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Model Answer/Suggested Solution

Commercial Laws
B. Com (II Semester) Examination, 2014 Paper Code: AS-2613

* (Prepared by: Harish Khandelwal, Assistant Professor, Department of Commerce, GGV)

Note: These model answers are a depiction of important points which an examinee must have
to mention to secure high marks in particular question. The length of the answer may vary as
per the examinees understanding, interpretation and his/her ability to comprehend the

Q.1 Short answer type Question:

i. What do you mean by negotiable instrument?

Ans. The term, negotiable instrument means a written document which creates a right in favour
of some person and which is freely transferable. Although the Act mentions only these three
instruments (such as a promissory note, a bill of exchange and cheque), it does not exclude the
possibility of adding any other instrument which satisfies the following two conditions of

1. The instrument should be freely transferable (by delivery or by endorsement. and delivery) by
the custom of the trade; and

2. The person who obtains it in good faith and for value should get it free from all defects, and be
entitled to recover the money of the instrument in his own name.

ii. What is Bills of exchange?

Ans. Section 5 of the Act defines, A bill of exchange is an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of a certain person or to the bearer of the instrument. A bill of
exchange, therefore, is a written acknowledgement of the debt, written by the creditor and
accepted by the debtor. There are usually three parties to a bill of exchange drawer, acceptor or
drawee and payee. Drawer himself may be the payee.

iii. What is meant by crossing of cheque?

Ans. A crossed cheque is a cheque that has been marked to specify an instruction about the way
it is to be redeemed. A common instruction is to specify that it must be deposited directly into
an account with a bank and not immediately cashed by a bank over the counter. The format and
wording varies between countries, but generally two parallel lines and/or the words 'Account
Payee' or similar may be placed either vertically across the cheque or in the top left hand corner.
By using crossed cheques, cheque writers can effectively protect the cheques they write from
being stolen and cashed.
iv. What do you understand by discharge by material alteration?

Ans. An alteration which in any way alters the operational character of the instrument or rights
and liabilities of the parties is called material alteration. It is immaterial whether the alteration is
advantageous or disadvantageous. Alteration must be intentional. An accidental alteration is not
bad. It need not be made by the holder. It is sufficient if it was made when the instrument was in
the possession of the holder. The holder must take every care to protect it from such alteration,
otherwise he will be liable for the consequence of the alteration.

The following alterations are regarded as material: 1. the date, 2. the sum payable, 3. the place of
payment, 4. the time of payment, 5. the rate of interest, 6. the place where the instrument is
drawn, 7. addition of a party's name or place of payment.

Any of the above alterations made will discharge the parties liable on the instrument.

v. Define Partnership.

Ans. According to Section 4 of the Partnership Act, 1932 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. 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.

vi. Mention the kinds of partners.

Active Partner
Sleeping Partner/Dormant Partner.
Nominal Partner
Partners for profit only
Sub Partners
Partners by Holding Out or estoppel

vii. Define the term arbitration.

Ans. The submission of a dispute to an unbiased third person designated by the parties to the
controversy, who agree in advance to comply with the awarda decision to be issued after a
hearing at which both parties have an opportunity to be heard.

Arbitration is an alternative means of setttling a dispute by impartial persons without proceeding

to a court trial. It is sometimes preferred as a means of settling a matter in order to avoid the
expense, delay, and acrimony of litigation.

viii. Define consumer.

Ans. A 'consumer' is considered to be any natural person or legal entity to which a product or
service offered on the market is addressed. The person or legal entity deemed to be a
consumer in this sense should make use of the product or service, provided that it constitutes
the end user of such product or service.

A consumer is a person or group of people, such as a household, who are the final users of
products or services. The consumer's use is final in the sense that the product is usually not
improved by the use.
ix. Define the term Authorised Person as per FEMA.

Ans. Authorised persons means an authorized dealer, money changer, off shore banking unit,
or any other person for the time being authorized to deal in foreign exchange or foreign

x. Discuss the Minors position in partnership.

Ans. The position of a minor in partnership firm and the provision, of law in this respect are
given below:

A minor cannot become a partner in the firm:-

1. But he can admitted to the benefit of partnership business with the consent of all other
partners. This can be performed by an agreement executed by his guardian on his behalf with the
existing partners of the firm.

2. A minor will be entitled to his agreed share of the property and of the profits of the firm.

3. He is not personally liable for the obligations of the firm but his share in profit and property
may be liable for the debts of the firm.

4. He can file a suit for accounts and for his agreed share of property or profit when he severs his
connection with the firm.

5. He has a right to inspect and copy books of accounts of the

Long answer type question:

2. What is promissory note? What are its essential elements? Give a specimen of a
promissory note.

Ans. Section 4 of the Act defines, A promissory note is an instrument in writing (note being a
bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to
pay a certain sum of money to or to the order of a certain person, or to the bearer of the

Essential elements

An instrument to be a promissory note must possess the following elements:

1. It must be in writing: A mere verbal promise to pay is not a promissory note. The method of
writing (either in ink or pencil or printing, etc.) is unimportant, but it must be in any form that
cannot be altered easily.

2. It must certainly an express promise or clear understanding to pay: There must be an

express undertaking to pay. A mere acknowledgment is not enough.

The following are not promissory notes as there is no promise to pay.

If A writes:
(a) Mr. B, I.O.U. (I owe you) Rs. 500

(b) I am liable to pay you Rs. 500.

(c) I have taken from you Rs. 100, whenever you ask for it has to pay.

The following will be taken as promissory notes because there is an express promise to pay:

If A writes:

(a) I promise to pay B or order Rs. 500

(b) I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand, for the value

(3) Promise to pay must be unconditional: A conditional undertaking destroys the negotiable
character of an otherwise negotiable instrument. Therefore, the promise to pay must not depend
upon the happening of some outside contingency or event. It must be payable absolutely.

(4) It should be signed by the maker: The person who promises to pay must sign the
instrument even though it might have been written by the promisor himself. There are no
restrictions regarding the form or place of signatures in the instrument. It may be in any part of
the instrument. It may be in pencil or ink, a thumb mark or initials. The pro-note can be signed
by the authorised agent of the maker, but the agent must expressly state as to on whose behalf he
is signing, otherwise he himself may be held liable as a maker. The only legal requirement is that
it should indicate with certainty the identity of the person and his intention to be bound by the
terms of the agreement.

(5) The maker must be certain: The note self must show clearly who is the person agreeing to
undertake the liability to pay the amount. In case a person signs in an assumed name, he is liable
as a maker because a maker is taken as certain if from his description sufficient indication
follows about his identity. In case two or more persons promise to pay, they may bind
themselves jointly or jointly and severally, but their liability cannot be in the alternative.

(6) The payee must be certain: The instrument must point out with certainty the person to
whom the promise has been made. The payee may be ascertained by name or by designation. A
note payable to the maker himself is not pronate unless it is indorsed by him. In case, there is a
mistake in the name of the payee or his designation; the note is valid, if the payee can be
ascertained by evidence. Even where the name of a dead person is entered as payee in ignorance
of his death, his legal representative can enforce payment.

(7) The promise should be to pay money and money only:

Money means legal tender money and not old and rare coins. A promise to deliver paddy either
in the alternative or in addition to money does not constitute a promissory note.

(8) The amount should be certain: One of the important characteristics of a promissory note is
certaintynot only regarding the person to whom or by whom payment is to be made but also
regarding the amount.

(9) Other formalities: The other formalities regarding number, place, date, consideration etc.
though usually found given in the promissory notes but are not essential in law. The date of
instrument is not material unless the amount is made payable at a certain time after date. Even in
such a case, omission of date does not invalidate the instrument and the date of execution can be
independently ascertained and proved.

3. Holder in due course is a holder but a Holder is not a Holder in due

course. Discuss.

Ans. Section 9 of the Act defines holder in due course as any person who (i) for valuable
consideration, (ii) becomes the possessor of a negotiable instrument payable to bearer or the
endorsee or payee thereof, (iii) before the amount mentioned in the document becomes payable,
and (iv) without having sufficient cause to believe that any defect existed in the title of the
person from whom he derives his title.

The essential qualification of a holder in due course may, therefore, be summed up as follows:

1. He must be a holder for valuable consideration.

Consideration must not be void or illegal, e.g. a debt due on a wagering agreement. It may,
however, be inadequate. A donee, who acquired title to the instrument by way of gift, is not a
holder in due course, since there is no consideration to the contract. He cannot maintain any
action against the debtor on the instrument. Similarly, money due on a promissory note executed
in consideration of the balance of the security deposit for the lease of a house taken for immoral
purposes cannot be recovered by a suit.

2. He must have become a holder (possessor) before the date of maturity of the negotiable
instrument. Therefore, a person who takes a bill or promissory note on the day on which it
becomes payable cannot claim rights of a holder in due course because he takes it after it
becomes payable, as the bill or note can be discharged at any time on that day.

3. He must have become holder of the negotiable instrument in good faith. Good faith implies
that he should not have accepted the negotiable instrument after knowing about any defect in the
title to the instrument. But, notice of defect in the title received subsequent to the acquisition of
the title will not affect the rights of a holder in due course. Besides good faith, the Indian Law
also requires reasonable care on the part of the holder before he acquires title of the negotiable
instrument. He should take the instrument without any negligence on his part. Reasonable care
and due caution will be the proper test of his bona fides. It will not be enough to show that the
holder acquired the instrument honestly, if in fact, he was negligent or careless. Under conditions
of sufficient indications showing the existence of a defect in the title of the transferor, the holder
will not become a holder in due course even though he might have taken the instrument without
any suspicion or knowledge.

Holder: A person who is legally entitled to the possession of the negotiable instrument in his own
name and to receive the amount thereof, is called a holder. He is either the original payee, or
the endorsee. In case the bill is payable to the bearer, the person in possession of the negotiable
instrument is called the holder.

Privileges granted to a holder in due course under the Negotiable Instruments are given below:

1. He gets a better title than that of the transferor:

One who is a holder only gets no better title than that of his transferor but a holder in due
course is in a privileged position in that he gets a better title than that of the transferor and the
defenses on the part of a person liable that the instrument has been lost, or has been obtained by
means of an offence or fraud or for an unlawful consideration cannot be pleaded against a holder
in due course (Sec. 58).

2. Privilege in case of inchoate stamped instruments (Sec. 20):

In the case of inchoate stamped instrument, if the holder or original payee fills more amount than
that was authorised, he cannot enforce the instrument for the whole amount (only actual
authorised amount can be recovered).

3. Liability of prior parties:

All prior parties to a negotiable instrument (i.e., its maker or drawer, acceptor and intervening
indorsers) continue to remain liable to a holder in due course both jointly and severally (i.e., he
can hold any or all prior parties liable) until the instrument is duly satisfied (Sec. 36). Whereas,
only preceding party is liable to a succeeding party, if the succeeding party is only a holder.

4. Privilege in case of Fictitious bills (Sec. 42):

When a bill of exchange is drawn in a fictitious name and is made payable to the drawers order
(i.e., where both drawer and payee of a bill are fictitious persons), the bill is said to be a fictitious
bill. Such a bill is not a good bill and cannot be enforced at law.

4. Define the term cheque. Discuss the circumstances when the banker must refuse
the payment of cheques.

Ans. Section 6 of the Act defines 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 truncated cheque and a cheque in the electronic form
Following are the circumstances when the banker must refuse the payment of cheque:

When the customer countermands payment

On the death of the customer
On the insolvency of the customer
On the insanity of the customer
When the cheque are issued against the trust
When the title of the possessor is doubted to be defective
Other condition.
(Proper Explanation required.)

5. The registration of firm has been effectively devised in the Partnership Act without
making it compulsory. Explain.
Ans. Partnership firms in India are governed by the Indian Partnership Act, 1932. While
it is not compulsory to register your partnership firm as there are no penalties for non-
registration, it is advisable since the following rights are denied to an unregistered firm:

A partner cannot file a suit in any court against the firm or other partners for the
enforcement of any right arising from a contract or right conferred by the Partnership Act

A right arising from a contract cannot be enforced in any Court by or on behalf of your
firm against any third party

Further, the firm or any of its partners cannot claim a set off (i.e. mutual adjustment of
debts owned by the disputant parties to one another) or other proceedings in a dispute
with a third party.

Registration Procedure: A partnership firm can be registered whether at the time of its
formation or even subsequently. You need to file an application with the Registrar of
Firms of the area in which your business is located.
Application for partnership registration should include the following information:
- Name of your firm
- Name of the place where business is carried on
- Names of any other place where business is carried on
Date of partners joining the firm
- Full name and permanent address of partners.
- Duration of the firm
Every partner needs to verify and sign the application
Ensure that the following documents and prescribed fees are enclosed with the
registration application:

- Application for Registration in the prescribed Form I

- Certified copy of the Partnership deed

- Proof of ownership of the place of business or the rental/lease agreement thereof
It may be noted here that the name of your partnership firm should not contain any
words which may express or imply the approval or patronage of the government except
where the government has given its written consent for the use of such words as part of
the firms name.
Once the Registrar of Firms is satisfied that the application procedure has been duly
complied with, he shall record an entry of the statement in the Register of Firms and issue
a Certificate of Registration.

6. Discuss rights of consumer under Consumer Protection Act, 1986:

Ans. The rights of consumer under section 6 of the consumer protection act are as follows:
Right to safety
Right to be informed
Right to choose
Right to be heard
Right to seek redressal.
Right to consumer education.

(Proper explanation required by students)

7. What is arbitration agreement? Discuss the essentials of valid arbitration


Ans.Arbitration agreement" means an agreement by the parties to submit to arbitration all or

certain disputes which have arisen or which may arise between them in respect of a defined legal
relationship, whether contractual or not.

An arbitration agreement may be in the form of an arbitration clause in a contract or in

the form of a separate agreement.
An arbitration agreement shall be in writing.
An arbitration agreement is in writing if it is contained in-
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of telecommunication which
provide a record of the agreement; or
(c) an exchange of statements of claim and defence in which the existence of the
agreement is alleged by one party and not denied by the other.

The essentials of a valid and binding arbitration agreement as follows:

*Law requires that the arbitration agreement must be in writing.

It simply means that the terms of the arbitration agreement must be placed in writing and it must
be stated in writing that the parties agreed to the settlement of disputes by arbitration.

However, it shall be presumed to be in writing if an arbitration agreement contains a document

signed by the parties.

Thus, an arbitration agreement is not required to be in any form. What it is required to be

ascertained is whether the parties have agreed that if dispute arise between them in respect of
subject matter of the contract, such dispute shall be referred to arbitration. Then such agreement
would spell out an arbitration agreement ( Rukmanibaj Vs Collector)

*The agreement should be to refer either a present or future dispute for arbitration. Thus,
existence of a dispute or difference is essential to the validity of a reference to arbitration.

*Parties to the arbitration agreement must be competent to contract.

*All parties interested to the matter in disputed must give their consent to the arbitration

*Terms in the arbitration agreement must be definite and certain. Matter or the dispute to be
referred to arbitration must not be immoral or illegal.
However, it is not necessary to name the arbitrator in the arbitration agreement. The names of the
person who will act as an arbitrator could be determined after entering in to arbitration
agreement. But, when it determine, it should be fixed and definite.

8. Define the following term under FEMA,1999:

a) Person resident in India.

Ans. "Person resident in India" means-

A person residing in India for more than one hundred and eighty-two days during the course of
the preceding financial year but does not include;-
1) A person who has gone out of India or who stays outside India, in either case-
(a)For or on taking up employment outside India, or

(b) For carrying on outside India a business or vocation outside India, or

(c) For any other purpose, in such circumstances as would indicate his intention to stay outside
India for an uncertain period;
2) A person who has come to or stays in India, in either case, otherwise than-
(a) For or on taking up employment in India, or
(b) For carrying on in India a business or vocation India, or
(c) For any other purpose, in such circumstances as would indicate his intention to stay in India
for an uncertain period;

(ii) any person or body corporate registered or incorporated in India,

(iii) an office, branch or agency in India owned or controlled by a person resident outside India,
(iv) an office, branch or agency outside India owned or controlled by a person resident in India;

b) Current account transaction.

It means a transaction other than a capital account transaction, and includes the
Payment due in connection with the foreign trade, other current business
services, and short term banking and credit facilities in the ordinary course of
Payment due as interest on loans and as net income from investment;
Remittances for living expenses of parent, spouse and children residing abroad;
Expenses in connection with the foreign travel, education and medical care of
parents, spouse and children.