is available to C and how may it be appled? What is meant by oppression? How does the Companies Act. 30% and 20% of the issued share capital of a company and A and B are its directors. 47. Notes 37. 45. (Doctrine of Indoor-Management). Write short note on passing of resolution by postal ballot. Self-Learning Material 217 3. False 10. True 14. 50. True 9. 44. Explain various meetings of shareholders. False 3. True Answers to “Practical Problems” 1. as majority shareholders. False 11. therefore. What is the legal position of a director in a company? Explain the powers of the Board of Directors. They are not servants of the company but are rather in the position of managing partners. pass a resolution at a general meeting to the effect that their remuneration as directors shall be 90% of the profits.” Discuss this statement and bring out the exact position of directors in a company. 43. A. False 7. adoption and filing of annual accounts. What books of accounts are required to be kept by a company? Explain the law relating to authentication. in this case. False 5. 46. ‘Reconstruction’ and ‘Amalgamation’. False 13. “Arrangements’. 48. rights and duties? “The will of majority must prevail” Is the principle of a company management. 1956 attempt to prevent oppression and mismanagement? Explain the terms ‘Compromise’. 40. What is ‘corporate governance’? Explain its historical evolution. False 6. Yes. No. Yes. B and C own respectively 50%. 35. 36. 39. as Tara was entitled to assume that the resolution of the company in general meeting has been passed. What do you understand by winding-up of a company? What are the various modes of winding-up? Explain duties and powers of the liquidator. The company has made good profits but the directors refuse to recommend the declaration of dividend and A and B.34. Death. True 15. False 8. True 2. a company is an entity distinct from its members. What is a motion? Explain types of resolutions. leave the company unaffected. 49. True 12. . 42. A casual vacancy has occured in a public company due to a director vacating his office before his term expires. insolvency or retirement of its members. the certificate of incorporation given by the registrar in respect of any company shall be conclusive evidence that all the requirements of the Act have been complied with in respect of registration and matters precedent thereto. 38. the company was liable on the bond.

10(b).12 References 1 2 3 4 5 6 (1895) AII.5.10.10(b). 35) 12.R. The Tribunal cannot prevent a company from holding an EGM for considering the proposed modification of a scheme. 20) 12.2. Since. 59) 12.4. unless permission of the registrar was obtained for extension of time which may be granted upto a period of 3 months under certain special circumstances.2. 8) 12.3(c).7. 26) 12.10.1. The Act (Sec. 55) 12. 78) 12. amount to oppression. 12. 39) 12.12. at least 45 members must vote in favour of the resolution.3. 66) 12.5.19.3. 11) 12.10(b).7.5.10. The vacancy being a casual vacancy can be filled by the board of directors at its meeting.3.2. Amar shall have no remedy against the company.8.3.3.14. unfair conduct. seeking change in management does not.8.14. 40) 12. 49) 12.7. 48) 12.9(b).11. 54) 12.6.9. 14) 12. Rep.6. the meeting of2004 has been missed.9.8.6(a&b).4. 7. 74) 12. company can be wound up on just and equitable ground as there was a deadlock in management. Thus. 4) 12.10.7.7. 31) 12.7. 10) 12.11(a). 76) 12.6(a). It may also be filled in a general meeting. 42) 12.9. next meeting is held only in Feb.5.14. Under these circumstances. 21) 12. 12. 53) 12.7. No.11.5(d).5(d).5.1.6(c)(ii). there being no privity of contract between Amar and the company.8(a).3.9. For a valid special resolution.11. 61) 12.4. 51) 12.6.4.9. 60) 12. if any. 5) 12.8.10.3(c).4.1.2. E. director cannot refuse to call EGM requisitioned by members in this case.7.4(b)(ii).10. 33) 12.14. 23) 12. Those who abstain are not to be counted. votes cast in favour must at least be 3 times the votes cast against the resolution.1(b).12.11. 15) 12.9. 12.14. 12. 7) 12.4(d). 12. 32) 12.5.e.3. 2006.8(c).10(e).8.11.2.12. 45) 12.13. 166) requires a company to hold its annual general meeting every calendar year. 63) 12.1.5.1. 2) 12.17.15(h).6.2.4. Answers to “Check Your Progress” 1) 6) 12) 18) 24) 30) 36) 41) 47) 52) 57) 62) 67) 72) 77) 12. Thus.2(e). or prejudice in the exercise of legal and proprietary rights as a shareholder.5.14. 12.18(b).5.4.16.8. there is no need to call an extra-ordinary general meeting for this purpose.9. 12. 37) 12. 3/4th of 60 i.13. 64) 12.14. 16) 12.7(a). 12.11. 17) 12.8.5(k).1. 65) 12. 6. prima-facie.2(c).7.5(c)(iv).3(b). 13) 12. 34) 12.3.5.4.15(a). 9.18.9. 9) 12.7. The conduct of majority does not show any lack of probity. 10. 12.2. 58) 12.7.2. 29) 12.5. No. 27) 12. 25) 12. 12. 3) 12.5. 38) 12.4. Thus in this case the meeting held in March 2004 is actually the meeting of December 2003.11.4(d)(ii).1. 46) 12.3. 28) 12.1. 68) 12. 70) 12. 12.3. 71) 12.9. 43) 12. 75) 12.3(b).8. Notes 5. 19) 12.9. 69) 12.7.1.3. Yes. Section 12 (2) (b) of the Companies Act Section 12 (2) (c) of the Companies Act Section 617 Section 591 218 Self-Learning Material . the company shall be proceeded against.4(b).7.8(g). So there should be one meeting per year and as many meetings as there are years.2. 50) 12.16(b)(iii).2.17. 12. 12.10. 8.1. 73) 12.10. 44) 12.4(b).3(g). 22) 12.7. 33 Section 12 (2) (a) of the Companies Act. 56) 12. 12.11.9.

Green [1880] 5 B.10. Kalinga Tubes [1965] 1 Comp LJ 193. 653 23Section 16 Sections 21 and 22 25Section 146 26Section 17 27Section 38 28Section 94 29Section 2(2) (1934) 4 Comp. 204 = AIR 1965 SC 1553 = [1965] Self-Learning Material 219 .f.7 8 9 Section 4 Sections 581 A to 581 ZT Section 45 Section 62 Section 69 Section 147 [1916] 2 AC 307 AIR 1927 Bom. Cas. 327 Section 2(36) Nandita Jain v. (afterwards chief justice) of the Supreme Court of India in Shanti Prasad Jain v.e. Bennett Coleman and Co. [1996] A SCALE 202 (SC) In Twycross v. 289 = AIR 1939 Mad. 371 [1962] AII.e. 1999 w. 109 at page 111 [1924] A.C. 207 49Section 233B 50Section 210A 51 Companies (Amendment) Act 2000 based on the recommendations of Kumar Mangalam Birla Committee Report 52 54 [1843] 2 Hare 461 53Sections 397. 31. 442. Grant 1872.1998 39Section 2(12) 40 (Amendment) Act. 1958 Section 2 (28) [1875] LR 7 HL. 579 (1856) 6 E. 2 C.R. Ltd.10. E. Elder and Watson Ltd 1952 SC 49 Scotland. 31. and B. 27 of 1972 Section 150 Section 151 Section 2(46) Section 114 Section 79A .P.f. Section 292A inserted by the Ltd.1998 41Section 2(13) 42Section 270 43Section 265 44Section 318 45 Life Insurance Corporation of India v. [1986] Tax LR 1826(SC) 46Section 285 47Section 192A 48 Ltd[1962] 32 Comp. Cas. Escorts Lalita Rajya Lakshmi v. Indian Motor Co.inserted by the Companies Section 542 Notes 10 11 12 13 14 15 16 17 18 19 20 21 22 24 30 31 32 33 34 35 36 37 38 (Amendment) Act..D.Inserted by the Companies Section 372 A . Appeal No. It was cited with approval by Justice Wanchoo. 1999 w. 496 at page 541 In Whaley Bridge Printing Company v.D. 398 Lord Cooper in the Scottish case of Elder v.

4th ed. Re (1882) 20 Ch. P. Section 390(b) Modern Company Law. 184 (SC) Section 439A .Vide Companies (Second Amendment) Act.. Ltd. 169 Yendje Tobacco Co.Singh (Excel Books) 1st Ed. Cas. 213 Section 439 National Textile Workers’ Union v. 2005 in Part IV (from Page 285 to page 419) 66 Expert Committee Report on Company Law is published in Corporate Law Advisor June (2) 2005 from page 112 to 204 = 200566 CLA (st) 112 220 Self-Learning Material . 2002 Summary of all these Committee’s Reports can be seen in “Corporate Governance. v. 789 Section 433 German Date Coffee Co. D. Ltd. Comp. AIR (1956) S. Nageshwara Rao. Re (1916) 2 Ch.1 SC A 556 Notes 55 56 57 58 59 60 61 62 63 64 65 Section 397.Global Concepts and practices’ by Dr S. 426 Rajamundary Electric Supply Corp. p.R Ramakrishnan [1983] 53.C.

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