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The Indian Partnership Act, 1932

The Indian Partnership Act 1932 defines a partnership as a relation between two or more persons who agree to share the profits of a
business run by them all or by one or more persons acting for them all. As we go through the Act we will come across five essential
elements that every partnership must contain. The Partners shall run the business of the firm to the highest level of common
advantage by being true to each other. They have to be accountable to one another and provide complete information of all
the aspects of the firm , to any other partner or their legal representatives.

Eligibility
A partnership agreement can be entered into between persons who are competent to contract. Every person who is of the age
of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any
law to which he is subject can enter into a partnership.

NUMBER OF PARTNERS-
The new Companies Act 2013 has prescribed the maximum number of members in case of a partnership firm should not be more
than 100 in case of partnerships. As per the previous Companies Act 1956, the maximum limit in case of partnerships was 10
and 20 for banking business and other businesses respectively.

Essentials of Partnership

• AGREEMENT- The relationship between partners arises from contract and not status. If after the death of sole proprietor of a
firm, his heirs inherit firm they do not become partners, as there is no agreement between them.
• SHARING OF PROFITS- The partners may agree to share profits out of partnership business, but not share the losses. Sharing of
losses is not necessary to constitute the partnership. The partners may agree to share the profits of the business in any way they
like.
• BUSINESS- Business includes every trade, occupation, or profession. There must be course of dealings either actually continued
or contemplated to be continued with a profit motive and not for sport or pleasure.
• RELATION BETWEEN PARTNERS- The partner while carrying on the business of the partnership acts a principle and an agent. He
is a principal because he acts for himself, and he is an agent as he simultaneously acts for the rest of the partners.

General duties of a partner

• Subject to a contract to the contrary between the partners the following are the duties of a partner.
• To carry on the business of the firm to the greatest common advantage. Good faith requires that a partner shall not obtain a
private advantage at the expense of the firm. Where a partner carries on a rival business in competition with the partnership, the
other partners are entitled to restrain him.
• To be just and faithful. Partnership as a rule is presumed to be based on mutual trust and confidence of each partner, not only in
the skill and knowledge, but also in the integrity, of each other partner
• To render true accounts and full information of all things done by them to their co-partners.
• To indemnify for loss caused by fraud. Every partner shall indemnify the firm for loss caused to it by his fraud in the conduct of
the business of the firm.
• Not to carry on business competing with the firm. If a partner carries on any business of the same nature as and competing with
that of the firm, he shall account for and pay to the firm all profits made by him in that business.
• To indemnify the firm for wilful neglect of a partner. A partner shall indemnify the firm for any loss caused to it by his wilful
neglect in the conduct of the business of the firm.
• To carry out the duties created by the contract. The partners are bound to perform all the duties created by the agreement
between the partners.

Rights of the partners

• To take part in the conduct and management of the business

• To express opinion in matters connected with the business. He has a right to be consulted and heard in all matters affecting the
business of the firm
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• To have free access to all the records, books of account of the firm and take copy from them.
• To share in the profits of the business. Every partner is entitled to share in the profits in proportion agreed to between the parties.
• To get interest on the payment of advance. Where a partner makes for he purpose of the business, any payment or advance
beyond the amount of capital he has agreed to subscribe, he is entitled to interest thereon at the rate of 6% per annum.
• To be indemnified by the firm against losses or expenses incurred by him for the benefit of the firm.

Minor admitted to benefits of partnership

A partnership firm cannot be formed with a minor as the only other member. The relation of partnership arises from a contract.
“Section 30 of the Indian Partnership Act, clearly lays down that a minor cannot become a partner, though, with the consent of
the adult partners, he may be admitted to the benefits of partnership. Any document which goes beyond this section cannot be
regarded as valid for the purpose of registration.” Section 30 of the Indian Partnership Act 1932 contains legal provisions about a
minor in a partnership. Now we know the Indian Contract Act 1857 clearly states that no person less than the age of 18, i.e. a minor
can be a party to a contract. And a partnership is a contract between the partners. Hence a minor cannot be a partner in a partnership
firm. However, according to the Partnership Act, a minor may be admitted to the benefits of a partnership. So while the minor will not
be a partner he will enjoy all the benefits of a partnership. To admit all the minor to the benefits of the partnership all of the partners
of the firm must be in agreement.

Rights of a Minor

• A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of
• all the partners for the time being, he may be admitted to the benefits of partnership.
• Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access
to and inspect and of the accounts of the firm.
• Such minor's share is liable for the acts of the firm, but the minor is not personally liable for any such act.
• Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm

Partnership Deed

A partnership deed also called as a partnership agreement, is a record that outlines in detail the rights and functionalities of all
parties to a business operation. It has the force of law and is designed to guide the partners in the conduct of the business.
The Partnership comes into the limelight when:

• There is an outcome of agreement among the partners.

• The agreement can be either in written or oral form
• The Partnership Act does not demand that the agreement has to be in writing. Wherever it is in the form of writing,
the document, which comprises terms of the agreement is called ‘Partnership Deed’
• It normally comprises the attributes about all the characteristics influencing the association between the partners
counting the aim of trade, contribution of capital by each of the partner, the ratio in which the gains and losses will be
divided by the partners and privilege and entitlement of partners to interest on loan, interest on capital, etc.,

A partnership deed should contain the following clauses :

• Name of the parties

• Nature of business
• Duration of partnership
• Name of the firm
• Capital
• Share of partners in profits and losses
• Banking, Account firm
• Books of account
• Powers of partners
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• Retirement and expulsion of partners

• Death of partner
• Dissolution of firm
• Settlement of disputes

Partnership Property (Section 14)

The property of a firm is also known as partnership property, partnership assets, joint stock, common stock, or joint estate. A
partnership property includes all property and rights, and interest in property that the partnership firm purchases. These purchases
can also be made for the purpose and in course of the business of the firm, including the goodwill of the firm. All partners collectively
own such properties. Hence, a partnership property comprises of the following items if there is no agreement between the partners
showing any contrary intention:

• All property and rights and interest in property that the partners purchase in the common stock as their contribution to the
common business.

• All property and rights and interest in property that the firm purchases either for the firm or for the purpose and in course
of the business of the firm.

• Goodwill of the business.

Effects of Non-Registration of Partmership:

1. The firm cannot file a suit against the third party.

2. No partner can file a suit against other partners of the firm.

3. The firm cannot file a suit against any partner.

4. A partner cannot file a suit to enforce a right arising from the contract or conferred by the Partnership Act against the firm.

5. Third parties can file a suit against the firm to enforce their rights.

Key Differences Between Void Contract and Voidable Contract :

1. A contract which lacks enforceability is Void Contract. A contract which lacks the free will of one of the parties to the
contract is known as Voidable Contract.
2. Void Contract is defined in section 2 (j) while Voidable Contract is defined in Section 2 (i) of the Indian Contract Act,
1872.
3. A void contract was valid at the time when it is created, but later on, it becomes invalid. Conversely, the voidable
contract is valid until the aggrieved party does not revoke it within stipulated time.
4. When it is impossible, for an act to be performed by the parties, it becomes void, as it ceases its enforceability. When
the consent of the parties to the contract is not free, the contract becomes voidable at the option of the party whose
consent is not free.
5. In void contract, no party can claim any damages for the non-performance of the contract. On the other hand, the
aggrieved party can claim damages for any loss sustained.
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Agreements which has been Expressly Declared as Void by the Indian Contract Act :

1. Agreements made by incompetent parties. (Sec. 11).

2. Agreements made under a mutual mistake of fact. (Sec. 20).

3. Agreements the consideration or object of which is unlawful. (Sec. 23).

4. Agreement, the consideration or object of which is unlawful in part. (Sec. 24).

5. Agreements made without consideration. (Sec. 25).

6. Agreements in restraint of marriage. (Sec. 26).

7. Agreement in restraint of trade. (Sec. 27).

8. Agreement in restraint of legal proceedings. (Sec. 28).

9. Agreement the meaning of which is uncertain. (Sec. 29).

10. Agreements by way of wager. (Sec. 30).

11. Agreements to do impossible acts. (Sec. 56).

Dissolution of Partnership Firm :

According to Section 39 of the Partnership Act, 1932, “The dissolution of partnership between all the partners of a firm is

called dissolution of the firm.” The Indian Partnership Act, 1932 recognises the difference between ‘dissolution of partnership’

and ‘dissolution of firm’. Dissolution of a firm involves the complete breakdown of partnership relation. In the dissolution of

partnership firm, the partners may by agreement provide for the continuance of the firm after its dissolution by death, lunacy

or insolvency of any partner. In such cases the firm is reconstituted without any dissolution. Thus dissolution of firm does

involve the dissolution of partnership while the dissolution of partnership does not necessarily involve dissolution of the firm.
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“A minor’s bind others but is never bound by others.”

All agreements are not contracts. Only those agreements are contract which fulfil he conditions of section 10 and according to
section 10 for a contract parties must be competent, the consent must be free. Therefore the competency of the parties to a
contract is most essentials element of a contract.
According to section 11 of Indian contract Act 1872 which provided, “That every person is competent to contract who is
of the age of majority according to law to which is subject and who is sound mind and not disqualified from contracting by any
law to which he is subject.” The following persons are competent to contract -

i) Who is major.
ii) Who is of sound mind.
It is evident that minor’s and unsound mind person cannot make a contract. A Major person means who has attained the age
of 18 years. The age of majority has been decided by Indian majority act 1875. In case of guardian appointed by the court, the
age shall be 21 years.
“ An agreement made by a minor is void.”, from the above statement we find that the minor is not competent to
contract. Indian contract act is silent about whether it will be void or voidable up to 1903. But it is decided by the Court that
these are void. Agreement by a minor is void-ab-initio, such contract cannot be enforced by law. Further the minor cannot
authorise any other person to do a contract.

Sale
A sale is a transaction between two or more parties in which the buyer receives tangible or intangible goods, services, and/or
assets in exchange for money. In some cases, other assets are paid to a seller. In the financial markets, a sale can also refer to
an agreement that a buyer and seller make regarding the price of a security. A sale is the transfer of title to a piece of property
or performance of a service in return for compensation. In the retail world, a sale means a temporary price discount on certain
items.

Contract of Sale of goods

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. There can be a contract of sale between one part-owner and another. In other words, under a contract of sale, a seller
(or vendor) in the capacity of the owner, or part-owner of the goods, transfers or agrees to transfer the ownership in goods to
the buyer (or purchaser) for an agreed upon value in money (or money equivalent), called the price, paid or the promise to pay
same. A contract of sale may be absolute or conditional depending upon the desire of contracting parties.

Essentials elements of a Contract of Sale

1. Two Parties: A contract of sale of goods is bilateral in nature wherein property in the goods has to pass from one party to
another. One cannot buy one’s own goods.
For example, A is the owner of a grocery shop. If he supplies the goods (from the stock meant for sale) to his family, it does not
amount to a sale and there is no contract of sale. This is so because the seller and buyer must be two different parties, as one
person cannot be both a seller as well as a buyer. However, there shall be a contract of sale between part owners.

2. Goods: The subject matter of a contract of sale must be goods. Every kind of movable property except actionable claims and
money is regarded as ‘goods’. Contracts relating to services are not considered as contract of sale. Immovable property is
governed by a separate statute, ‘Transfer of Property Act’.

3. Transfer of ownership: Transfer of property in goods is also integral to a contract of sale. The term ‘property in goods’ means
the ownership of the goods. In every contract of sale, there should be an agreement between the buyer and the seller for transfer
of ownership. Here property means the general property in goods, and not merely a special property.

4. Price: The buyer must pay some price for goods. The term ‘price’ is ‘the money consideration for a sale of goods’. Accordingly,
consideration in a contract of sale has necessarily to be in money. Where goods are offered as consideration for goods, it will not
amount to sale, but it will be called barter or exchange, which was prevalent in ancient times.
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5. All essentials of a Valid contract: A contract of sale is a special type of contract, therefore, to be valid, it must have all the
essential elements of a valid contract, viz., free consent, consideration, competency of contracting parties, lawful object, legal
formalities to be completed, etc. A contract of sale will be invalid if important elements are missing. For instance, if A agreed to
sell his car to B because B forced him to do so by means of undue influence, this contract of sale is not valid since there is no free
consent on the part of the transferor.

6. Includes both a ‘Sale’ and ‘An Agreement to Sell’: The ‘contract of sale’ is a generic term and includes both sale and an
agreement to sell. The sale is an executed or absolute contract whereas ‘an agreement to sell’ is an executory contract and implies
a conditional sale.

Agreement Of Sale :

An agreement of sale constitutes the terms and conditions of sale of a property by the seller to the buyer. These terms and
conditions include the amount at which it is to be sold and the future date of full payment. Being an important document in
the sale transaction, it enables the process of sale to go through without any hurdles. All the terms and conditions included in
the agreement of sale must be understood thoroughly by both the parties and obeyed throughout the sale process till the time
the sale deed is made. Agreement of sale is the base document on which the sale deed is drafted. An agreement of sale is a
legal document that outlines the terms of a real estate transaction. It lists the price and other details of the transaction, and is
signed by the seller and the buyer. An agreement of sale is also known as the contract of purchase, contract for sale, contract
agreement or sale agreement.

Differences Between Contract of Sale and Agreement to Sale :

1. When the vendor sells goods to the customer for a price, and the transfer of goods from the vendor to the customer
takes place at the same time, then it is known as Sale. When the seller agrees to sell the goods to the buyer at a
future specified date or after the necessary conditions are fulfilled then it is known as Agreement to sell.

2. The nature of sale is absolute while an agreement to sell is conditional.

3. A contract of sale is an example of Executed Contract whereas the Agreement to Sell is an example of Executory
Contract.

4. Risk and rewards are transferred with the transfer of goods to the buyer in Sale. On the other hand, risk and rewards
are not transferred as the goods are still in possession of the seller.

5. If the goods are lost or damaged subsequently, then in the case of sale it is the liability of the buyer, but if we talk
about an agreement to sell, it is the liability of the seller.

6. Tax is imposed at the time of sale, not at the time of agreement to sell.

7. In the case of a sale, the right to sell the goods is in the hands of the buyer. Conversely, in agreement to sell, the seller
has the right to sell the goods.

An agreement to sell becomes a sale :

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. Agreement of Sale or the agreement to sell becomes a sale when certain
conditions are met. Here we will see certain aspects derived from the Sale of Goods Act, that determine the nature of a Sale
and Agreement of Sale. A contract is a formal or verbal agreement that is enforceable by law. Every contract must have an
agreement but every agreement is not a contract. The section 4(1) of the Sale of Goods Act, 1930 states that – ‘A contract
of sale of goods is a contract whereby the seller either transfers or agrees to transfer the property in goods to the buyer for
a decided price.’ In Section 4(4) of the Act, it is maintained that for an agreement of sale to become a sale, the time has to
elapse or the conditions have to be fulfilled subject to which the property in the goods is to be is to be transferred. The point
that is to be understood from the above discussion is that a contract for the sale of goods can either be a sale or an agreement
of sale
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BASIS FOR
SALE AGREEMENT TO SELL
COMPARISON

Meaning When in a contract of sale, the When in a contract of sale the parties to
exchange of goods for money contract agree to exchange the goods for a
consideration takes place immediately, price at a future specified date is known as an
it is known as Sale. Agreement to Sell.

Nature Absolute Conditional

Type of Contract Executed Contract Executory Contract

Transfer of risk Yes No

Title In sale, the title of goods transfers to In an agreement to sell, the title of goods
the buyer with the transfer of goods. remains with the seller as there is no transfer
of goods.

Right to sell Buyer Seller

Consequences of Responsibility of buyer Responsibility of seller

subsequent loss or
damage to the goods

Tax VAT is charged at the time of sale. No tax is levied.

Memorandum of Association

A Memorandum of Association (MOA) is a legal document prepared in the formation and registration process of a limited
liability company to define its relationship with shareholders. The MOA is accessible to the public and describes the company’s
name, physical address of registered office, names of shareholders and the distribution of shares. The MOA and the Articles of
Association serve as the constitution of the company. The Memorandum of Association or MOA of a company defines
the constitutionand the scope of powers of the company. In simple words, the MOA is the foundation on which the company is built. In
this article, we will look at the laws and regulations that govern the MOA. Also, we will understand the contents of the Memorandum
of Association of a company.

Content of the MOA

✓ Name Clause

1. For a public limited company, the name of the company must have the word ‘Limited’ as the last word

2. For the private limited company, the name of the company must have the words ‘Private Limited’ as the last words.

This is not applicable to companies formed under Section 8 of the Act who must include one of the following words, as applicable:
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• Foundation

• Forum

• Association

• Federation

• Chambers

✓ Registered Office Clause

It must specify the State in which the registered office of the company will be situated.

✓ Object Clause

It must specify the objects for which the company is being incorporated. Further, if a company changes its activities which are not
reflected in its name, then it can change its name within six months of changing its activities. The company must comply with all
name-change provisions.

✓ Liability Clause

It should specify the liability of the members of the company, whether limited or unlimited. Also,

1. For a company limited by shares – it should specify if the liability of its members is limited to any unpaid amount on the
shares that they hold.

2. For a company limited by guarantee – it should specify the amount undertaken by each member to contribute to:
i. The assets of the company when it winds-up. This is provided that he is a member of the company when it winds-up
or the winding-up happens within one year of him ceasing to be a member. In the latter case, the debts and liabilities
considered would be those contracted before he ceases to be a member.

ii. The costs, charges, and expenses of winding up and the adjustment of the rights of the contributors among
themselves.

✓ Capital Clause

This is valid only for companies having share capital. These companies must specify the amount of Authorized capital divided into
shares of fixed amounts. Further, it must state the names of each member and the number of shares against their names.

✓ Association Clause

The MOA must clearly specify the desire of the subscriber to form a company. This is the last clause.

Articles of Association

Articles of Association (AOA) is the secondary document, which defines the rules and regulations made by the company for its
administration and day to day management. In addition to this, the articles contain the rights, responsibilities, powers and
duties of members and directors of the company. It also includes the information about the accounts and audit of the company.
Every company must have its own articles. However, a public company limited by shares can adopt Table A instead of Articles of
Association. It comprises of all the necessary details regarding the internal affairs and the management of the company. It is
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prepared for the persons inside the company, i.e. members, employees, directors, etc. The governance of the company is done
according to the rules prescribed in it. The companies can frame its articles of association as per their requirement and choice.

Memorandum of Association Vs Articles of Association

BASIS FOR
MEMORANDUM OF ASSOCIATION ARTICLES OF ASSOCIATION
COMPARISON

Meaning Memorandum of Association is a document that Articles of Association is a document

contains all the fundamental information which are containing all the rules and regulations
required for the incorporation of the company. that governs the company.

Defined in Section 2 (56) Section 2 (5)

Type of Information Powers and objects of the company. Rules of the company.
contained

Status It is subordinate to the Companies Act. It is subordinate to the memorandum.

Retrospective Effect The memorandum of association of the company The articles of association can be
cannot be amended retrospectively. amended retrospectively.

Major contents A memorandum must contain six clauses. The articles can be drafted as per the
choice of the company.

Obligatory Yes, for all companies. A public company limited by shares can
adopt Table A in place of articles.

Compulsory filing at Required Not required at all.

the time of
Registration

Appointment of Directors under Companies Act 2013

Generally, in a public company or a private company subsidiary of a public company, two-thirds of the total numbers of
Directors are appointed by the shareholders and the remaining one-third’s appointment is made as per Articles and failing
which, shareholders shall appoint the remaining one-third. In a private company, which is not a subsidiary of a public company,
the Articles can prescribe the manner of appointment of any or all the Directors. In case the Articles are silent, the Directors
must be appointed by the shareholders.

Director

A director may be defined as an individual who directs, controls or manages the affairs of the Company. A director is a person
who is appointed to perform the duties and functions of a company in accordance with the provisions of the Company Act,
2013[1]. They are comparatively known as the Board of Directors. Every Company shall have a Board of Directors consisting of
Individuals as director. They play a very important role in managing the business and other affairs of the Company. The
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appointment of Directors is very crucial for the growth and management of the Company. Every Company shall have a Board of
Directors consisting of individuals as directors.

Types of Director:

• Executive director

H/she is the full-time working director of the company. They have a higher responsibility towards the organization. The
company and its employees expect them to be efficient and careful in all the dealings.

• Non-Executive Directors
H/she are non- working directors and are not involved in the everyday working of the company. They might take part in the
planning or policy-making process. They challenge the executive directors to come up with decisions and solutions that are in
the best interest of the company.

• Managing directors
They have a substantial ability to make decisions, manage and direct other members of the company. A Public Company or a
subsidiary of a Public Company that has a share capital of more than Five Crore rupees must have a Managing Director.

• Independent directors
They are the ones who do not have any direct relationship with the company. Their experience is their asset and gives expert
advice to the board when required. Public companies who have paid-up share capital, turnover, or outstanding loans of Rs. 100
Crores, Rs.100 Crores, and Rs.50 Crores or more need two independent directors.

Qualifications to be an independent director:

✓ Must have expertise and experience;

✓ Must be a person of integrity;
✓ Should not be a promoter of the company or its subsidiaries;
✓ Should have no relations (financial/personal) with the promoters, or directors of the company;
✓ Should not have been key managerial personnel of the company or any of its holdings and subsidies;
✓ Should not hold total voting power exceeding two percent in such company.

• Residential director
A director who has lived in India for at least 182 days is a residential director. A company should have one residential director.

• Small Shareholder Directors

They are the ones who can appoint a single director in a listed company. By issuing a notice to at least 1000 shareholders or
1/10th of the shareholders whichever is lesser, to approve this action.

✓ Women directors
The companies who have their securities listed on the stock exchange or have a paid-up capital of Rs. One hundred
crores/turnover of Rs. Three hundred crore or more must have a women director.

✓ Additional Directors
An individual can act as an additional director by taking the position of a director until the next Annual General Meeting.

✓ Alternate director
When a director is absent for more than three months; an alternate director comes on board on his behalf. He acts as a director
for a temporary period. And can only hold office as permissible to the director whose office this director holds.
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✓ Nominee Director
Shareholders, central government or third parties appoint them. Nominee directors come on board when there is grave
mismanagement or the board members abuse their powers.

Conclusion :
Directors hold different positions and powers in a company. The division of power helps in maintaining a fair and transparent
system. Moreover, the distribution of control keeps a check on abuse of power and increases efficiency.

Negotiable Instruments
Negotiable Instruments are written contracts whose benefit could be passed on from its original holder to a new holder. In
other words, negotiable instruments are documents which promise payment to the assignee (the person whom it is assigned
to/given to) or a specified person. These instruments are transferable signed documents which promises to pay the
bearer/holder the sum of money when demanded or at any time in the future.
As mentioned above, these instruments are transferable. The final holder takes the funds and can use them as per his
requirements. That means, once an instrument is transferred, holder of such instrument obtains a full legal title to such
instrument. A negotiable instrument is actually a written document. This document specifies payment to a specific person or the
bearer of the instrument at a specific date. So we can define a bill of exchange as “a document signifying an unconditional promise
signed by the person giving promise, requiring the person to whom it is addressed to pay on demand, or at a fixed date or time, a
certain sum to or to the order of a specified person, or to bearer.”
Presumptions under the Negotiable Instruments :

1. Consideration: It shall be presumed that every negotiable instrument was made, drawn, accepted or endorsed for
consideration. It is also presumed that, consideration is present in every negotiable instrument until the contrary is
proved. The presumption of consideration however may be rebutted by proof that the instrument had been obtained
from its lawful owner by means of fraud or undue influence.
2. Presumption as to Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn
on such date, unless the contrary is proved. In any case where according to the terms of the bills they were to be paid
the current rate for Bank Demand Drafts at the date of payment, it was held that the rate of the exchange should be
calculated at the due date.
3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is presumed to have been accepted
within a reasonable time after its issue and before its maturity. This presumption only applies when the acceptance is
not dated; if the acceptance bears a date, it will prima facie be taken as evidence of the date on which it was made.
4. Time of transfer: Unless the contrary is proved, it shall be presumed that every transfer of a negotiable instrument was
made before its maturity. But it is also seen that there is no presumption as to the exact date of negotiation.
5. Order of indorsement: Until the contrary is proved, it shall be presumed that the indorsements appearing upon a
negotiable instrument were made in the order in which they appear thereon. For example, in a situation where no
evidence is adduced by the defendant, and when the instrument is signed by the second defendant below the
indorsement signature of first defendant (who is the payee in the promissory note), the presumption will be made that
the indorsement signatures were made in the order in which they occur.

Types of Negotiable Instruments :

Promissory notes -

A promissory note refers to a written promise to its holder by an entity or an individual to pay a certain sum of money by a pre-
decided date. In other words, Promissory notes show the amount which someone owes to you or you owe to someone
together with the interest rate and also the date of payment. However, the seller isn’t bound to accept the promissory note.
The reputation of a buyer is of great importance to a seller in deciding whether to accept the promissory note or not.
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BASIS FOR
BILL OF EXCHANGE PROMISSORY NOTE
COMPARISON

Meaning Bill of Exchange is an instrument in A promissory note is a written promise made

writing showing the indebtedness of a by the debtor to pay a certain sum of money
buyer towards the seller of goods. to the creditor at a future specified date.

Defined in Section 5 of Negotiable Instrument Section 4 of Negotiable Instrument Act, 1881.

Act, 1881.

Parties Three parties, i.e. drawer, drawee and Two parties, i.e. drawer and payee.
payee.

Drawn by Creditor Debtor

Liability of Maker Secondary and conditional Primary and absolute

Can maker and payee Yes No

be the same person?

Copies Bill can be drawn in copies. Promissory Note cannot be drawn in copies.

Dishonor Notice is necessary to be given to all Notice is not necessary to be given to the
the parties involved. maker.

Bill of exchange

Bills of exchange refer to a legally binding, written document which instructs a party to pay a predetermined sum of money to
the second(another) party. Some of the bills might state that money is due on a specified date in the future, or they might state
that the payment is due on demand.

A bill of exchange is used in transactions pertaining to goods as well as services. It is signed by a party who owes money (called
the payer) and given to a party entitled to receive money (called the payee or seller), and thus, this could be used for fulfilling
the contract for payment. However, a seller could also endorse a bill of exchange and give it to someone else, thus passing such
payment to some other party.

It is to be noted that when the bill of exchange is issued by the financial institutions, it’s usually referred to as a bank draft. And
if it is issued by an individual, it is usually referred to as a trade draft.

A bill of exchange primarily acts as a promissory note in the international trade; the exporter or seller, in the transaction
addresses a bill of exchange to an importer or buyer. A third party, usually the banks, is a party to several bills of exchange
acting as a guarantee for these payments. It helps in reducing any risk which is part and parcel of any transaction.
 13

Cheques

A cheque refers to an instrument in writing which contains an unconditional order, addressed to a banker and is signed by a
person who has deposited his money with the banker. This order, requires the banker to pay a certain sum of money on
demand only to to the bearer of cheque (person holding the cheque) or to any other person who is specifically to be paid as per
instructions given.

Cheques could be a good way of paying different kinds of bills. Although the usage of cheques is declining over the years due to
online banking, individuals still use cheques for paying for loans, college fees, car EMIs, etc. Cheques are also a good way of
keeping track of all the transactions on paper. On the other side, cheques are comparatively a slow method of payment and
might take some time to be processed.

Cheque Vs Bill of Exchange

BASIS FOR
CHEQUE BILL OF EXCHANGE
COMPARISON

Meaning A document used to make easy payments on A written document that shows the
demand and can be transferred through hand indebtedness of the debtor towards
delivery is known as cheque. the creditor.

Defined in Section 6 of The Negotiable Instrument Act, 1881 Section 5 of The Negotiable
Instrument Act, 1881

Validity Period 3 months Not Applicable

Payable to bearer Always Cannot be made payable on demand

on demand as per RBI Act, 1934

Grace Days Not Applicable, as it is always payable at the time 3 days of grace are allowed.
of presentment.

Acceptance A cheque does not require acceptance. Bill of exchange needs to be accepted.

Stamping No such requirement. Must be stamped.

Crossing Yes No

Drawee Bank Person or Bank

Noting or If the cheque is dishonoured it cannot be noted or If a bill of exchange is dishonoured it

Protesting protested can be noted or protested.
 14

Types of Cheque Crossing (Sections 123-131 A):

✓ General Cheque Crossing

In general crossing, the cheque bears across its face an addition of two parallel transverse lines and/or the addition of words ‘and
Co.’ or ‘not negotiable’ between them. In the case of general crossing on the cheque, the paying banker will pay money to
any banker. For the purpose of general crossing two transverse parallel lines at the corner of the cheque are necessary. Thus, in this
case, the holder of the cheque or the payee will receive the payment only through a bank account and not over the counter. The
words ‘and Co.’ have no significance as such.

✓ Special Cheque Crossing

In special crossing, the cheque bears across its face an addition of the banker’s name, with or without the words ‘not negotiable’. In
this case, the paying banker will pay the amount of cheque only to the banker whose name appears in the crossing or to his
collecting agent. Thus, the paying banker will honor the cheque only when it is ordered through the bank mentioned in the crossing or
its agent bank.

✓ Restrictive Cheque Crossing or Account Payee’s Crossing

This type of crossing restricts the negotiability of the cheque. It directs the collecting banker that he needs to credit the amount of
cheque only to the account of the payee, or the party named or his agent. Where the collecting banker credits the proceeds of a
cheque bearing such crossing to any other account, he shall be guilty of negligence. Also, he will not be eligible for the protection to
the collecting banker under section 131 of the Act.

✓ Not Negotiable Cheque Crossing

It is when the words ‘Not Negotiable’ are written between the two parallel transverse lines across the face of the cheque in the case
of general crossing or in the case of special crossing along with the name of a banker. The Not Negotiable Crossing does not mean
that the cheque is non-transferrable. As per section 130 of the Negotiable Instruments Act, 1881 a person taking a cheque bearing a
general or special crossing with the words ‘not negotiable’ will not have and is neither capable of giving a better title than that which
the person from whom he took it had. One of the important features of a negotiable instrument is that a person who receives it in
good faith, without negligence, for value, before maturity and without knowing the defect in the title of the transferor, gets a good
title to the instrument. Thus, he becomes the holder in due course and acquires an indisputable title to it. Also, when the instrument
passes through a holder in due course, all the subsequent holders also receive a good title.

Difference Between Cheque And Promissory Note

• Promissory Note is a written promise made by one person to pay certain sum of money due to another person or any other
legal holder of the document. Whereas A cheque is an unconditional order, in writing addressed by a customer, with signature,
to the bank requiring it to pay on demand a certain sum of money to the order of a specified person or to the bearer.

• There are two parties in the promissory note – the Maker and the Payee. Whereas in case of cheque, there are three parties –
the drawer, drawee and payee.

• In case of Promissory Note, acceptance is not necessary but in case of cheque, acceptance is required before it is presented for
payment

• Promissory note can never be conditional but cheque can be conditional

• The maker of Promissory Note cannot pay to himself but in case of cheque, drawer can be payee.

• While a cheque is a one time payment, a promissory note is a promise made to pay back a loan; either in installments or in one
go at a later date.

• Cheque is drawn on a bank whereas promissory note can be made by any individual in favour of another person.
 15

Endorsement

The act of a person who is holder of a negotiable instrument in signing his or her name on the back of that instrument, thereby
transferring title or ownership. An endorsement may be made if favour of another individual or legal entity, resulting in a
transfer of the property to that other individual o legal entity.

Endorsement is a term that has various definitions depending on the context of its use. For example, a signature authorizing the
legal transfer of a negotiable instrument between parties is an endorsement. Endorsements can be amendments to contracts
or documents such as life insurance policies or driver's licenses. A public declaration of support for a person, product, or service
is also an endorsement.

Types of Endorsement :

1. Blank Endorsement or General Endorsement

An endorsement is blank or general where the endorser signs his name only, and it becomes payable to bearer. Thus, where a bill is
payable to “Ram or order”, and he writes on its back “Ram”, it is an endorsement in blank by Ram and the property in the bill can
pass by a mere presentation.

2. Special or Full Endorsement

An endorsement “in full” or a special endorsement is one where the endorser puts his signature on the instrument as well as writes
the name of a person to whom order the payment is to be made.

3. Restrictive Endorsement
An endorsement is restrictive which restricts the further negotiation of an instrument. A restrictive endorsement limits the
use of a financial instrument (usually a cheque). The result of a restrictive endorsement is that a financial instrument is
no longer a negotiable instrument that can be passed from the stated payee to a third party. An example of a restrictive
endorsement is the "For Deposit Only" stamp used by most companies on the back of a received cheque. This stamp
effectively limits further action on the check by the stated payee to only being able to deposit it. A customer may send
a supplier a cheque payment, on which is written the words "in full payment of account" or similar terms. This is not
precisely a restrictive endorsement, since it is not restricting the further negotiability of the cheque. However, it may
have a substantial impact on the ability of the supplier to obtain payment on any remaining unpaid balance on the
customer's account, since depositing the cheque may be considered acceptance of the terms added to the cheque.

4. Partial Endorsement

An endorsement partial is one which allows transferring to the endorsee a part only of the amount payable on the instrument. This
does not operate as a negotiation of the instrument.

5. Conditional or Qualified Endorsement

Where the endorser puts his signature under such writing which makes the transferof title subject to fulfilment of some conditions of
the happening of some events, it is a conditional endorsement.

Fictitious Bill:

When the name of drawer and payee are in the bill of exchange are fictitious. It is considered as a fictitious bill. A fictitious bill
even if accepted by a genuine person is not a good bill and cannot be enforced by law. However, such a bill, if accepted by
 16

genuine person become a good bill in the hand of a holder in due of course provided he can show that the first endorsement on
the bill and the signature of the drawer are in the same handwriting and acceptor is liable on the bill to him. ( Sec.42)

All contracts are agreements:

For a Contract to be there an agreement is essential; without an agreement, there can be no contract. As the saying goes,
“where there is smoke, there is fire; for without fire, there can be no smoke”. It could will be said, “where there is contract,
there is agreement without an agreement there can be no contract”. Just as a fire gives birth to smoke, in the same way, an
agreement gives birth to a contract.

What is agreement?

An agreement is a form of cross reference between different parties, which may be written, oral and lies upon the honor of the
parties for its fulfillment rather than being in any way enforceable.
All agreements are not contracts
As stated above, an agreement to become a contract must give rise to a legal obligation. If an agreement is incapable of
creating a duty enforceable by law. It is not a contract. Thus an agreement is a wider term than a contract.
Agreements of moral, religious or social nature e.g., a promise to lunch together at a friend’s house or to take a walk
together are not contracts because they are not likely to create a duty enforceable by law for the simple reason that the parties
never intended that they should be attended by legal consequences
On the other hand, legal agreements are contracts because they create legal relations between the parties.

“All agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful
consideration and with a lawful object and not hereby declared to be void.”
Thus an agreement becomes a contract when at least the following conditions are satisfied.
1-free consent
2-competency of the parties
3-lawful consideration
4- lawful object.

Conclusion:
In a nut shell, an agreement is the basis of a contract and contract is the structure constructed on these basis. An agreement
starts from an offer and ends on consideration while a contract has to achieve an other milestone that is enforceability. Due to
this, breach of an agreement does not give rise to any legal remedy to the aggrieved party while breach of contract provides
legal remedy to the aggrieved party against the guilty party. Thus we can say that all contracts are agreements but all
agreements are not contracts.

Essentials of a Valid Contract :

1. Offer and Acceptance

All offers must be valid and once accepted, it binds both the parties into a valid agreement. The offree is now an acceptor, and
thus the agreement is made between an offeror and an acceptor. The adjective lawful suggests that the offer and acceptance
must satisfy the recruitments of the contract act in relation.

2. Legal relationship

Parties to a contract must desire to constitute a legal relationship. It results when the parties know that if any one of them fails
to fulfil his/her part of the promise, he/she would be liable for the failure of the contract. If there is no desire to create a legal
relationship, there is no contract between the parties. Agreements of social or domestic natures, which do not contemplate a
legal relationship, are not contracts.
 17

3. Lawful consideration

Consideration is described as something in return. It is also vital for the validity of the contract. A promise to do something or to
provide something without anything in return will not be enforceable at law and, therefore, will not be valid. Consideration
need not be in kind or cash. A contract without consideration is a wagering contract or betting. Besides, the consideration must
also be lawful.

4. Competency of parties

The parties to an agreement should be capable of contracting. In other words, they should be capable of entering into the
contract. According to the Contract act, every person is competent to contract who is the age of majority to which he/she is
subject to and who is of the sound mind and is not disqualified from the contracting by any law to which he/she is subject.
Thus, according to the contract act, every person with the exception of the following is competent to enter into a contract:

• A minor
• A person of unsound mind
• A person expressly declared disqualified to get into a contract under any Law

5. Free consent

Another essential of the valid contract is the consent of parties, which should be free. As per the Contract Act, two or more
parties are said to consent when they agree upon the same things in the same sense. The consent is considered free when any
of the following things do not induce it:

• Coercion
• Misrepresentation
• Fraud
• Undue influence
• Mistake

6. Lawful objects

According to Contract act, an agreement may become a valid-contract only, if it is for a lawful consideration and lawful object.
The below-mentioned considerations and objects are not lawful as per the Contract Act

• If it is forbidden by law
• If it is against the provision of any other laws
• If it is fraudulent
• If it damages somebody’s person or property
• If it is in the opinion of courts, immoral or against the public policies

If an agreement is illegal, immoral or against public policy, such agreement becomes an invalid valid contract.

7. Writing and Registration

The agreements may be oral or in writing. When the agreement is in writing it should comply with all legal formalities as to
attestation and registration. If the agreement does not abide by the requisite legal formalities, the law cannot enforce it.
 18

8. Certainty

To give rise to the valid contracts, the terms of the must not be vague or uncertain. Ascertaining the meaning of the agreement
for must be possible. Otherwise, it cannot be enforced.

9. Possibility of Performance

A valid contract must be capable of performing. An agreements to do an act impossible in itself are void. If the act is impossible
in itself, physically, practically or legally then the agreement is not enforceable.

10. Not expressly declared void

The agreement must have been expressly declared to be void under the contract laws. This act specifies certain types of
agreement that have been expressly declared to be void. The following agreements have been declared as void under the
Contract Act.

• An agreement in restraint of marriage

• An agreement in restraint of trade
• An agreement by way of wager

Consent -
Consent is an act of reason and deliberation. A person who possesses and exercises sufficient mental capacity to make anintelli
gent decision demonstrates consent by performing an act recommended by another. Consent assumes a physicalpower to act a
nd a reflective, determined, and unencumbered exertion of these powers. It is an act unaffected by Fraud,duress, or sometimes
even mistake when these factors are not the reason for the consent. Consent is implied in everyagreement. Consent in
business law refers to a situation where there are external circumstances that would cause a rational person to think that
consent has been given, even when no upfront or straightforward words of acceptance have been said. For instance, implied
consent to an agreement can be deduced when one party has been acting according to the contract and the other party
has consented to the first party's actions without opposing or protesting.

Free Consent -

In the Indian Contract Act, the definition of Consent is given in Section 13, which states that “it is when two or more persons agree
upon the same thing and in the same sense”. So the two people must agree to something in the same sense as well. Let’s say for
example A agrees to sell his car to B. A owns three cars and wants to sell the Maruti. B thinks he is buying his Honda. Here A and B have
not agreed upon the same thing in the same sense. Hence there is no consent and subsequently no contract. A free consent is
defined by Section 14 of the Indian Contract Act in these words: Consent is said to be free when it is not caused by :

1. Coercion, i.e., where consent is secured by doing or threatening to do any act forbidden under Indian Penal Code or by unlawful

detaining of properties.

2. Undue influence, ie., by exercising domination on the will of the other party by one who is in a position to do so.

3. Fraud, ie.,by actively misstating or concealing some facts with a view of inducing the other party to make a contract.

4. Misrepresentation, i.e., mis-statement of facts innocently without any intention to deceire.

5. Mistake, i.e., facts are presented different from what they actually are.
 19

Consideration

Consideration is the benefit that each party receives, or expects to receive, when entering into a contract. Consideration is
often monetary, but it can be a promise to perform a specific act, or a promise to refrain from doing something. In order for a
contract or agreement to be legally binding, every party to the contract must receive some type of consideration. In other
words, a contract is a two-way street, so each party must receive something of value from the other party or parties. Illegal or
immoral acts are not legally considered to serve as consideration.

Characteristics of Consideration :

(1) promising to do something that the promisor has no prior legal duty to do (e.g., promising to pay money for
the promisor’s goods);

(2) performing an action that the promisor is not otherwise obligated to undertake; or

(3) refraining from exercising a legal right which the promisor is otherwise entitled to exercise.

Breach of Contract
A contract is a legally binding promise made between two parties. Each party to a contract promises to perform a certain duty,
or pay a certain amount for a specified item or service. The purpose of a contract being legally binding is so each party will have
legal recourse in the event of a breach.

A breach of contract occurs when the promise of the contract is not kept, because one party has failed to fulfill their agreed
upon obligations, according to the terms of the contract. Breaching can occur when one party fails to deliver in the appropriate
time frame, does not meet the terms of the agreement, or fails perform at all.

REMEDIES AVAILABLE FOR A CONTRACT BREACH

• Monetary damages. The party who breached the contract can be held responsible for the losses caused by the
breach. Both general or expectation damages and consequential damages can result from a breach of a
contract. General or expectation damages refer to the loss directly caused by the breach. Consequential damages refer
to losses that occurred because of the breach but that were an indirect cause. For example, if you contracted and paid
for a machine to be delivered and it never came, the general losses would include the value of the money you paid for
the machine. The consequential losses could include the loss of business caused by the fact you did not have the
machine you needed to do your work.
• Specific performance. In some cases, the appropriate remedy for a breach of contract is to correct the breach by
forcing the breaching party to complete the terms of the agreement. Specific performance is an appropriate remedy in
situations where monetary damages could not possibly make the non-breaching party whole for the losses. For
example, if there was a contract created for a buyer to purchase a very rare piece of art, the buyer could not simply find
the art elsewhere. The only remedy that would help the buyer in this circumstance is for the court to require the sale to
go through so the buyer got the unique one-of-a-kind painting that he contracted for.
• Rescission. Rescission allows the non-breaching party to essentially be released from performance obligations.
Recession is a remedy for a breach of contract because it makes clear that the party is relieved of his duties due to the
failure of the other party to perform.
• Liquidation damages. Sometimes, it is very difficult to determine how much a person was damaged by a breach of
contract. To address this problem, some contracts contain liquidated damage clauses. Essentially, these clauses specify
that the non-breaching party will be awarded a specific amount of money in the event a breach occurs. These clauses
will be upheld as long as they are fair.

Caveat Emptor

Caveat emptor is a Latin term that means "let the buyer beware." Similar to the phrase "sold as is," this term means that the
buyer assumes the risk that a product may fail to meet expectations or have defects. In other words, the principle of caveat
emptor serves as a warning that buyers have no recourse with the seller if the product does not meet their expectations.
 20

The term is actually part of a longer statement: Caveat emptor, quia ignorare non debuit quod jus alienum emit ("Let a
purchaser beware, for he ought not to be ignorant of the nature of the property which he is buying from another party.")
The assumption is that buyers will inspect and otherwise ensure that they are confident with the integrity of the product (or
land, to which it often refers) before completing a transaction. This does not, however, give sellers the green light to actively
engage in fraudulent transactions. Caveat emptor is a Latin phrase that is translated as “let the buyer beware.” The phrase
describes the concept in contract law that places the burden of due diligence on a buyer of a good or service. Caveat emptor is
a fundamental principle in commerce and contractual relationships between a buyer and a seller.
According to the caveat emptor principle, a buyer is responsible for performing the necessary due diligence before
the purchase to ensure that a good is not defective or that it suits his/her needs. If the buyer fails to perform the necessary
actions, he or she will not be entitled to any remedies for the damage in case the purchased product showed significant
defects.

Exceptions To The Rule Of Caveat Emptor- Section 16 of The Sale of Goods Act, 1930

1. Section 16(1) – Fitness for buyers purpose

Sub section (1) of Section 16 of the said Act prescribes the circumstances in which the seller is obliged to supply goods to the

buyer as per the purpose for which he intends to make a purchase. It states that when the seller either expressly or by necessary

implication is aware of the purpose for which buyer makes purchase thereby relying on seller’s skill and judgment and the goods

to be purchased are of a description which the seller in his ordinary course of business supply, then there is as implied condition

that the goods shall be reasonably in accordance with the purpose

Requirements of the Section 16(1) are as follows:-

• The buyer should make the seller aware of the particular purpose for which he is making purchase;

• The buyer should make purchase on the basis of seller’s skill or judgment;

• The goods must be of a description which it is in the course of the seller’s business to supply.

2. Merchantable quality [Section 16(2)]

The second important exception to the doctrine of caveat emptor is incorporated in Section 16(2) of the Act. The Section

provides that the dealer who sells the goods has a duty to deliver the goods of merchantable quality. Merchantable

quality means that if the goods are purchased for resale they must be capable of passing in the market under the name

or description by which they are sold.

3. Conditions implied by trade usage [ Sec. 16(3)]

Sub-Section (3) of section 16 gives statutory force to conditions implied by the usage of a particular trade. It says:

“An implied warranty or condition as to the quality or fitness for the particular purpose may be annexed by the usage of trade.”
 21

Unpaid seller
A seller of goods is an unpaid seller within the meaning of the Sale of Goods Act 1979 when thewhole price has not been paid
or tendered or when a bill of exchange or other negotiable instrument has been received asconditional payment and the con
dition on which it was received has not been fulfilled by reason of the dishonour of theinstrument or otherwise.
An unpaid seller is one who has not been paid or tendered the whole of the price or one who receives a bill of exchange or
other negotiable instrument as conditional payment and the condition on which it was received has not been fulfilled by
reason of the dishonor of the instrument or otherwise.

Rights of Unpaid Seller Against Buyer

When the buyer of goods does not pay his dues to the seller, the seller becomes an unpaid seller. And now the seller has certain
rights against the buyer. Such rights are the seller remedies against the breach of contract by the buyer. Such rights of the unpaid
seller are additional to the rights against the goods he sold.

1] Suit for Price

Under the contract of sale if the property of the goods is already passed but he refuses to pay for the goods the seller becomes an
unpaid seller. In such a case. the seller can sue the buyer for wrongfully refusing to pay him his due.

2] Suit for Damages for Non-Acceptance

If the buyer wrongfully refuses or neglects to accept and pay the unpaid seller, the seller can sue the buyer for damages caused due
to his non-acceptance of goods. Since the buyer refused to buy the goods without any just cause, the seller may face certain
damages.

3] Repudiation of Contract before Due Date

If the buyer repudiates the contract before the delivery date of the goods the seller can still sue for damages. Such a contract is
considered as a rescinded contract, and so the seller can sue for breach of contract. This is covered in the Indian Contract Act and is
known as Anticipatory Breach of Contract.

4] Suit for Interest

If there is a specific agreement between the parties the seller can sue for the interestamount due to him from the buyer. This is when
both parties have specifically agreed on the interest rate to be paid to seller from the date on which the payment becomes due.

Rights of Unpaid Seller Against Goods

An unpaid seller has certain rights against the goods and the buyer. In this article, we will refer to the sections of the Sale of Goods Act,

1930 and look at the rights of an unpaid seller against goods namely rights of lien, rights of stoppage in transit etc.

1. He sells the goods without any stipulation for credit

2. The goods are sold on credit but the credit term has expired.

3. The buyer becomes insolvent.

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Company
A company is a legal entity formed by a group of individuals to engage in and operate a business—commercial or industrial—
enterprise. A company may be organized in various ways for tax and financial liability purposes depending on the corporate law
of its jurisdiction. The line of business the company is in will generally determine which business structure it chooses such as
a partnership, proprietorship, or corporation. These structures also denote the ownership structure of the company. They can
also be distinguished between private and public companies. Both have different ownership structures, regulations, and
financial reporting requirements.

An association of persons formed for the purpose of some business or undertaking, which has a legalpersonality separate from
that of its members. A company may be formed by charter, by special Act of Parliament or byregistration under the Companies
Acts. The liability of members is usually (but not always) limited by the charter, Act ofParliament or memorandum of associatio
n.

Characteristics of a company :

1. Registration:

A company comes into existence on registration under the Companies Act. It is an incorporated association. A joint stock
company may be incorporated as a private or public company or one person company.

2. Legal Entity:

A company formed and registered under the Companies Act is a legal entity separate and distinct from its members. It may

contract, sue and be sued in its own name. It has no physical body and exists only in the eyes of law.

3. Perpetual Succession:

As the life of the company is not affected by changes in individual shareholders, it is said to have perpetual succession (i.e.,

continuity of life). Even the death or insolvency of a member (or even all members) does not affect the corporate existence of

the company. Members may come, members may go, but the company continues its operations unless it is wound up.

4. Transferability of Shares:

Shareholders have the right to transfer their shares. The shares of a company are freely transferable and can be sold or

purchased in the stock exchange. However, in the case of a private company, certain restrictions are placed on the rights of a

member to transfer his shares.

5. Limited Liability of Members:

It means that the liability of the shareholders is limited upto the value of the shares held by them. Once the shareholders have
paid the full nominal value of the shares they have agreed to take, they cannot be held responsible for any of the debts of the

company which cannot be met from company’s assets.

6. A Company is Capable of Owning, Using and Disposing of Assets in its Own Name:

The property of the company is not considered as the joint property of the shareholders although the same has been purchased

from the capital contributed by the shareholders.

7. Common Seal:

A company, being an artificial person, cannot sign its name on any document. So a company functions with the help of a
Common Seal which is the official signature of a company.
 23

Difference Between Pvt Ltd and Public Ltd Company

1. The public company refers to a company that is listed on a recognised stock exchange and traded publicly. A Private
Ltd. the company is one that is not listed on a stock exchange and is held privately by the members.

2. There must be at least seven members to start a public company. As against this, the private company can be started
with minimum two members.

3. The is no ceiling on the maximum number of members in a public company. Conversely, a private company can have
a maximum of 200 members, subject to certain conditions.

4. A public company should have at least three directors whereas the Private Ltd. company can have a minimum of 2
directors.

5. It is compulsory to call a statutory general meeting of members, in the case of a public company, whereas there is no
such compulsion in the case of a private company.

6. In a Public Ltd. Company, there must be at least five members, personally present at the Annual General Meeting
(AGM) for constituting the requisite quorum. On the other hand, in the case of Private Ltd. Company, that number is
2.

7. The issue of prospectus/statement instead of the prospectus is mandatory in case of a public company, but this is not
the case with the private company.

8. To start a business, the public company needs a certificate of commencement of business after it is incorporated. In
contrast, a private company can start its business just after receiving a certificate of incorporation.

9. The transferability of shares of a Pvt. Ltd. company is completely restricted. On the contrary, the shareholders of a
public company can freely transfer their shares.

10. A public company can invite the general public for subscribing shares of the company. As opposed, a private company
has no right to invite public for subscription.

Prospectus

A prospectus is a legal document that is required by the Securities Exchange Commission (SEC) to accompany securities

or investment offerings for sale. A prospectus contains key facts and information about the offering to help investors make an

informed decision. Companies must issue a prospectus prior to offering stock or bonds for sale to the public. In the US, all

public companies that intend to issue securities to the public must also file a prospectus with the SEC. Mutual funds also

provide a prospectus to potential clients, which includes a description of the fund's strategies, the manager's background, the

fund's fee structure, and a fund's financial statements. The purpose of the prospectus is to make investors aware of the risks of

an investment. Without this information, they would essentially have to evaluate investment offeringswithout complete

information. This disclosure also protects the company from claims that it did not fully disclose enough information about itself

or the securities in question.

A final prospectus must contain the following:

• Description of the offering

• History of the business
• Description of management
• Price
 24

• Date
• Selling discounts
• Use of proceeds
• Description of the underwriting
• Financial information
• Risks to buyers
• Legal opinion regarding the formation of the company

Misstatements in the prospectus

Since prospectus is relied on by the members of the public to subscribe or purchase the securities of a company, any

misstatements on it invite penal consequences. Misstatement may occur when a statement which is untrue or

misleading in form or context is included in the prospectus. Also, any inclusion or omission of any matter which is likely

to mislead will also be considered as a misstatement (sec. 34). For e.g., a statement on the purpose of offering shares

which is untrue, or statement on the locations of offices for a company which is misleading will amount to misstatement

in the prospectus.

Liability for misstatement in the prospectus

A person who has signed and given consent to the prospectus is liable for misstatement. Persons who had the management of

the whole, or substantially whole of the affairs of the company can be held liable for misstatement in prospectus if they have

signed the prospectus and had given consent for the same. Managers, Company Secretaries, and Directors will come under this

category. However, the mere signing of the declarations in the prospectus will not result in liability for misstatement if the person

signing is neither a manager of the company nor draw salary from the company.

Key Differences Between Condition and Warranty

1. A condition is an obligation which requires being fulfilled before another proposition takes place. A warranty is a
surety given by the seller regarding the state of the product.

2. The term condition is defined in section 12 (2) of the Indian Sale of Goods, Act 1930 whereas warranty is defined in
section 12 (3).

3. The condition is vital to the theme of the contract while Warranty is ancillary.

4. Breach of any condition may result in the termination of the contract while the breach of warranty may not lead to
the cancellation of the contract.

5. Violating a condition means violating a warranty too, but this is not the case with warranty.

6. In the case of breach of condition, the innocent party has the right to rescind the contract as well as a claim for
damages. On the other hand, in breach of warranty, the aggrieved party can only sue the other party for damages.
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When condition to be treated as warranty :

(1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition
or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as
repudiated.

(2) Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any
condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the
goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect.

(3) Nothing in this section shall affect the case of any condition or warranty fulfillment of which is excused by law by
reason of impossibility or otherwise.

Goods

Goods are products, i.e., things that we make or grow and aim to sell. For example, we can exchange money for goods and
services. The term also refers to one’s possessions; the things we own. For example “All my worldly goods would fit into that
bag.” We usually use the term when we refer to items that we can move. Although we generally use the term in its plural form,
we can also use the singular form ‘good.’ A ‘good’ is a product.

Auditor
An auditor is a person authorized to review and verify the accuracy of financial records and ensure that companies comply with
tax laws. They protect businesses from fraud, point out discrepancies in accounting methods and, on occasion, work on a
consultancy basis, helping organizations to spot ways to boost operational efficiency. Auditors work in various capacities within
different industries.

Debenture
A debenture is a type of debt instrument unsecured by collateral. Since debentures have no collateral backing, debentures must
rely on the creditworthiness and reputation of the issuer for support. Both corporations and governments frequently issue
debentures to raise capital or funds. A debenture is one of the most typical forms of long term loans that a company can take.
It is normally a loan that should be repaid on a specific date, but some debentures are irredeemable securities (sometimes
referred to as perpetual debentures).

Preference Shares
Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid
out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are
entitled to be paid from company assets before common stockholders. Most preference shares have a fixed dividend, while
common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common
shareholders usually do.

Grace Period
A grace period is a set length of time after the due date during which payment may be made without penalty. A grace period,
typically of 15 days, is commonly included in mortgage loan and insurance contracts.
Contingent Goods:

Are goods which are to be acquired by the seller upon the happening ofan uncertain event. Obviously they are a type of future
goods and therefore a contractfor the sale of contingent goods also operates as ‘an agreement to sell’ and not a‘sale’ so far as
the question of passing of property to the buyer is concerned. It isimportant to note that an “agreement to sale contingent
goods” is enforceable onlyif the event on the happening of which the performance of the contract is dependenthappens,
otherwise the contract becomes void

Quasi Contract
A quasi contract is a retroactive arrangement between two parties who have no previous obligations to one another. It is
created by a judge to correct a circumstance in which one party acquires something at the expense of the other. The contract
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aims to prevent one party from unfairly benefiting from the situation at the other party's expense. These arrangements may be
imposed when goods or services are accepted, though not requested, by a party. The acceptance then creates an expectation
of payment.

Holder in Due Course

A holder is a person in possession of an instrument payable to bearer or to the identified person possessing it. If a person to
whom an instrument is negotiated becomes nothing more than a holder, the law of commercial paper would not be very
significant, nor would a negotiable instrument be a particularly useful commercial device. A mere holder is simply an assignee,
who acquires the assignor’s rights but also his liabilities; an ordinary holder must defend against claims and overcome defenses
just as his assignor would. The holder in due course is really the crux of the concept of commercial paper and the key to its
success and importance. What the holder in due course gets is an instrument free of claims or defenses by previous possessors.
A holder with such a preferred position can then treat the instrument almost as money, free from the worry that someone
might show up and prove it defective.

Rights under Holder in due course :

1) Holder in due course can file a suit in his own name against the parties liable to pay. He is deemed prima facie to be holder in
due course (Sec 118)
2) The holder is due course gets a good title even though the instruments were originally stamped but was an inchoate
instrument (Sec 20). The person who has signed and delivered an inchoate instrument cannot plead as against the holder in due
course that the instrument has not been filled in accordance with the authority given by him. However, a holder who himself
completes the instrument is not a holder in due course.
3) Every prior party to the instruments is liable to a holder in due course until the instrument is duly satisfied (Sec 36).
4) Acceptor cannot plead against a holder in due course that the bill is drawn in a fictitious name (Sec 42). In Bank of England v
Vagliano Bros (1891 – Ac 107) it was held that the acceptor should consider whether the bill was genuine of false before signing
his acceptance in it.
5) The other parties liable to pay cannot plead that the delivery of the instrument was conditional or for a specific purposes
only (Sec 46).
6) He gets a good title to the instrument even though the title of the transferor or any price party to the instrument is defective
(Sec 53) He can recover the full amount unless he was a party to fraud; or if the instrument is negotiated by means of a forged
endorsement.

ACCEPTANCE TO AN OFFER IS WHAT A LIGHTED MATCHSTICK TO A TRAIN OF GUN POWDER.

OFFER: (Contract Act 1872)•The above statement is basically an analogy i.e. it is a comparison of two different phenomenons
that are similar in some way. The two important or main phenomenons in this statement are “offer” and “acceptance”. To
understand the meaning of this analogy it is important to know what an offer and acceptance is. They are briefly defined under
the contract act as:

ACCEPTANCE: (Contract Act 1872)•Offer is also termed as “proposal”. it is defined as “when one person signifies to another
person his willingness to do or not to do something with a view to obtain the assent of the other person, he is said to make a
proposal”

“A proposal is said to be accepted when the person to whom the proposal is made signifies his assent thereto. A proposal when
accepted becomes a promise.” Both of these definitions show the importance of offer and acceptance. The above statement or
the analogy depicts the situation related to revocation or cancellation of the proposal or an offer and an acceptance. It
describes that when an acceptance is being made, against an offer, it becomes mandatory for the first party to fulfill his
promise. Therefore such an acceptance produces something which cannot be recalled or reversed.

Upon analyzing this statement, it can be seen that gunpowder is the offer and lighted matchstick is acceptance. If a lighted
matchstick is placed or brought near a train of gun powder disaster or explosion takes place which couldn’t be undone or
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reversed. Similarly when an acceptance is being made, in response of an offer it cannot be revoked r cancelled. On the other
hand, if a lighted matchstick is not brought near a train of gunpowder nothing serious or disastrous would occur. This implies
that 1st party can revoke or reverse the offer before it is being accepted. If we analyze “offer” and “acceptance” separately,
they cannot lead to the formation of contract. But whenever a valid offer is supported by acceptance, this leads to such a
contract which is valid and enforceable by law. The statement or analogy consists of “gunpowder” and “lighted matchstick”
which are “offer” and “acceptance” respectively. These two things help us to know the importance of accepting an offer. The
gunpowder if placed separately cannot be exploded. But it can explode or burst if a lighted matchstick is brought near it.
Likewise if offer is made and it is being accepted it becomes compulsory to be fulfilled and it couldn’t be revoked by anyone.
However there could be certain restrictions or limitations to this offer and acceptance binding. Those limitations could be that
the gunpowder or offer lacks any of its elements or the lighted matchstick Due to change in any law etc Apart from these ways,
there is no other solution of revoking the offer. Hence it becomes a binding on the first party who is the offeror to fulfill his
promise. If not then penalties would be imposed upon him under the law. By counter offer  By lapse of time  By death or
insanity of offeror  By notice becomes wet or it might happen that the gunpowder becomes damp or wet or the person who
has laid the train or has made the acceptance removes it… in all these situations there would be no explosion. This means that
an offer can only be cancelled prior to its acceptance. Hence it can be said that it becomes very difficult to revoke an offer when
it is accepted. There are few ways in which an offer can be revoked:

Just as when the lighted match comes in contact with gunpowder, there would be an explosion and it will not be possible to
bring back or revoke the gunpowder to the original position. Similarly, after the offer is accepted it creates a contract whereby
both the parties become bound and none of them go back. Here, Gunpowder is an offer and lighted match is an acceptance.
There is also a possibility that in course of time the gunpowder may have become damp or the which has been removed will
not create any explosion. And, by the lapse of time prescribed in such proposal for its acceptance or, if no time is so prescribed,
by the lapse of a reasonable time, without communication of the acceptance. According to the Section 6 of the Indian Contract
Act, 1872 Once the offer lapses or is revoked, it is incapable of being converted into contract by being accepted. Thus, the
acceptance of the offer while the same is still alive, would result in an contract creating obligations for both the parties.

Appointment of Directors

In public or a private company, a total of two-thirds of directors are appointed by the shareholders. The rest of the one-third remaining
members are appointed with regard to guidelines prescribed in the Article of Association. In the case of a private company, their Article
of Association can prescribe the method to appoint any and all directors. In case the Articles are silent, the directors must be appointed
by the shareholders.

The Companies Act also has a clause that permits a company to appoint two-thirds of the company directors to be appointed according
to the principle of proportional representation. This happens if the company has adopted this policy. Nominee directors will be
appointed by third party authorities or the Government to tackle mismanagement and misconduct. The duties of directors are to act
honestly, exercise reasonable care and skill while performing their duties on behalf of the organization.

Conditions for Appointing Directors

1. He or she should not have been sentenced to imprisonment for any period, or a fine imposed under a number of statutes.

2. They should not have been detained or convicted for any period under the Conservation of Foreign Exchange and Prevention
of Smuggling Activities Act, 1974.

3. He or she should have completed twenty-five (25) years of age, but be less than the age of seventy (70) years. However, this
age limit is not applicable if the appointment is approved by a special resolution passed by the company in general meeting
or the approval of the Central Government is obtained.

4. They should be a managerial person in one or more companies and draws remuneration from one or more companies
subject to the ceiling specified in Section III of Part II of Schedule XIII.
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5.
He or she should be a resident of India. ‘Resident’ includes a person who has been staying in India for a continuous period of
not less than twelve (12) months immediately preceding the date of his or her appointment as a managerial person and who
has come to stay in India for taking up employment in India or for carrying on business or vocation in India.
Powers of Director :

· power to make calls on shareholders in respect of money unpaid on their shares

· power to issue debentures

· power to borrow moneys otherwise than on debentures

· power to invest the funds of the company

· Power to make loans

RIGHTS OF DIRECTORS:
· Right to refuse to transfer shares: According to Section 111 of the Act, directors of private companies and deemed public
companies are entitled to refuse registration of transfer of shares to a person whom they do not approve.

· Right to elect a Chairman: Regulation 76(1) of Table-A provides that the directors are entitled to elect a chairman for the
board meetings.

· Right to appoint a Managing director: The Board has the right to appoint the managing director/ manager (as defined in the
Act) of the company.

· Right to recommend dividend: The Board is entitled to decide whether dividend is to be paid or not. Shareholders cannot
compel the directors to pay dividend. However they can reduce the rate of recommended dividend. Payment of dividend is the
prerogative of the board