Business & Corporate Law: Dr. Jaya Mathew

Business & Corporate Law
Dr. Jaya Mathew
K J Somaiya Institute of Management, India 1

Structuring a business
Sole Proprietorship
Partnership
Limited Liability Partnership
Company

Company-Fundamental
Concepts
Independent corporate existence

Perpetual
Succession
Company can sue and be sued
Company has its own separate property
Limited liability of the members
Transferable shares
Lifting the Corporate Veil
Background : Once a company is formed and

registered under the Act, it becomes a
separate legal entity distinct from its
members. But there could be an abuse of this
corporate devise. That gave birth to this
theory.
Result: There are circumstances when the
members, directors or certain persons can be
made personally liable for the debts or acts of
the company
Situations when lifting of
the veil has been justified
 When corporate personality used as an instrument of fraud
PNB Finance Ltd Vs. Shital Prasad jain
 When the company is used as a mere cloak or sham for doing an unlawful act
Gilford Motor Co. Ltd Vs. Horne
 When the cloak of corporate personality is used to evade tax
State of U.P Vs. Renusagar Power Co.
 When the statute itself contemplates the lifting of the veil
LIC of India Vs. Escorts Ltd.
 Fraudulently conducting company’s business during winding up
 Separate corporate personality may be ignored in holding and subsidiary companies
 For determining the legal character of a company
Dalmier Co. Ltd. Vs. Continental & Tyre & Rubber Co.
 Reduction of membership below the statutory minimum

Thank You
simsr.somaiya.edu

{
CORPORATE PERSONALITY AND

ADVANTAGES OF INCORPORATION
The corporate personality and the nature and advantages of a company
can best be understood by looking at its following characteristic features.
1. Indepenflent corporate existence.-By registration under the
Companies Act, a company becomes vested with corporate personality
which is independent of, and distinct from, its members. A company is a
legal person. The decision of the House of Lords in Salomon v Salomon & Co
Ltd is a well-known authority of this principle: One S incorporated a com-
pany to take over his personal business of manufacturing boots and shoes-
The seven subscribers to the memorandum were all the members of his
own family, each taking only one share. The company's Board of Directors
was composed of S, as the managing director, and his four sons. Through
this Board, S's business was transferred to the company at an agreed price
in payment of which S was allotted 20,000 shares of f I each and deben-
tures worth f 10,000 creating a charge on the company's assets. Within a
year the company came to be wound up and the state of affairs was like
this. lssets: f 6000; Liabilities: (l) debenlure creditors f 10,000, (2) ordinary
creditors f 7000. It was argued on behalf of the unsecured creditors that,
though incorporated under the Act, the company never had an independ-
ent existence. It was S himself trading under another name. But the House
of Lords held that Salomon & Co must be regarded as a separate person
from S. "When the memorandum is duly signed and registered, the sub-
scribers are a body corporate capable forthwith of exercising all the func-
tions of an incorporated individual. It is difficult to understand how a body
corporate thus created by statute can lose its individuality by issuing the
bulk of its capital to one person. The company is at law a different person
altogether from the subscribers of the metnorandutn'"
In the 13th century, Pope Innocent IV espoused the theory of legal fic-
tion by saying that corporate bodies could not be excommunicated because
they existed only in abstract. The Supreme Court regarded this enuncia-
tion as the foundation of separate entity principle '
2. Limited tiability.-Limitation of liability is another major advantage
of incorporation. The company, being a separate entity, leading its own
business life, the members are not liable for its debts. If the liability of
members, as is usual , is limited by shares, each member is bound to pay
the nominal value of the shares held by him and his liability ends there.
3.Perpetual succession,;tt/ly1 incorporated company never dies." In the
words of Professor Gower: "Members may come and go, but the company
can go on for ever. During the war all the members of one private com-
pany, while in general meeting, were killed by a bomb. But the company
l. 1897 AC22 (1895-99) All ER Rep 9 (HL)'

2. Vorlq/bne Internarional Holtlings BV v tJnion ttf India, (2012) 6 SCC 613: (2012) 3 SCC (Civ)
867 (2012) 170 ComP Cas 369.
I
survived; not even a hydrogen bomb courd have

destroyed it.,,, Thus, the
death or insolvency of members does
not affect the continued existence
the company. The company remains of
the same entity ,,in the like manner
as
river'
:l: :'ffiJ:;i:H:lll#;'"me 'h;;;;;;;parts which compose it
4. Transferabre shqres.*when joint stock
companies were established
the great object was that the shares
shourd b"
ferred. Section 44 gives expression "uputr" of being easiry trans_
to this principre
shares or other interest of any member by providing that ,,the
shali be movabre property transfer_
able in the man.ner provided by the
articles of the company,,. The unique
advantage of this is that a member
may se, his shares in the open market
and get back his money without affecting
the capitat structure of the com_
pany. The shares of a pubtic company
are freely transferable.
5 ' separate property'-The
property of
is vested in the corporate body. The companyan incorporated company
enjoying property in its own ,,u-". No is capable of hording and
member, not even ail the members
can claim ownership of any jtem of
the compary,. urr"ts. Thus, where a
substantiar sharehorder insurLd the
company,s timber in his own name,
could not recover indemnity when the he
timber was burnt by lire as he had
no insurable interest in the company,s property..
6.A company can sue and be stted in ils corporate
natne.
7. A compsny afiracts professional management.
8' A company ge-ts' the privitege
oJ collecting interest-Jree monqt
the public -for its business by *i*ing from
a pubrii issne or through private
placement of shares and other secnrities.
Disadvantages
l' Lifting the corporate veir.-A, the abovenoted
poration folrow from the principre that advantages of incor_
for ail purposes of law a com_
pany shourd be regardecl as a separate
entity from its sharehorders. But
sometimes it may become necessary to
look at the persons behind the
corporate veil and then some of those
advantages disappear. The separate
entity of the company is disregarded and
the schernes and intentions of
the persons behind are expos"a to. fu, view.
liable for using the company as a vehicre
They are made personary
for undesirabre purposes., This is
usually done in the following cases:
(a) when it becomes necessary to determine
a corporotion--Thus it has been herd by the House the regar character oJ.
co Ltd v continentar Tyre & Rubber co (Great of Lords in Daimrer
Britain) Ltd that a company,
3. L.C.B. Gower, MODERN COMPANy LAW (2nd
Ectn. 1957) 71.
4. Macaura v Northern Assurance Co Ltd, 1925,AC
619 (HL).
5' Jai Narain Parasrampuria v Pushpa Devi saraf, (2006)
the company for furtherance oftheir personal
7 scc zso, promoters-directors used
objects.
6. (1916) 2 AC 307: (1916-17) Ail ER Rep l9t (HL).
.
though registered in England, would

"assume an enemy character
persons in de facto control of its when
affairs, are residents in an enemy
or' wherever re^sident, are acting under country
the control of enemies." on the
other hand, an American court, refused
to hold that a company consisting
of Negroes would become a black
company.
(b) For beneJit of revenae.-The
separate existence of a company
be disregarded when the only purpose may
for which it appears to have been
formed is the evasion of taxes.^Benefits
under excise law were denied to
a company when it was found that it
was a pa.t of a group of three
panies which were related not com_
onry in financial
managerial personner. They were intertwined contror but arso through
operation' Their production had to_be in their management and
crubbed together so as to see
it was withi, exemption limits.- This principre whether
reveal that the companies (hording is appried where the lacts
and subsldiary) are indurging in
ous methods for tax evasion.,, dubi-
(c) llhen company conceivecr on.d
brought forth Jbr
poses---Thus a company was restrained fraucrulent pur_
shareholder was bound by a restraint
from *ting when its principal
covenant and had incorporated the
company only to escape the covenant.,,
(d) Agency or trust and Government
Company._The separate exist_
ence of a company may be ignored
where it i;;;i"g used as an agent
trustee' The qourts insist upon very or
strong evidence for this purpose.
example' a Governrnent comparry ir For
ro, regarded u, u, agent or trustee of
the State unless it is perfor-irrg sovereign
functions
mercial functions'" The p.op"rty of a Government as opposed to com_
held to be not that of State.'' A transport company has been
company in which ail the shares
were held by the Transport Commission
was heri to be not acting as an
agent for the commission.'' A craimant
entered into a contract with a com_
pany because of misrepresentations
made by third parties who controiled
the company. The court refused to rift
the corporaie veil in order to dis-
cover such persons and hold them liabre
for breach of the agreement.," A
7' People's preusure parkco, rnc v Rohreder, r09 va 439: 6r sE 794 (r90g).
Ltd v commr ofcustoms and centrot Excise, (2010)'i+
' '''
i{r:1;?;';." scc 378: (2012) r scc
' v
{"i:.wr';:";;"ilI{!::Tir.u, Irnion qf rndia, (2012) 6 SCC 613: (2012) 3 SCC (civ)
l0' Gilford Motor co Ltd v Home, 1933 ch 935 (cA);
Atur Gupta v Trident projects Ltd, ArR
NoC 384 (Del), Iifting when there is fraud, misrepresentation, 20lo
ll' see, Praga Toors cyln v cA Manual, (1969) r diversion of funds.
SCC 585: 39 comp cas 889: AIR 1969
1306; Som prakash Rekhiv rJnion oJIndia, (r98r)
comp cas 7l' where a Government underiaking
l SCC449:rosr icc (L&S) 200: (r98r) sc 5r
which Burmah-shell was
held to be amenable to writjurisdiction. ""q,ii."o
12. Bharat Alutninium Co Ltd v Speciol Area Development Authority, (l9g
l ) 5l Comp Cas
184 (MP).
13. Ebbw Vale \JDC v South Wales TralJic Area Licensing
Authorig,
14. VTB Capital Pic v Nutritek Internatio,nal Corpn, (2013) UKSC (1951) 2 KB 366 (CA).
5: (2013) Z WLR 398.
wholly owned subsidiary company is arso
viewed to be as distinct from its
parent as any other company.'' Thus
power generating unit created
company for its own exclusive supply by a
was not"regarded as a separate
for the purposes of excise."'The court entity
pierced the veil of incorporation
found that the Area Deveropment and
corporation was infact a public author_
ity tho,gh the Governmentlnvestment in
it was only 17.4 percent. It was
created under pubric-private-participation
water supply and sewerage treatment
to b"il;, operate and transfer
system.,,
Lifting the veil is not arways to the- iisudvurrtuge
moters- The supreme court rooked through of the company,s pro_
joint-venture sponsors of the company the ieil and finding that the
were qualifiecl for participating in
a Government tender, held that their
company srrourd arso be treated as
qualified tenderer.,' a
(e) under statutory provisions.-Besides

personal liability in certain cases
this, the Act itserf imposes
upon persons crothed behind the cor_
poration' For exampre, where business
is carried on beyond six months
after knowledge that the membership
statutory minimum rs. a6al; or a contract
of the company has gone below
name of the company [s. 12]; or the
is rnade by misdescribing the
business is carried on onry to defraud
creditors [s' 339], members or officers
who are parties to such transactions
are personaily riabre. Under Section
r3g read with secti on 14r, Negotiabre
Instruments Act, rggr, directors, etc,
of a company can be herd criminaily
liable for dishonour of the company's chequ".
punished for it under attribution of r*," company can also be
directors, intent to it. ,
A company cannot escape crirninar liabirity orrry
provision for punishment by way of imprisonment o""uuse there is a
mens rea on the part of the acting director, and fine. If there is
it becomes attributable to the
15. h.eewheels (p) Ltd v Veda Mitro, (1969)

39 Comp Cas l: (t969) I Conrp LJ I3g:
258, except when the parent controls its AIR 1969 Del
activities in all respect s. F G Films Lttl, re, (1953)
I WLR483.
16' stote ofuP
v Renusagar Power co, (1988) 4 SCC 59: AIR 19g8
India, (2003) 5 scc r63: 2003 scc sc 1737; AK Bindal v union oJ.
1r-as; 620: (2003) l r4 comp cas 590, Government not
liable to pay salary of a Government Company,s
staff.
17. New Tirupur Area Deveropment corpn Ltcr v
state of rN, AIR 2010 Mad 176: (2010)
nr}; Bharar steer rubes Ltd v IFC| Ltd, (201r; tr sic :as, 4 MLJ
j j scc (civ) 689: (201)
comp cas 283: AIR 2011 sc 2568, it is not necessary lzorr 163
for a public Financial Institution
under s' 2(72) that rhe Government shourd hord 5r'p".
more paid up capitar.
Dalco Engg (p) Ltd "*ior
v satish prabhakar padhye, (2010) 4 sic:za, (2010) l SCC (L&S) 1052:
AIR 2010 sc 1576, a company is not an entity established
under the
companies Act for
the purposes of Persons with Disabilities (Equal
opportunities, protection of Rights
and Full Participation) Act, 1995' Such.o*puni..
a,lonly registered and incorporated
under the Act and not establr'shed.
18' New Horizons Ltd v o/rndia, (r995) r SCC 47g: (rgg7) gg cornp
.tinion
19. Aneeta Hada v Grdfather cas g49.
Travers Tours (p) Ltd, (2012)'5 scb oot : (2012)
(2012) 172 comp cas 75: AIR 2012 sc 2795. 3 scc (civ) 350:
A company is not imnrune from criminal
liability' The plea that a company cannot possess crlminal
intent is not tenable as the
criminal intent of persons guiding the company gets imputed
to the company.
/ company.r' A company is not capabre
of suffering mental agony and hard_
ship. It can only suffer financial io.r"..,,
A holding company means a company which has the
trol the composition of another company,s Board power to con-
majority of its shares. Such a controlred company
of Directors or holds a
is known as a ,,subsidi_
ary". ordinariry even a 100 per cent subsidiary
and its hglding company
are regarded as two separate regal entities..,
tain statutory provisions such colpanies have
iut under the force of cer_
to present a joint picture of
their accounts and financiar position.
ts.
controls the whole conduct of its subsidiary,
129] whlre the hording company
it *uy incur liabirity for such
condtt c t.''
2. Fonnality aner expense.-Incorporation
is a very expensive aftair.
It requires a nlmber of formarities to u. .orrptied
formation of the company and administration with both as to the
"iii, "r"rr...
3. Company is not citiTen.*[,qs1Jy, a company,
is not a citizen-" It can have the benefit of though a legal person,
only such fundampntal rights
as are guaranteed to every "person"
whether a-citizen or not. A company
does, however, have a nationality,
and residence. A company
incorporated in a particurur.o.,rt.y.domicile
has the
though, unlike a natural person, it cannot ""rior"riry of that country,
change its nationatirf :..
- REGISTRATION AND INCORPORATIO.N

Formation of Company IS.3I
A company may be formed for any lawful purpose of
types:
the following
(a) Public company.-Any seven or

more peisons when the company to
be formed is a public company.
(b) Private compsny'- Any two or more persons
when the company to
be formed is a private company.
(c) One man company.-Any one person
company, when the company
to be formed is ,'one person company,,, i.e. u prirut"
company with one
member.
They have to subscribe their name to the memorandum
of the company.
The memorandum of "one person company,, has
to indicate
of the person, with his prior written consent in the prescribed the name
form. Such
20. Iridiun India Terecom Ltdv Motorora tnc, (20r r scc 74: (2010)
CompCas I47:AIR20l I SC20.
) 3 scc (cri) r20r: (2010) 160
2l' Best sellers Retair {!y!a {4 Lrd v Aditva Birra Nuvo Ltd, (2012) 6 scc 792:
(Civ) 1044: (2012) I 15 ArC t. (2012) 3 scc
22. Freewheers (p) Lrd v veda Mitra, (1969) 39 comp cas r: (1969)
Del 258
r comp LJ r38: AIR 1969
23. Alembic Glass Industries Ltd v cCE & Customs, (2002) g
SCC 463: (2002) lr 2 comp cas 3.r9.
24. State h'ading cdrpn oflndia Lrd v cTo, (1963) 33 comp
cas 1057: AIR 1963 sc 18il.
25' Ga'rquev IRC' (1940) 2 KB 80; Dhodha House v SKMaingi, (2006) g
SCC 4l: AIR 2006 SC 730.
person is to becotne a member of the cornpany
in the event drhe subscrib-
er's death or his incapacity to contract. Such person,s
written
to be filed with the Registrar at the time of incorporation consent has
company a10ng with its memorandum and articles.
of one person
such perso, *uy with_
draw his consent in accordance with the prescribed
manner. The member
of such company may also change the name of such person
the prescribed procedure. He has to intimate the
by folowing
change to his nominee
by indicating in the memorandum or otherwise. The company
has then
to notify the Registrar of the change. Such change is
not to be taken as an
alteration of the memorandum.
A company formed under this section may be either a company
by shares or a company limited by guarantee or an rimited
unlimited company.
Registration of a company is obtained by firing an
apprication rvith the
Registrar of companies. [S. 7] The application shourd
be accompanied by
the following documents: (l) memorandum of
associatio n; (2) articles of
association; (3) a copy of the agreement, if any, whiclr
the company pro-
poses to enter into with any individual for his
appointment as managing or
whole-time director or manager; and (4) a declai-ation
that aI the require_
ments of the Act have been complied with.,"
Section 7, 2ol 3 Act introduces certain new requirements.
has to be filed by each of the subscribers to the
An affidavit
-emo.andum and persons
named as the first directors, if any, in the articre
that he has not been con_
victed of any offence in connection with the promotign,
formuiiorr",-o.'rrur_
agement of any company or found guilty of any fraud
or misfeasance or of
any breach of duty to the company under the Act
or preceding company
law during the preceding five years and that the documents
filed for regis-
tration contain correct and complete information and true
knowledge and belief; the address for correspondence
to,h;l;r; o-inr,
registered office is established; the particulars of name,
tiil the company,s
including surname,
or family name' residential address, nationality and such
other particulars
of every subscriber to the memorandum arong with proof of
may be prescribed. where the subscriber is a uoay corporate,
identity as
such particu_
lars have to be discrosed as may be prescribed; the particulars
of persons
mentioned in the articres as the first directors of the tompuny,
their names
including surnames or family names, Director Identification
Number, res_
idential address, nationality and such other particulars including
proof of
identity as may be prescribed; and particulars of interests
of persons men-
tioned in the articles as the first directors of the company
in such form and
manner as may be prescribed. tS. 7(l)]
The company has to maintain and preserve at its registered
office copies
of all the documents and information as originalty filed
under section 711)
till its dissolution under the Act.
26. This declaration should be signed by an advocate, or any proposed

director, manager or
secretary ofthe company or by a secretary or cost accountant,
or chartered accountant
who is in whole-time pracrice in India.
tS. 7(l)(b)l
Nature of a company
What is a company?
The word company has no technical or legal meaning. It may be described to imply an
association of persons for some common object or objects
A. Nature of a company:-
The salient features are:-
1. Independent corporate existence

A company gets its existence when it is incorporated by the issue of a certificate of
incorporation by the Registrar of companies. On incorporation, the company becomes a
body corporate having perpetual succession and common seal. It is a person different from
its members. Even if its members go on changing from time to time, the company continues
to live.
The feature of separate corporate independent existence of a company may be illustrated
by referring to the case of Salomon V. Salomon & Co Ltd.
2. Perpetual Succession
A company being an artificial person has perpetual succession. i.e., it continues to live
practically forever. A member of a company could transfer his shares or on the death of a
member his shares may devolve on to his legal representatives, but the company may
continue to live.
3. Company can sue and be sued
Being a legal person, a company can sue and be sued in his own name.
But no insolvency petition shall be presented against a company. The reason for the above
stated rule is that the remedy of winding up of a company by the Tribunal is available, if the
company is unable to pay its debts.
4. Company has its own separate property
The property of the company belongs to the company itself, rather than to its members. A
company is a legal entity and therefore, it has a right like any other person to own, enjoy or
dispose of its property.
A shareholder is not a part owner of a company or its property. So a member does not have
any insurable interest in the company’s property.
5. Limited liability of the members
No member of a company can be made liable to pay more than the amount unpaid on the
shares held by him whether during the active life of the company or at the time of its
winding up.
6. Transferable shares
Shares are movable property. And according to the Sale of Goods Act, the term goods
include stock and shares and therefore, the shares could be sold as goods. When the shares
are transferred, the transferee becomes a member of the company in place of the
transferor.
1
K J Somaiya Institute of Management
Formerly K J Somaiya Institute of Management Studies & Research
B. Corporate Personality and lifting the corporate veil
It has been noted in Salomon V. Salomon & Co. that even if one person and his family
members contribute to the whole of capital and have control over the business, yet the
members and the company are different persons, separated by corporate veil. But in some
exceptional cases the corporate personality of the company may be ignored and the
principle of piercing the corporate veil may be applied in the interest of justice.
Situations when the lifting of the corporate veil has been considered to be justified are
being discussed below:-
1. When corporate entity is being used as an instrument of fraud, the corporate personality
may be disregarded.
2. When the corporate personality of a company is being used as a clock for doing an unlawful
act, the courts will look behind the corporate veil to know the reality.
3. When the cloak of corporate personality is used to evade tax.
4. When the statute itself contemplates the lifting of the corporate veil.
5. On incorporation the company becomes a distinct legal entity, having separate existence
from its members. However, if the number of members of a public company falls below 7
and that of a private company below 2, the advantages of incorporation stand withdrawn.
And if the company carries on business for more than 6 months while the number is
reduced, every person who is the member of the company during such period shall be
severally liable for the payment of the whole debts of the company contracted during the
time and may be severally sued therefore.
6. If in the course of the winding up of the company, it appears that any business of the
company has been carried on, with the intent to defraud creditors of the company or any
other persons, or for any fraudulent purpose, the Tribunal may declare that persons who
were carrying on the business shall be personally responsible.
7. The Holding and its Subsidiary are two distinct legal entities, and the holding company or
controlling company cannot be held liable for the acts of the subsidiary company. But
accounts of the holding and the subsidiary companies are to be presented in a manner that
a complete joint picture of these companies is available.
8. In times of war the court may ignore the place of registration of the company and lift the
corporate veil to see whether the company is being controlled by enemy aliens or not and
determine the enemy character of the company by that. In other words the court may find
out the natural persons who constitute and control the company by lifting the veil.
2
Limited Liability Partnership
1. LLP is a body corporate and a legal entity separate from its partners, with perpetual
succession.
2. LLP is an alternative corporate business model that gives the benefits of limited liability
of a company and the flexibility of a traditional partnership firm.
3. LLP can continue its existence irrespective of changes in partners. It can enter contracts
and holding property in its own name.
4. Mutual rights and duties of the partners inter se or between the LLP and its partners are
governed by an LLP agreement. When an LLP has no agreement, model agreement in the
First Schedule will apply.
5. Limited liability partnerships are governed by the LLP Act, 2008.

LLP shall have minimum two partners and no maximum limit on number of partners.
Partners may be individuals, firms, or body corporate as well as foreign LLPs. LLP shall
appoint two designated partners, who shall be individuals and who will be responsible for
compliance of legal formalities.
6. Foreign LLPs can establish a place of business in India and can become partners of an
Indian LLP.
7. A limited liability partnership is a body corporate and is created by law. Registrar of

Companies of the State, in which the registered office of the LLP is situated, is
empowered to issue certificate of registration to LLPs.
8. LLPs shall submit an incorporation document with Registrar, duly signed by persons
subscribing to LLP, stating the name of LLP, its registered office, proposed business,
names and addresses of partners and designated partners, and a statement of compliance
of rules.
9. The LLP comes into existence from the date, mentioned in the certificate of registration
issued by the Registrar.
10. Incorporation empowers an LLP to commence business, to sue or be sued, hold or

transfer property, have a common seal, and do all such acts which a body corporate can
lawfully do.
1
11. An LLP shall use the words 'Limited Liability Partnership' or 'LLP' as the last words of its
name and shall publish its name, registered office, registration number in all its invoices
and official correspondence.
12.A partner may cease his interest in LLP in accordance with the agreement or by giving 30
days written notice. Death, insanity, insolvency of a partner or dissolution of LLP
terminates his partnership interest.
13. A partnership firm will be converted into an LLP only if the partners of the LLP comprise
all the partners of the firm and no one else.
14. The Limited Liability Partnership Act, 2008 provides for conversion of a partnership
firm, a private company, or an unlisted public company into limited liability partnership
as per procedure prescribed in Schedules II to IV.
15. On conversion, the LLP and its partners shall be bound by the provisions of the LLP Act.
16. The winding-up of an LLP may be either voluntary or by the Tribunal (compulsory
winding-up) and LLP so wound-up may be dissolved.
17. An LLP may wind-up voluntarily if at least three-fourths of its partners pass a resolution
in favour of winding-up and file the resolution with the Registrar, along with a declaration
of solvency. However, if LLP has creditors, consent of two-thirds in value of creditors
shall be required to wind-up LLP voluntarily.
18. Voluntary winding-up commences from the date of passing of resolution by the partners
of the LLP. LLP liquidator, appointed by the partners or creditors, settle the list of
creditors and partners, pay all debts of LLP from its assets and properties and distribute
the surplus, if any, among LLP partners according to their rights and interest. As soon as
the affairs of the LLP are fully wound-up, the Liquidator submits winding-up account
report, and explanation, to the partners and creditors who pass resolution with two-third
majority to dissolve LLP.
2
Classification of Companies
Dr. Jaya Mathew

Company - Definition
The term company means a company

incorporated under the Companies Act, 2013
or under any previous company law.

Classification
Based on Incorporation
Based on control
Based on liability
New Breed
Others

Based on Incorporation
Chartered
Statutory
Registered

Private Company
A Company having a minimum paid-up share capital of Rs. 1, 00,000
and which by its articles,—
restricts the right to transfer its shares
limits the number of its members to two hundred
---A private company is prohibited to make invitation to the public to
subscribe for any securities of the company.
---A private company may by alteration of Memorandum and Articles
and compliance with other procedures convert it into a public
company.
--- Companies Amendment Act (2015)

Public Company
A Company which—
is not a private company;
has a minimum paid-up share capital of Rs. 5,00,000.
---However, a subsidiary of a company, not being a private company, shall be deemed to

be public company for the purposes of this Act.
---A public company may by alteration of Memorandum and Articles and compliance with
other procedures convert it into a private company.
----Companies Amendment Act (2015)

Based on Liability
Unlimited
Limited

Unlimited company
A company not having any limit on the

liability of its members.

Company limited by shares
A company having the liability of its

members limited by the
memorandum to the amount, if any,
unpaid on the shares respectively
held by them.

Company limited by guarantee
A company having the liability of its

members limited by the memorandum to
such amount as the members may
respectively undertake to contribute to the
assets of the company in the event of its
being wound up.

On the basis of Control
Government
Holding & Subsidiary

Dormant
Associate

Government Company
A company in which not less than fifty-
one per cent of the paid-up share capital is
held by the Central Government, or by any
State Government or Governments, or
partly by the Central Government and
partly by one or more State Governments
and includes a company which is a
subsidiary company of such a
Government company.

Subsidiary Company
A company in which the holding company

controls the composition of the Board of Directors
or
exercises or controls more than one-half of the
total share capital either at its own or together
with one or more of its subsidiary companies.
It means either of the condition stated above shall
be satisfied to be classified as a subsidiary
company.
Associate Company
If a company (Acquirer
company)has 20% or more but not
more than 50% of the total share
capital of another company, then
another company shall be treated
as associate Company for the
acquirer company.

Dormant Company
 Dormant Company on Application
Where a company is formed and registered under the
Companies Act for a future project or to hold an asset
or intellectual property and has no significant
accounting transaction, such a company may make an
application and obtain the status of a dormant company
 Dormant Company on default
If a company which has not filed financial statements or
annual returns for 2 financial years consecutively, then
ROC shall issue a notice to that company and enter the
name of such company in the register maintained for
dormant companies
New Breed Companies
One Person Small

One Person Company
A company which has only one person as

member.
The Companies (Incorporation) Rules, 2014
specifies that only a natural person who is
citizen and resident in India is entitled to
form OPC.
A person can form only one OPC.

Small Company
A company, other than a public company,
paid-up share capital of which does not exceed Rs. 50
lakhs
Or
turnover of which as per its last profit and loss account
does not exceed Rs. 2 cr.
---Simplified financial reporting norms and audit
exemptions are prescribed for Small companies.

Others
Section -8
Foreign

Section 8 Companies
Section 8 Companies are formed not with a

purpose of promoting trade and business.

Foreign company
A company or body corporate incorporated

outside India which—
has a place of business in India and
conducts any business activity in India.

Unlawful Association
Any unregistered association shall be treated as

illegal association provided such association has
more than 50 members. ( As per rule 10 of
companies Rules, 2014)

Thank You
simsr.somaiya.edu

Issue of Securities
Dr. Jaya Mathew

Issue of Securities
Public
Company Private Company
Public Offer Private
Private Placement
Placement Rights Issue
Rights Issue Bonus Issue
Bonus Issue

What is a Prospectus?
Prospectus means any document
described or issued as a
prospectus and includes a Red
Herring prospectus or Shelf
prospectus or any notice, circular,
advertisement, or other document
listed on any recognized stock
exchange
Contents of Prospectus
 Every prospectus has to be dated and signed and contain the following information
 Names and addresses of the registered offices of the company, company secretary, chief
financial officer, auditors, legal advisers, bankers
 Dates of opening and closing of the issue
 Statement by the Board of Directors about the separate bank account where receipts of issue
are to be kept
 Consent of directors, auditors, bankers to the issue, expert’s opinion
 Authority for the issue and details of resolution passed for it
 Procedure and time schedule for allotment and issue of securities
 Capital structure of the company
 Main objects of the public offer
 Details of the directors including their appointments and remuneration
 Disclosures about sources of the promoters’ contribution
 Reports for purpose of the financial information by the auditors
 Statement of an independent expert
 A copy of the prospectus signed by every person who is named in the prospectus as a director has
to be filed with the Registrar
 No Prospectus is to be valid if it is issued for more than 90 days after the date on which a copy
was delivered to the Registrar.

Liabilities for misstatements in
prospectus
Civil Liability Criminal Liability
 Rescission  Imprisonment
 Suit for damages  Fine
 Suit for
compensation

Thank You
simsr.somaiya.edu

Issue of Securities by Companies
After the incorporation of a company, it can raise necessary finance for the conduct of its business by
issuing securities (Shares & Debentures)
A public Company may issue securities to public through Public Offer, Private Placement or through
a rights issue or a bonus issue. And a Private Company may issue securities through Private
Placement or a rights issue or a bonus issue
The classification of issues: -
1. Private Placement
The expression’ Private Placement’ means any offer of securities or invitation to subscribe securities
to a select group of persons by a company other than by way of public offer through issue of private
placement letter (Section 42 of the Companies Act, 2013) .A company shall not make a private
placement of its securities unless the proposed offer of securities has been previously approved by the
shareholders of the company by a special resolution. The offer of securities or invitation to subscribe
securities shall not be made to more than 200 persons in aggregate in a financial year. A complete
record of private placement offers shall be kept by the company and complete information about such
offer shall be filed with the registrar within a period of 30 days from the date of making private
placement offer. The payment to be made for subscription to the securities shall be made from the
bank account of the person subscribing to such securities and the company shall keep the record of the
Bank account from where such payments for subscription has been received.
To pursue this route for raising finance, the company shall adhere to the following:
 Company to make private placement through issue of 'private placement offer letter'
 Offer or invitation to be made to such number of people not exceeding two hundred in a
financial year.
 Fresh offer or invitation to be made only after allotments with respect to any offer or
invitation made earlier have been completed, withdrawn, or abandoned.
 Money payable towards subscription of securities be paid through cheque /DD or other
banking channels but not by cash.
 Allotment of securities to be made within 60 days from the date of receipt of application
money.
1
 If company fails to allot the shares within 60 days application money needs to be repaid
within 15 days from the date of completion of 60 days. Failure to such refund within 15 days
shall make company liable to repay that money with interest @ 12 p.a.
 The application money received shall be kept in a separate bank account in a scheduled bank
and shall not be utilized for any other purpose.
 Private placement offer/invitation shall only be made to such persons whose names are
recorded by the company prior to invitation to subscribe the securities.
 Complete information about such offer to be filed with ROC within 30 days of circulation of
relevant private placement offer.
 Failure to comply with the provisions of section 42 shall make the company and directors
liable for penalty which may extend to the amount involved in the offer or invitation or two
crore rupees whichever is higher.
 Each offer or invitations needs to be previously approved by the shareholders of the company
by a special resolution and explanatory statement to the notice of the general meeting shall
contain the basis or justifications for the price at which offer or invitation is being made .
2. Public issue:
When an issue / offer of securities is made to new investors, it is called a public issue. Public issue
can be further classified into Initial public offer (IPO) and Further public offer (FPO). The significant
features of each type of public issue are explained below:
(i)Initial public offer (IPO): When an unlisted company makes either a fresh issue of securities or
offers its existing securities for sale or both for the first time to the public, it is called an IPO. This
paves way for listing and trading of the issuer's securities in the Stock Exchanges.
(ii)Further public offer (FPO) or Follow-on offer: When an already listed company makes either a
fresh issue of securities to the public or an offer for sale to the public, it is called a FPO.
3. Rights issue: When an issue of securities is made by an issuer to its shareholders existing as on a
particular date fixed by the issuer (i.e. record date), it is called a rights issue.
4. Bonus issue: When an issuer makes an issue of securities to its existing shareholders as on a record
date, without any consideration from them, it is called a bonus issue.
2
Prospectus
Prospectus is a document inviting offers from the public to invest in the company by purchasing its
shares or debentures.
Registration of Prospectus
No prospectus shall be issued by or on behalf of a company unless, on or before the date of its
publication, a copy of the same has been delivered to the Registrar for Registration duly signed by the
directors or proposed directors of the company. The prospectus must be issued within 90 days of the
date of delivery of a copy of the same to the Registrar for Registration.
Contents of Prospectus
Every Prospectus shall state the matters specified in Section 26 (1) of the Companies Act, 2013 which
includes the details about the objects of the company, shares, Managerial Personnel etc.
The prospectus shall be dated and signed. Prospectus includes a statement made by an expert and
should state that the expert has given his written consent to the issue thereof.
Misstatements in Prospectus and consequences (Golden rule of prospectus)

A prospectus is the document which gives information to the public as to the company’s soundness.
The prospectus must be full, frank, and honest disclosure of all material facts with scrupulous
accuracy. No material fact should be misstated or withheld. Greatest care should be taken in its
preparation. The persons who are responsible for the preparation and issue of prospectus should not
only state all relevant facts but also not to omit any material facts.
Every person who is a director of the company at the time of issue of the prospectus, every person
who has authorised himself to be named and is named in the prospectus as a director, every person
who has authorised the issue of the prospectus is responsible for Mis- statement in prospectus.
Liabilities for misstatements in Prospectus

A Misstatement in a prospectus gives rise to civil as well as criminal liability.
1. Civil Liability
A person who was induced to subscribe shares of a company on the faith of a mis statement in the
prospectus has four-fold civil remedies.
a. Rescission of the contract
3
When the consent of a party to a contract has been obtained by a misstatement, he has a right to avoid
the contract. A shareholder avoiding the contract is entitled to get back the money paid by him.
The right to avoid the contract comes to an end in the following circumstances:
If the rescission of the voidable contract is not made within a reasonable time, Delay in the exercise of
the right by a shareholder is deemed to mean that he has waived his right of avoiding the contract,
when the winding up of the company commences. But when the shareholder does some act which is
inconsistent with his right of repudiation such as receiving dividend without any objection, attempt to
sell the shares, the right to avoid the contract comes to an end.
b. Suit for deceit
Shareholder can sue the company for damages
c. Suit against Directors for compensation
Claim for compensation from the directors
d. Suit for compensation under S. 35 of the Companies Act
Where a prospectus contains untrue statements, a shareholder can claim compensation for loss
suffered by him from every person who is a director of the company at the time of the issue of the
prospectus.
But the director concerned may plead defences such as he withdrew his consent to be a director before
the prospectus was issued and that the prospectus was issued without his authority or consent, as soon
as he became aware of any untrue statement in the prospectus, he withdrew his consent to the
prospectus and gave reasonable public notice of such withdrawal before the allotment of shares.
2. Criminal Liability
There is criminal liability of every person who authorised the issue of prospectus in respect of non-
disclosures and misstatements and shall be punishable for the offence of fraud. The Punishment is
provided under S. 447 of Companies Act. The punishment may extend to imprisonment up to 10 years
and shall also be liable to fine which shall not be less than the amount involved in the fraud and the
amount may extent to three times the amount involved in fraud.
A person may avoid his liability by proving that the statement in question was immaterial or that he
had reasonable ground to believe that the statement was true.
4
Memorandum of Association
The Memorandum of Association is the charter of the company, indicating the permitted range of its
enterprise. It enables the outside world who deals with the company, to know about certain vital
aspects about the company.
Contents of Memorandum of Association
1. The Name Clause-The Memorandum must state the name of the Company. No company shall be
registered by a name which in the opinion of the Central Government is undesirable. It is necessary
that the word Limited must be mentioned as the last word of the name in the case of a public limited
Company and the words Private Limited are to be used in the case of a Private Limited Company.
2. The Registered Office Clause-The Memorandum of every company must mention the state in
which registered office of the company is situated.
3. The Objects Clause-The Memorandum of a company has to mention the objects of the company
because a company cannot do acts which are outside its objects.
The Doctrine of Ultra Vires-The Company is authorized to do only such acts which it has been
authorised to do through the memorandum and it cannot do those acts which are outside its powers
(ultra vires). Any ultra vires act done by the company is void. Ultra vires act cannot be ratified also.
Ashbury Railway Carriage Company vs. Riche
4. The Liability Clause-The Memorandum of a company limited by shares or by guarantee shall state
that the liability of the members is limited.
5. The Capital Clause-When the company is limited by shares, the Memorandum shall state the
amount of share capital with which the company is to be registered and the division of the capital into
shares of a fixed amount.
C. Articles of Association
The Articles of Association (AOA) is a document containing rules and regulations for the
administration of the company. Matters contained in the articles include issue and transfer of shares,
Dividend, Meetings, Appointment of directors, Winding up etc. The Articles of Association is
subordinate to Memorandum of Association of the company. Memorandum lays down what is to be
done and Articles lays down how it is to be done.
5
Doctrine of Constructive Notice
Both MOA & AOA are public documents and are therefore, open to inspection. There is a
presumption that the person dealing with the company has the notice of the contents of these
documents. If a person enters into a contract with a company which is not permitted by the
Memorandum or the Articles (Ultra Vires Acts), the company cannot be made liable for the same. The
person dealing with the company is bound by the Law of Estoppel and he cannot be allowed to say
that he had no notice of the contents of these documents.
Kotla Venkataswami v. Ram Murthy (AOA stipulated that a deed on behalf of the company should
be signed by three officers of the company. The Plaintiff accepted a mortgage deed which was signed
by two officers only. It was held that the said mortgage deed was invalid, and the plaintiff could not
claim any rights under it.)
Doctrine of Indoor Management
This doctrine is an exception to the principle of Constructive Notice. The Principle of Constructive
Notice does not apply to the internal proceedings of a company. An outsider can presume that the
internal working of the company is in consonance with the provisions of the public documents. And
even if there is irregularity in the internal proceedings, the transactions made by the outsider with the
company are enforceable on the basis of the doctrine of Indoor Management.
Royal British Bank v. Turquand (The Directors of a company borrowed money from the Royal
British Bank and issued a bond in respect of the same. The directors had a power to issue the bonds
provided they had been so authorised by a resolution passed at the general meeting of the company.
No such resolution had actually been passed. It was held that the outsider (Bank) need not enquire
whether the internal formality of the resolution was gone through or not. The principle of
Constructive Notice does not apply to the internal proceedings of a company.)
6
company was not allowed to be enforced against the other party by the
33
person signing.
Commencement of Business [S. 11]

A company having share capital is not to commence business or exercise
any power unless it has satisfied the following requirements: (a) a decla-
ration has to be filed by a director with the Registrar in a prescribed form
and manner and verification that every subscriber to the memorandum
has paid the value of the shares agreed to be taken by him and the paid
up capital of the company is not less than Rs 5,00,000 in case of a public
company and not less than Rs 1,00,000 in the case of a private company on
the date of the declaration; (b) the company has filed with the Registrar a
verification of its registered office as required by Section 12(2).
Any default in compliance with the section makes the company liable to
a penalty extending up to Rs 5000 and for every officer who is in default up
to Rs 1000 for every continuous day of default. [S. 11(2)]
Where no such declaration has been made within 180 days of incorpora-
tion and the Registrar has a reasonable cause to believe that the company is
not carrying on any business, he may initiate action for removing the name
of the company from the register of companies.
M E M O R A N D U M OF A S S O C I A T I O N [ S . 4]
The first step in the formation of a company is to prepare a document
called the memorandum of association. This document contains the con-
stitution of the company. It has to be divided into five clauses. [S. 4] It has
to be in any of the forms specified in Tables A to E in Schedule 1. [S. 4(6)]
1. Name Clause
The first clause of the memorandum states the name of the proposed
company. The name should not be such as, in the opinion of the Central
Government, is undesirable. [S. 4] Generally, a name is undesirable when
it is identical with, or too nearly resembles, the name of another company.
The name should not mislead as to the nature of the company's business
or its scale. The name should not indicate connection with or patronage
of Government. The name should not be such that its use by the company
will be an offence under any law. If the company is with "limited liabil-
ity" the last word of the name should be "limited" and in the case of a
private company "private limited". This informs persons contracting with
the company that the liabilities of its members are limited. The Central
Government may, however, permit a company to drop the word "limited"
from its name if it is a charitable company within the meaning of Section 8.
The name of the company must be painted outside of every place where
the company carries on business and printed on every business document
33. Newborne v Sensolid (Great Britain) Ltd, (1954) 1 QB 45: (1953) 2 WLR 596: (1953) 1 All
ER 708.
and official letter. Misdescription of name entails personal liability.
[S. 12(3)( )]
fl
Advance reservation of name.—A person may make an applicable in a

prescribed form and manner and on payment of prescribed fee for reserv-
ing name for the proposed company or for changing the name of an exist-
ing company. [S. 4(4)] Such name may be reserved for 60 days from the
date of application. If no such company is formed, the reservation is to be
cancelled and the applicant is to be punished with fine extending up to
Rs 1,00,000. If the company is formed but particulars were incorrect, the
company may be directed to change its name within three months after
passing an ordinary resolution, or the Government may take action for
removing the company's name from the register of companies or for wind-
ing up of the company. [S. 4(5)]
2. Registered Office Clause

The second clause of the memorandum states the State in which the
registered office of the company shall be situated. After incorporation the
exact address of the registered office should be sent to the Registrar.
3. Objects Clause
The third clause of the memorandum states the objects of the pro-
posed company and any matter considered necessary in furtherance of
the objects. The company carries on business with other people's money
and, therefore, the investors must be informed of the objects in which their
money is going to be employed. People are more willing to invest in one
kind of object than in others. Secondly, the creditors of the company are
paid out of the company's assets and they feel protected when they know
that the assets can be used only for the authorised objects. Financial insti-
tutions also need information as to its objects.
Under the UK Companies Act of 2006, companies have not to state their
objects in the memorandum. The objects, if at all, have to be stated in the
articles. If there is no such statement, the company would be with unre-
stricted objects. The objects, stated in the articles, operate as a contract only
between the company and its members.
4. Liability Clause
The fourth clause has to state the nature of liability that the members
incur. The clause will state whether the liability of the members is to be
limited, and, if so, whether limited by shares or by guarantee, or unlimited.
5. Capital Clause
The last clause states the amount of capital with which the company is
proposed to be registered and the kinds, number and value of shares into
which the capital is to be divided.
Subscription.—The memorandum concludes with the subscribers' dec-
laration that they desire to be formed into a company. The memorandum
must be subscribed by at least seven persons in the case of a public com-
pany and by at least two in the case of a private company. Each subscriber
must sign the memorandum, and take at least one share, and write oppo-
site his name the number of shares he takes. After incorporation no sub-
scriber can withdraw his name on any ground whatsoever.
In the case of "one person company", the memorandum has to state
the name of the person who, in the event of death of the subscriber, is to
become the member of the company.
Any provision in the memorandum or articles of a company limited by
guarantee and not having a share capital, purporting to give to any person
a right to participate in divisible profits otherwise than as a member is to
be void. [S. 4(7)]
Objects, Powers and Ultra Vires

The objects clause has a two-fold operation. It determines affirmatively
the field of industry within which the corporate activities are to be con-
fined and it determines negatively that nothing shall be done beyond that
field. An act outside the objects is ultra vires the company, that is, beyond
the powers of the company. This was most emphatically laid down by the
House of Lords in Ashbury Rly Carriage & Iron Co v Riche?* A company was
incorporated (1) to manufacture and sell railway carriages etc, and (2) to act
as mechanical engineers and general contractors. The company contracted
with Riche to finance the construction of a railway line in Belgium. The
company subsequently repudiated the contract as one beyond its powers.
Riche brought an action for breach of contract. The company was held not
liable. Their Lordships were of the opinion that general terms like "general
contractors" must be taken in reference to the main objects of the company,
because otherwise the memorandum would authorise every kind of activ-
ity and would be meaningless.
The decision thus became the genesis of what subsequently came to be
known as the "main objects rule" of construction. Following this, a com-
pany formed to manufacture coffee from dates under a German patent and
to obtain other patents for improvements on and extensions of the said
invention, was ordered to be wound up when the German Government
35
refused its patent and the main objects had thereby failed. In Cotman v
36
Brougham the House of Lords had to consider a memorandum with a very
long objects clause and which concluded by saying that every clause was
independent and was not to be cut down by reference to other clauses.
Their Lordships felt that such an object clause was self-defeating but were
constrained to hold that it excluded the main objects rule of construction.
A company may pursue any object which is reasonably and fairly
incidental to its stated objects. Thus chemicals manufacturing company
was allowed to donate a huge sum of money to universities and scientific
34. (1875) 7 HL 653: (1874-80) All Er Rep Ext 2219.

35. German Date Coffee Co, re, (1882) 20 Ch D 169: (1881-85) All ER Rep 372 (CA).
36. 1918 AC 514: (1918-19) All ER Rep 265 (HL).
institutions for research as this would be conducive to the continued pro-
37
gress of the company. But a charity which would not promote the objects
of the company would be ultra vires. This has been pointed out by the
38
Supreme Court in A Lakshmanaswami Mudaliar v L/C: The business of an
insurance company was taken over by the LIC. Shortly before the acquisi-
tion, its directors in accordance with a power in the objects and sharehold-
ers' resolution, donated Rs 2,00,000 to a charitable trust formed to promote
education in commerce and insurance. The directors were held personally
liable to restore this money. At the time of the donation the company's
business was under acquisition and, therefore, it had no business left to
promote.
The objects clause should state only the objects and not powers. Even
where a power is stated, it does not become an independent object. Thus,
where a company borrowed a sum of money from a banker for a purpose
known to the banker to be not stated in the memorandum, the loan was
held to be ultra vires, although the company had an express borrowing
39
power.
An ultra vires contract is absolutely null and void. It is incapable of rat-
ification. No amount of performance or acquiescence on either side can
give it validity. Thus, a contractor who built a workshop for a company for
an unauthorised purpose, and two others who supplied building material
40
and coke for the same purpose, could not recover the price. But can a
company recover on a transaction which is ultra vires? This question arose
il
in Bell Houses Ltd v City Wall Properties Ltd. The defendants refused to pay
the plaintiff-company for the services rendered by its managing director
on the ground that the services were ultra vires the plaintiff-company. The
Court of Appeal escaped the whole question by holding the transaction as
within the company's objects. But SALMON LJ said, "It seems strange that
third parties could take advantage of a doctrine, manifestly for the pro-
tection of the shareholders, in order to deprive the company of the money
which in justice should be paid to it by the third party."
Alteration of Memorandum [S. 13]
Alteration of name company may change its name at

[ S . 13(2)(3)].—A
any time by passing a special resolution and with the prior approval of
the Central Government. Any change in the name of a company will be
subject to the provisions of Section 4(2) and (3) which have been explained
in the requirements of name clause of the memorandum. Approval of the
Central Government is not necessary where the only change in the name is
deletion or addition of the word "private" consequent upon conversion of
37. Evans v Brunner, Mond & Co Ltd, (1921) 1 Ch 359.

38. AIR 1963 SC 1185: (1963) 33 Comp Cas 420.
39. Introductions Ltd, re, Introductions lid v National Provincial Bank Ltd, 1970 Ch 199: (1969) 2
WLR 791: (1969) 1 All ER 887 (CA).
40. Beauforte (Jon) (London) Ltd, re, 1953 Ch 131: (1953) 2 WLR 465: (1953) 1 All ER 634.
41. (1966) 2 QB 656: (1966) 2 WLR 1323: (1966) 2 All ER 674 (CA).
the company from one class to another in accordance with the provisions
of the Act. Alteration of name does not affect the rights and obligations of
the company. Alteration becomes effective when it is registered with the
Registrar and a new certificate of incorporation with the new name has
been issued. Thereafter, the company should use its new name. Use of the
old name would be improper.
Alteration of registered office clause [S. 13(4)].—Shifting of registered
office from one State to another and alteration of objects may affect not only
42
the company's shareholders, but also its creditors, dealers and employees.
That is why the objects can be altered by a special resolution and the reg-
istered office can be removed from one State to another by a special resolu-
tion and sanction of the Central Government.
The Central Government has to dispose of the application within 60
days. Before passing its order it has to satisfy itself that the alteration has
the consent of creditors, debenture holders and other persons concerned
with the company. Alternatively, the Central Government has to be satis-
fied that sufficient provision has been made by the company for due dis-
charge of all its debts and obligations or that adequate security has been
provided for such discharge. [S. 13(5)] A certified copy of the order of the
Central Government approving the alteration has to be filed with the
Registrar of each of the States within the prescribed time. The Registrar
has to register the same. The Registrar of the State to which the registered
office is being shifted has to issue a fresh certificate of incorporation indi-
cating the alteration. [S. 13(7)]
Change of objects [S. company which has raised money from
13(8)].—A
the public through prospectus and has not still utilised the whole of the
money is not to change its objects except with the company's special res-
olution. The second requirement is that the prescribed details of the reso-
lution have to be published in the newspapers (one in English and one in
vernacular language) which is in circulation at the place of the company's
registered office. It has also to be placed on the website of the company,
if any. The publication has to indicate justifications for the change. The
dissenting shareholders have to be given an opportunity to leave the com-
pany, if they so desire. This opportunity has to be given by the promoters
and shareholders who have control over the company in accordance with
the regulations to be specified by SEBI.
The alteration has to be filed with the Registrar. He has to certify the
registration within 30 days from the date of filing of the special resolution
under Section 13(6). No alteration is to have effect unless it has been regis-
tered with the Registrar in accordance with the provisions of this section.
[S. 13(10)] Any alteration of the memorandum in the case of a company
limited by guarantee and not having a share capital, purporting to give
42. Shifting of the registered office cannot be opposed by the State on the ground of loss
of revenue. Orissa Chemicals and Distilleries (P) Ltd, re, (1962) 32 Comp Cas 497: AIR 1961
Ori 62.
any person a right to participate in the divisible profits of the company
otherwise than as a member is to be void. [S. 13(11)]
Formation of Companies with Charitable Objects [S. 8]

This section comes into play when it is proved to the satisfaction of the
Central Government that a person or an association of persons proposed
to be registered under the Act as a limited company satisfies the following
requirements of a charitable company: (a) it has for its objects the promo-
tion of commerce, art, science, sports, education, research, social welfare,
religion, charity, protection of environment or any such other object; (b) it
intends to apply its profits, if any, or other income in promoting its objects;
and (c) it intends to prohibit payment of any dividend to its members.
The Government may give it a licence allowing it to be registered as a
limited company without using the word "limited" or "private limited"
as a part of its name. The Registrar has then to be approached with a pre-
scribed form so that he may register the company as a charitable institu-
tion. The company will enjoy all the privileges of a limited company and
also be subject to the obligations of such companies.
A partnership firm may be a member of such a company. The company
so registered is not to alter the provisions of its memorandum and arti-
cles except with the previous approval of the Central Government. Such
company may convert itself into a company of any other kind only after
complying with prescribed conditions. Any other kind of company which
satisfies the requirements may come under the section subject to condi-
tions, etc that may be imposed by the Central Government. The Central
Government may deprive the company of its licence if there is no compli-
ance. A reasonable opportunity of hearing has to be given to the company.
A copy of the order has to be served on the Registrar. After revocation of
licence, the Central Government may order winding up of the company if
it is necessary in public interest or order its merger with another company
registered as charitable company. Here also an opportunity of being heard
has to be given to the company. Amalgamation with another charitable
company may be required to be subject to conditions and requirements as
may be specified in the order.
Where such company is ordered to be wound up and there are surplus
assets, they may be transferred to another charitable company with similar
objects subject to the conditions that the Tribunal may impose or may be
sold and proceeds may be credited to the Rehabilitation and Insolvency
Fund formed under Section 269. Amalgamation by choice can also be with
a charitable company with similar objects.
Default in complying with the requirements of the section is a punishable
offence. Both the company and its directors are punishable. Any fraud on
the part of the officers would make them liable to be proceeded against
under Section 447.
A R T I C L E S OF A S S O C I A T I O N [S. 5]
Articles of association is the second important document, which has to
be registered along with the memorandum. Articles are internal regula-
tions and bye-laws. Articles are to contain regulations for management
of the company. Schedule 1 of the Act sets out tables of model forms of
articles for different companies. [Tables F, G, H, I and J] Table F is appli-
cable to companies limited by shares. Such a company may either frame
its own articles or adopt Table F and the Table automatically applies to
the extent to which it is not excluded. The chief advantage of adopting the
Table is that its provisions are legal beyond all doubt. The document has to
be divided into paragraphs numbered consecutively and must be signed
by every subscriber.
The articles shall also contain such matters as may be prescribed from
time to time. They may also contain any additional matter that may be
requisite for the needs of the company. [S. 5(2)]
Provisions for entrenchment.—The Articles may contain provisions
for entrenchment to the effect that the specified provisions of the articles
may be altered only if conditions or procedures as that are more restrictive
than those applicable in the case of a private company and by a special
resolution in the case of a public company. Such provisions may be made
on the formation of the company or by subsequent amendment with the
consent of all the members of a private company or by special resolution in
the case of a public company. The provisions for entrenchment whenever
brought in have to be notified to the Registrar in the prescribed manner.
[S. 5(3) (4) (5)]
Articles in Relation to Memorandum

"The memorandum contains the fundamental condition upon which
alone the company is allowed to be incorporated. The articles of associa-
tion are internal regulations of the company." Secondly, the memorandum
is the dominant instrument, articles are subordinate to it. In case of any
inconsistency between the two, the articles give way. Thirdly, an action of
the company outside the scope of its memorandum is void and incapable
of ratification. In the words of LORD CAIRNS: "The memorandum is, as it
43
were, the area beyond which the action of the company cannot go; inside
that area the shareholders may make such regulations for their own
Government as they think fit." Lastly, some of the clauses of the memo-
randum can be altered only with the sanction of the Company Law Board.
Alteration of articles does not require the sanction of any authority.
Binding Force of Memorandum and Articles [S. 10]

The memorandum and articles contain the company's constitution
and the constitution of every institution is binding upon its members.
43. Ashbury Rly Carriage & Iron Co v Riche, (1875) 7 HL 653: (1874-80) All Er Rep Ext 2219.
Accordingly, Section 10 declares that the memorandum and articles when
registered shall bind the company and its members to the same extent as
if they had been signed by them and had contained a declaration on their
part that the memorandum and articles shall be observed. Sub-section (2)
provides that all moneys payable by any member to the company under
the memorandum and articles are to be a debt due from him to the com-
pany. Following are some of the effects of this declaration:
1. Members bound to company.—The members are bound to the com-
pany by the provisions of the memorandum and articles. For example, in
44
Borland's Trustee v Steel Bros & Co Ltd, the articles of a company provided
that if any member became insolvent his shares would be sold by the direc-
tors for a price fixed by them. It was held that shares having been pur-
chased on the terms and conditions contained in the articles, it was not
open to the trustee of an insolvent member to say that those terms were
not binding.
2. Company bound to members.—The company is bound to the mem-
bers to observe and follow the articles. Every member is entitled to say that
there shall be no breach of the articles and he is entitled to an injunction to
prevent the breach.
3. Neither company, nor members bound to outsiders.—But the com-
pany is not liable to any outsider by the provisions of its articles. Thus,
where the articles of a company provided that the plaintiff should be a
director and should not be removed till a certain date, it was held that
45
he could not enforce this provision against the company. The expression
"outsider" obviously refers to a person who is not a member. But even a
member may be an outsider when he sues the company in any capacity
other than that of a member. For example, in Elvy v Positive Govt Security
46
Life Assurance Co Ltd, a solicitor who was also a member could not com-
pel the company to appoint him in terms of its articles. The Lahore High
47
Court held in a case before it that "where in pursuance of certain articles
acted upon by the company, a member was appointed managing director
and acted for 11 years in that capacity, the articles constituted an implied
contract between him and the company".
4. Members inter se.—Lastly, to what extent members are bound inter se,
can articles be enforced by one member against another?" Lord Herschell
48
said in Welton v Saffrey- "It is quite true that articles constitute a contract
between each member and the company, and that there is no contract in
terms between individual members of the company; but the articles do
nonetheless regulate their rights inter se. Such rights can only be enforced
44. (1901) 1 Ch 279:17 TLR 45.

45. Browne v La Trinidad, (1887) 37 Ch D 1:4 TLR 14 (CA).
46. (1876) 1 Ex D 88:45 LJ QB 451 (CA).
47. Sardar Gulab Singh v Punjab Zamindara Bank Ltd, AIR 1942 Lah 47.
48. 1897 AC 299, 315: (1895-99) All ER Rep 567 (HL).
by or against a member through the company." But to the extent to which
the articles regulate members' rights (as opposed to things unconnected
with membership) they may be enforced directly by one member against
9
another. Thus, in Rayfield v Hands* the directors of a company were com-
pelled to purchase members' shares in terms of the company's articles.
Alteration of Articles [S. 14]

Section 14 empowers every company to alter its articles at any time with
the authority of a special resolution of the company and filing of a copy
with the Registrar.
The alteration has to be subject to the conditions contained in the memo-
randum. An alteration can be effected even if it has the effect of converting
a private company into a public company or a public company into private
company. If the company by means of the alteration drops the restrictions
of a private company, the company will cease to be a private company from
the date of such alteration. If the alteration has the effect of converting a
public company into a private company, the alteration is to take effect only
with the approval of the National Company Law Tribunal. The Tribunal is
empowered to make such order as it may deem fit. [S. 14(1)]
An alteration is not invalid simply because it changes the company's
constitution.
50
Thus in Andrews v Gas Meter Co, a company was allowed by changing
articles to issue preference shares when its memorandum was silent on the
point.
Secondly, a company may change its articles even if the alteration would
operate as a breach of contract. If the contract is wholly dependent upon
the company's articles, the company would not be liable in damages if it
51
commits breach of contract by changing its articles. But if the contract is
independent of the articles, the company will be liable in damages if it com-
mits breach by changing articles. Thus, where a managing director was
appointed for a term of 10 years and he was removed earlier under the new
articles adopted on the amalgamation of the company with another com-
52
pany, the company was held liable in damages for breach of contract. In
such cases, if damages would not be an adequate relief, the company may
be restrained from changing its articles. Thus in British Murac Syndicate Ltd
53
v Ahperton Rubber Co Ltd, a company was restrained from changing its
articles so as to deprive the plaintiff of his power to nominate two direc-
tors given to him by the company's articles as long as he held 5000 shares
in the company. "It would be dangerous to hold that in a contract of loan
or a contract of service or a contract of insurance validly entered into by a
company there is any greater power of variation of the rights and liabilities
49. 1960 Ch 1: (1958) 2 WLR 851: (1958) 2 All ER 194.

50. (1897) 1 Ch 361: (1895-99) All ER Rep 1280 (CA).
51. Chittambaram Chettiar v Krishna Ayyanagar, ILR 33 Mad 36.
52. Southern Foundries (1926) Ltd v Shirlaw, 1940 AC 701: (1940) 2 All ER 445 (HL).
53. (1915) 2 Ch 186: (1914-15) All ER Rep 346.
of the parties than would exist if, instead of the company, the contracting
54
party had been an individual."
Thirdly, the alteration must not constitute a fraud on the minority. It
should not be an attempt to deprive the company or its minority share-
holders of something that in equity belongs to it or to them. The power of
alteration should be exercised in absolute good faith in the interest of the
company.
Every alteration together with the order of the Tribunal approving the
alteration is to be filed with the Registrar together with the printed copy of
the altered articles within 15 days in the prescribed manner. The Registrar
has to register the same. [S. 14(2)] After registration the alteration becomes
as valid as if it were originally contained in the articles. [S. 14(3)]
Alteration of memorandum and articles to noted on every copy
[ S . 15].—Every alteration of the memorandum or articles is to be noted on
every respective document. Default in this respect is punishable. The com-
pany and defaulting officer may have to pay Rs 1000 for every copy issued
without noting the alteration.
Rectification of Name of Company [S. 16]

Where through inadvertence or otherwise a company on first regis-
tration or after altered name, happens to be registered by a name which,
in the opinion of the Central Government, is identical with or too nearly
resembles the name of an existing company, it may direct the company
to change its name. The company has to do so within three months from
the date of such direction after adopting an ordinary resolution for the
purpose. The owner of the trade mark which was being infringed by the
name may apply to the Central Government under the Trade Marks Act,
1999, within three years of the infringement, the Government may direct
rectification of the name which has to be done within six months. The new
name has to be registered with the Registrar within 15 days along with the
order of the Central Government so that the Registrar may issue the new
certificate of incorporation. The company is punishable for default with
Rs 1000 for every day of default and the defaulting officer with fine of not
less than Rs 5000 which may extend up to Rs 1,00,000.
Copies of Memorandum, etc to be Given to Members [S. 17]

If a member asks on payment of prescribed fee for a copy of the mem-
orandum, articles and every agreement and every resolution referred to
in Section 17(1) insofar as not embodied in memorandum and articles,
the company has to do so within seven days. Default in this respect is
punishable for the company and the defaulting officer with Rs 1000 for
each default and days for which it continues extending up to Rs 1,00,000.
54. Baily v British Equitable Assurance Co, 1906 AC 35: (1904-07) All ER Rep 592 (HL). See also,
Hari Chandana v Hindustan Joga Deva Coop Insurance Society Ltd, AIR 1925 Cal 690, where
an attempt to change the fund from which a policy-holder was to be paid was held to be
ineffective.
An alteration is not invalid simply because it changes the company's
55
constitution. Thus in Andrews v Gas Meter Co, a company was allowed by
changing articles to issue preference shares when its memorandum was
silent on the point.
Secondly, a company may change its articles even if the alteration would
operate as a breach of contract. If the contract is wholly dependent upon
the company's articles, the company would not be liable in damages if it
56
commits breach of contract by changing its articles. But if the contract is
independent of the articles, the company will be liable in damages if it com-
mits breach by changing articles. Thus, where a managing director was
appointed for a term of 10 years and he was removed earlier under the new
articles adopted on the amalgamation of the company with another com-
57
pany, the company was held liable in damages for breach of contract. In
such cases, if damages would not be an adequate relief, the company may
be restrained from changing its articles. Thus in British Murac Syndicate Ltd
58
v Ahperton Rubber Co Ltd, a company was restrained from changing its
articles so as to deprive the plaintiff of his power to nominate two directors
given to him by the company's articles as long as he held 5000 shares in
the company. "It would be dangerous to hold that in a contract of loan or
a contract of service or a contract of insurance validly entered into by a
company there is any greater power of variation of the rights and liabilities
of the parties than would exist if, instead of the company, the contracting
59
party had been an individual."
Thirdly, the alteration must not constitute a fraud on the minority. It should
not be an attempt to deprive the company or its minority shareholders of
something that in equity belongs to it or to them. The power of alteration
should be exercised in absolute good faith in the interest of the company.
Lastly, no alteration can require a member to purchase more shares in
the company or increase his liability in any manner except with his consent
in writing.
Constructive Notice of Memorandum and Articles
The memorandum and articles of a company are registered with the
Registrar, and thereby become public documents. They are open to pub-
lic inspection. Every person contracting with the company must acquaint
himself with their contents and must make sure that his contract is con-
sistent with them, otherwise he cannot sue the company. Thus, where the
articles of a company provided that its deeds, etc should be signed by the
managing director, the secretary and a working director, a lender to whom
a bond was given could not enforce it because it was signed only by the
60
secretary and a director.
55. (1897) 1 Ch 361: (1895-99) All ER Rep 1280 (CA).

56. NPNM Chithambaram Chettiar v Krishna Aiyangar, ILR (1909-11) 33 Mad 36.
57. Southern Foundries (1926) Ltd v Shirlaw, 1940 AC 701: (1940) 2 All ER 445 (HL).
58. (1915) 2 Ch 186: (1914-15) All ER Rep 346.
59. British Equitable Assurance Co Ltd v Baily, 1906 AC 35: (1904-07) All ER Rep 592 (HL).
60. Kotla Venkataswamy v Chintarama Murthy, AIR 1934 Mad 579.
Constructive notice is an unreal doctrine because it fails to take note of
the realities of business life. The courts in India do not seem to have taken it
seriously. For example, the Calcutta High Court enforced a security which
61
was not signed in accordance with the company's articles. Similarly, the
Allahabad High Court allowed recovery of an overdraft incurred by the
managing agent of a company when under the articles the directors had no
62
power to delegate their borrowing power.
Indoor Management
"Indoor management" restricts the operation of "constructive notice" to
the public documents of the company. Accordingly, a person dealing with
the company is bound to read only the public documents. If his contract
is consistent with them, the company is bound. He will not be affected by
any irregularity in the internal management of the company.
63
This is also known as the rule in Royal British Bank v Turquand. The
directors of the company borrowed a sum of money from the plaintiff. The
company's regulations provided that the directors might borrow on bonds
such sums as may from time to time be authorised by shareholders' resolu-
tions. The shareholders contended that there had been no such resolution
authorising the loan.
The company was held liable. Once it was found that the directors could
borrow subject to a resolution, the plaintiff had the right to assume that the
necessary resolution must have been passed.
The rule is based upon obvious reasons. Firstly, the internal procedure
is not a matter of public knowledge. An outsider "is presumed to know the
constitution of a company, but not what may or may not have taken place
within the doors that are closed to him." Secondly, "the lot of creditors of
a limited company is not a particularly happy one; it would be unhap-
pier still if the company could escape liability by denying the authority of
64
officials to act on its behalf."
The rule is applied to protect persons contracting with companies from
all kinds of internal irregularities. It has been applied, for example, to
cover acts of de facto directors, who have not been appointed but have only
65
assumed office at the acquiescence of the shareholders, or whose appoint-
66
ment is defective, or who have exercised an authority which could have
been delegated to them under the company's articles, but has not in fact
been so delegated, or who have acted without quorum.
The rule is, however, subject to a few limitations.
61. Charnock Collieries Co Ltd v Bholanath Dhar, ILR (1912) 39 Cal 810.
62. Dehra Dun Mussoorie Electric Tramway Co Ltd v ]agmandar Das, (1931) 1 Comp Cas 227:
AIR 1932 All 141.
63. (1856) 6 El & Bl 327:119 ER 886.
64. L.C.B. Gower, MODERN COMPANY LAW (3rd Edn 1969) 153.
65. Mahony v East Holyford Mining Co, (1875) LR 7 HL 869: (1874-80) All ER Rep 427: (1875) 33
LT 383.
66. Probodh Chandra Ultra v Road Oils (India) Ltd, AIR 1930 Cal 782: ILR (1930) 57 Cal 1101.
1. Knowledge of irregularity.—A person who has actual knowledge of
the internal irregularity cannot claim the protection of this rule, because
he could have taken steps for self-protection. A person who is himself a
party to the inside procedure, such as a director, is deemed to know the
67
irregularities, if any. But where a newly appointed director who knew
nothing was induced by another director to sign a guarantee contract, he
was allowed to claim the protection of the rule.
2. Suspicion of irregularity.—A person contracting with a company is
not protected by "the Turquand rule" if the circumstances are so suspi-
cious as to demand inquiry. Suspicion should arise, for example, from the
68
fact that an officer is exercising a power apparently outside his authority.
Thus, where a person holding directorship in two companies agreed to
apply the money of one company in the payment of the debts of the other,
the court said that it was something so unusual "that the plaintiffs were
put upon inquiry to ascertain whether the persons making the contract
69
had any authority in fact to make it" .
3. Forgery.—"The Turquand rule" is, perhaps, not applicable to the
transaction of a company in which forgery of signatures is involved. Thus,
70
in Ruben v Great Fingall Consolidated, a company was held not bound by a
certificate issued by its secretary by forging the signature of two directors.
Lord LOREBURN said that the rule "applies to irregularities which might
otherwise affect a genuine transaction. It cannot apply to a forgery." This
statement is, however, controversial. The Madras High Court did not allow
a company to eschew liability upon a document prepared by the compa-
71
ny's managing director by forging the signatures of two other directors.
4. Representation through articles.—A person who does not have actual
knowledge of the company's articles cannot claim as against the company
that he was entitled to assume that a power which could have been del-
egated to the directors was in fact so delegated. Rama Corpn v Proved Tin
72
and General Investment Ltd is an authority for this controversial proposi-
tion. The plaintiffs contracted with a director of the defendant company
and gave him a cheque under the contract. That director could have been
authorised under the company's articles, but was not in fact so authorised.
The plaintiffs had not seen the articles. The director misappropriated the
cheque and the plaintiffs sued the company. The company was held not lia-
ble. The act was outside the ostensible authority of the particular director.
The company had done nothing to hold him out as having that authority.
If an officer is held out as having an authority by reason only of the provi-
sions in the articles, knowledge of those provisions is essential. But if the
67. Hely-Hutchinson v Brayhead Ltd, (1967) 2 WLR1312: (1967) 2 All ER 14.

68. B Anand Behari Lai v Dinshaw & Co (Bankers) Ltd, AIR 1942 Oudh 417, accountant trans-
ferring the company's property.
69. Houghton &Cov Nothard, Lowe and Wills Ltd, (1927) 1 KB 246:1927 All ER Rep 97 (CA).
70. 1906 AC 439 (HL).
71. Official Liquidator v Commr of Police, (1968) 38 Comp Cas 884: (1969) 1 Comp LJ 5.
72. (1952) 2 QB 147: (1952) 1 All ER 554.
holding out takes place outside the articles, knowledge of articles would be
irrelevant. Thus, where a director was openly acting as the Chairman of a
company, a guarantee signed by him was held binding on the company. It
was immaterial that the party taking the guarantee did not know what the
73
company's articles provided. Similarly, where a director to the knowledge
of the other directors and shareholders, acted as a managing director, the
74
company was held bound to pay the architects whom he had appointed.
Act to override Memorandum and Articles [S. 6]

Any provisions in the memorandum, articles, agreement or resolution is
to be void or become void to the extent to which it is repugnant to the pro-
visions of the Act. [S. 6(b)] The provisions of the Act are to have effect irre-
spective of any thing contrary contained in the memorandum or articles of
a company or any agreement executed by it, or any resolution passed at its
general meeting or by its Board of Directors. This will be so whether the
company be registered before commencement of the Act or afterwards or
whether agreements executed or resolutions passed before or after com-
mencement of the Act. [S. 6(a)]
Registered Office of Company [S. 12]

The section requires a company to establish its functional registered
office from the 15th day of its incorporation and for all times from that time
onwards. The office should be capable of receiving and acknowledging all
communications and notices addressed to it. [S. 12(1)] The company has
to furnish in the prescribed manner the verification of its registered office
within 30 days of its incorporation. [S. 12(2)] Every company is required
to do the following acts: (a) it has to paint or affix its name, and the regis-
tered office address and maintain it on the outside of every office or place
in which its business is being carried on. It has to be in a conspicuous
position, in legible letters also in a language which is in general use in
that locality. It should also be in the characters of that language or one
of those languages; (b) the name should be engraved in legible characters
in its seal; (c) the name and address of registered office and the corporate
identity number along with telephone number, fax number, if any, e-mail
and website addresses, if any, must be printed in all business letters, bill
heads, letter papers, and all its notices and other official publications; (d) to
have the name printed on hundies, promissory notes, bills of exchange and
all such documents as may be prescribed.
On change of name, the earlier name should also remain indicated
along with the new name for two years. In the case of one person company,
the words "One Person Company" must be mentioned below its name.
[S. 12(3)]
73. British Thomson Houston Co Ltd v Federated European Bank Ltd, (1932) 2 KB 176:1932 All ER
Rep 675 (CA).
74. Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd, (1964) 2 QB 480: (1964) 2 WLR
618: (1964) 1 All ER 630 (CA).
Change of registered office situation.—Every change of registered
office situation verified in the prescribed manner, has to be notified with
the Registrar within 15 days. [S. 12(4)] Following changes can be effected
in the situation of the registered office only with the authority of a special
resolution: (a) in the case of an existing company, shifting the registered
office outside the local limits of any city, town or village where the office
was situate at the commencement of the Act or where it may have been
shifted by the company's special resolution; and (b) in the case of any other
company, shifting of the office outside the local limits of any city, town or
village where such office was first situated or later by the company's spe-
cial resolution.
No company is to change the place of its registered office from the juris-
diction of one Registrar to that of another Registrar within the same State
unless such change is confirmed by the Regional Director on application in
the prescribed manner. The Regional Director has to confirm the shifting
within 30 days of the application and the company has to file the same with
the Registrar within 60 days of the date of confirmation. The Registrar has
to certify the registration within 30 days. The certificate of the Registrar
is conclusive evidence that all the requirements of the Act were complied
with. [S. 12(3-7)]
Any default under the section is punishable. The company and every
officer in default is liable to a penalty of Rs 1000 for every day during which
the default continues but not exceeding Rs 1,00,000. [S. 12(8)]
Conversion of Companies already Registered [S. 18]

A company of any class registered under the Act may convert itself as a
company of another class by alteration of the memorandum and articles in
accordance with applicable provisions. Where the conversion is required
to be done under this section, the Registrar has to satisfy himself on an
application by the company that the provisions for registration of compa-
nies have been complied with. He may, then close the former registration
of the company, register the new documents and issue a certificate of reg-
istration like that of a new company. The company remains the same entity
as it was before in respect of its debts, liabilities, obligations or contracts.
CHAPTER I I I
P R O S P E C T U S AND A L L O T M E N T O F S E C U R I T I E S
Definition of Prospectus
A public company, but not a private company, is entitled, by issuing a
prospectus, to invite applications for its shares or debentures. "Prospectus"
is defined by Section 2(70) in the following words: " 'Prospectus' means
any document described or issued as a prospectus and includes a red
herring prospectus referred to in Section 32 or shelf prospectus referred
to in Section 31 or any notice, circular, advertisement or other document
IGry*
3
$
t
24 INTRODUCTION TO COMPANY LAW [s. 18
i
Change of registered office situation.-Every change of registered

office situation verified in ihe prescribed manner, has to be notified with
the Registrar within 15 days. 1^s. rz1+; Following changes can be effected
in the situation of the r"girtur.d office only with the authority of a special
resolution: (a) in the casi of an existing comPany, shifting the registered
office outside the local limits of any city, town or village where the
office
was situate at the commencement of the Act or where it may have been
shifted by the company's special resolution; and (b) in the case of any other
company, shifting of tire office outside the local limits of any city,
town or
village *h"r" ,rJh offi.u was first situated or later by the company's spe-
cial resolution.
No company is to change the place of its registered office from the
juris-
diction of one Registrar to that of another Registrar within the same State
unless such chan[e is confirmed by the Regional Director on application
in t:
the prescribed minner. The Regional Director has to confirm the shifting
withl.,30 days of the application and the company has to file the same with
i:
a
has
the Registrai within OO hays of the date of confirmation. The Registrar
to ceriify the registration within 30 days. The certificate of the Registrar
is conclusive evidence that all the ."qrrit"*"nts of the Act were complied
i:
I
with. t5.12(3--7)l
eny aufu"lt Lnder the section is punisltl: The compalf 1d
"y:ty
i
officer in default is liable to a penalty of nt 1000 for every day during which !a
the default continues but not exceeding Rs 1,00,000. [S. 12(8)] ts

6:
,:
I
Conversion of Companies already Registered tS' 18I ir
A company of any class registered under the Act may convert itself as a
5i
*
g
company of anotheiclass by ilteration of the memorandum and articles

in a
accordance with applicable provisions. Where the conversion is required

to be done under ihls sectiory the Registrar has to satisfy himself on an
application by the company that the provisions for registration o{ co19a-
,ri"s hurr" been complied with. He may, then close the former registration
reg-
of the comPany, register the new documents and issue a certificate of
istration like that olu rlu* comPany. The company remains the same entity
as it was before in respect of its debts, liabilities, obligations or
contracts'
Cnarrnn III
PNOSPUCTUS AND ATTOTPTENT OF SECURITIES
Defi nition of ProsPectus

A public company, but not a private company, entitled, by issuing a
i.q
prospectus, to invite applicatiot t fot its shares or debentures. "Prospectus"

is aefinea by Sectionî1lO! in the following words: "'Prospectus' means
any document described or issued as a Prospegtls and includes a red
heiring prospectus referred to in Section-32 or shelf prospectus referred
to in Section 31 or any notice, circular, advertisement or other document
5s.23)4,331 PROSPECTUS AND ALLOTMENT OF SECURITIES 25
rred inviting offers from the public for subscription or purchase of any securi-
/ith ties of a body corporate."
:ted An abridged prospectus means a memorandum containing such salient
cial features of a prospectus as may be specified by SEBI by making regula-
rred tions. IS.2(1)l
fice
Application Forms tS. 331
een
"her
Application forms for securities cannot be issued unless they are accom-
tor panied by a memorandum containing such salient features of a prospectus
;Pe- as may be prescribed. This is known as abridged prospectus. The purpose
is to reduce the expense-burden of a public issue. The full "prospectus"
Lris- has to be maintained in the office of the company and a copy of it has to be
tate supplied, when demanded by a person before closing of the subscription
nin test.
:ing This requirement is not to apply if it is shown that the form of applica-
vith tion was issued (a) in connection with a bona fide invitation to a person to
has enter into an underwriting agreement with respect to securities; or (b) in
trar relation to securities which are not offered to the public. [S. 33(1)]
lied A copy of the prospectus has to be given to a person who requests for
it before closing of the offer and the subscription list. [S. 33(2)] A default in
rery complying with the provisions of the section makes the company liable to
rich a penalty of Rs 50,000 for each default.
Public Offer IS.23I

A public company may issue securities to public through prospectus
asa (to be referred to as "public offe{' by complying with the provisions of
:s in Part I of Chapter III on Prospectus and Allotment of Securities). It may
ired also be done through private placement by complying with the provisions
tan of Part II of Chapter III. It may also be done through rights issue or bonus
lpa- issue by complying with the provisions of the Act and in case of listed
tion companies by complying with the provisions of the SEBI Act, 1992, and
reg- rules and regulations made under it.
ttity A prioate company may issue securities by way of rights issue or bonus
ts. issue or through private placement by complying with the provisions of
Part II of Chapter III. [S, 42]
AnExplanation to the section says that apublic offer includes initial pub-
lic offer or further public offer of securities to the public by a company,
or an offer for sale of securities to the public by an existing shareholder,
through issue of a prospectus.
:r8 a
SEBI's Power to regulate Issue and Transfer of Securities, etc [S. 24]
Lus" This section empowers SEBI to administer certain provisions of thg
]ans Companies Act by making regulations for that purpose. Such provisions
red are those contained in Chapters III and IV and Section 127 insofar as they
rred relate to issue and transfeiof securities and non-payment of dividend by
rent listed companies or those companies which intend to get their securities
26 INTRODUCTION TO COMPANY LAW [s.25
listed on any recognised stock exchange. The rest of provisions have to be

in the administration of the Central Government. The Explanation to Sub-
section (1)provides for removal of doubts. It says that all Powers relating to
all other matters relating to prospectus, return of allotment, redemption of
preference shares and any other matter specifically provided in the Act are
to be exercised by the Central Government, the Tribunal or the Registrar,
as the case may be.
Section 24Q) is as follows: The Securities and Exchange Board shall, in
respect of matters specified in Section 24(1) and the matters delegated to it
under Section 458(1)(Proolso) exercise the powers conferred uPon it under
Sections 11(1), (2A), (3) and (4),lL-A,11-B, and 11-D SEBI 4ct,7992.
Documents containing Offer of Securities for Sale, Deemed

Prospectus [S.25]
Where a company allots or agrees to allot any securities of the com-
pany with a view to those securities being offered for sale to the public,
any document by which the offer for sale is made to the public is to be
deemed for all purposes as a prosPectus issued by the comPany. All enact-
ments and ruIes of law as to contents of prospectus and as to liability for
misstatement in and omissions from prospectus or otherwise relating to
prospectus are to become applicable. This is subject to modifications sPee-
ified in Section 25(3) and (a). The original allotment is presumed to have
been made with a view of offering them to the public where (L) shares
are offered to the public within six months of allotment and (2) where at
the date of offer to the public the whole of the consideration has not been
received by the company. [S. 25(2)]
Section 26 which provides for matters to be stated in the prospectus is
applicable to the offer for sale with the following additional requirements:
(a) a statement of the net amount received or to be received as considera-
tion for the securities to which the offer relates; (b) the time and place at
which the underlying contract for allotment may be inspected; and (c) the
persons making the offer were named in the prospectus as directors of the
company. [S.25(3)]
Where the person making the offer is a company or firm, it is.to be suffi-
cient if the offering document is signed on behalf of the company by its two
directors or by not less than one-half of the partners of the firm. [S. 25(4)j
The provisions of the Act relating to prospectus and the penal provi-
sions are attracted only when the prospectus has been issued. "Issued"
means issued to the public. "Public" includes any section of the public,
whether selected as members or debenture holders of a company con-
cerned or as clients of the person issuing ProsPectus or in any other
manner. Thus, where 3000 copies were distributed among the members
of certain gas companies only, it was held to be an offer of shares to the
public.7s But where a company's prospectus was given to a solicitor of the
75. South of Engtand Natural Gas and Petroleum Co Ltd, re, (1911) 1 Ch 573. 3
s.261 PROSPECTUS AND ALLOTMENT OF SECURITIES 27
lS.25i
company and he forwarded it to one of his clients, this did not amount to
l tobe
an issue to the public and accordingly the provisions of the Act relating
: Sub.
to liability for omissions, etc were not attracted.T6 The term "issue" is not
:ingto
jonof satisfied by a single private communication. There must be some measure
of publicity, however modest.
tct are
;istrar, Contents of Prospectus (Matters to be Stated in Prospectus) tS. 261

Every prospectus issued by or on behalf of a company either on its for-
rall, in mation or subsequently on behalf of a person engaged or interested in the
:d to it formation of a public company has to be dated and signed and has to con-
under tain the following information: (i) names and addresses of the registered
offices of the company, company secretary, chief financial officer, auditors,
legal advisers, bankers, trustees, if any, underwriters and such other per-
sons as may be prescribed; (ii) dates of opening and closing of the issue
and declaration about issue of allotment letters and refunds within the
3 com-
prescribed time; (iil) statement by the Board of Directors about the sep-
public,
arate bank account where receipts of issue are to be kept and details of
stobe
utilisation and non-utilisation of receipts of previous issues; (lu) underwrit-
i enact-
ing details; (u) consent of directors, auditors, bankers to the issue, expert's
lity fot
opinion and of such other person as may be prescribed; (ai) authority for
ting to
the issue and details of resolution passed for it; (oii) procedure and time
&
E
E
is sPec-
schedule for allotment and issue of securities; (oiii) capital structure of
E
F.
;o have E
€ the company in the manner which may be prescribed; (lx) main objects
shares
t of public otter, terms of the present issue and such other particulars as
here at rF
may be prescribed; (r) main objects and present business and its location,
of been g
E
schedule of implementation of the project; (ri) particulars relating to (A)
e
E management perception of risk factors specific to the project; (B) gestation
ectus is
{ period of the projec! (C) extent of progress in the project; (D) deadlines
:ments: F
:
for completion of the projecf and (E) any litigation or legal action pend-
midera-
ing or taken by a Government Department or a statutory body during the
place at
last five years immediately preceding the year of the issue of prospectus
1(c)the
against the promoter of the company; (xii) minimum subscriptiory amount
ls of the
payable by way of premium, issue of shares otherwise than on cash; (xiii)
details of directors including their appointments and remuneratiory and
be suffi-
such particulars of the nature and extent of their interests in the company
litstwo
as may be prescribed; and (xra) disclosures in such manner as may be pre-
,. 25(4)l
scribed about sources of the promoters' contribution.
il provi-
'lssued" (bl Reports.-Following reports for the purposes of the financial infor-
rpublic, matiory namely, (i) reports by the auditors of the company about its prof-
ny con- its and losses and assets and liabilities and such other matters as may be
ry otlrer prescribed; (ii) rcports relating to profits and losses for each of the five
oembers financial years (or less as the case may be) immediately preceding the
:s to the financial year of the issue of prospectus including such reports of its sub-
or of the sidiaries and in such manner as may be prescribed; (iii) reports made in the
76. Nashv Lynde,1929 AC 158 (HL).

28 INTRODUCTION TO COMPANY LAW !s.26
prescribed manner by the auditors upon profits and losses of business for
each of the five financial years (or less period), immediately preceding the
issue and assets and liabilities of business on the last date of the accounts
not exceeding 180 days before the issue; (io) reports about the business ot
transaction as to which proceeds of the securities are to be applied directly
or indirectly; (cl a statement about compliance of provisions of the Act and
a statement to the effect that nothing in the prospectus is contrary to the
provisions of the Ac! Securities Contracts (Regulation) Act,1956 and SEBI
Act,1992 and rules and regulations made under it; {dl such other matters
and other reports as may be prescribed.
(2) Sub-section (2) provides that nothing in the Sub-section (1) is to apply
(a) to issue to existing members or debenture holders of a prospectus or
form of application relating to shares or debentures, whether the applicant
has a right to renounce the shares or not (under 5.62) in favour of any other
person; or (b) issue of a prospectus or form of application relating to shares
or debentures which is in all respects uniform with shares or debentures
previously issued and for the time being dealt in or quoted on a recognised
stock exchange.
(3) The provisions of Sub-section (1) are to apply to a prospectus or form
of applicationwhetherissued on formation of the company or subsequently.
@l Filing of copy with Registrar.-Sub-section (4) provides that no pro-
spectus is to be issued by or on behalf of or in relation to an intended
company unless on or before the date of its publication a copy has been
delivered to the Registrar for registration. The copy should be signed by
every person who is named in the prospectus as a director or proposed
director or by his duly authorised attorney.
(5) Statement of independent expert.-A prospectus is not to include a
statement purporting to be made by an expert unless the expert is a person
who is not and has not been engaged in the formatiory promotion or man-
agement of the company and has given his consent to the issue of prospec-
tus and has not withdrawn his consent before delivery of a copy to the
Registrar. The term "expert" has been defined by Section 2(38) as includ-
ing an engineeq, a valuer, chartered'accountant, company secretary, cost
accountant and any other person who has the power or authority to issue a
certificate in pursuance of any law for the time being inforce. A statement
to that effect has to be included in the prospectus.
statement that a copy hasbeen delioered to Registrar [s. 26(6)].-The
prospectus has to state on the face of it that a copy has been delivered to
the Registrar. The statemeht has also to specify the documents which have
been delivered along with the copy of the prospectus.
Registration of prospectus by Registrar [S. 25(7)].-The Registrar is
not to register a prospectus unless the requirements of section with respect
to registration have been complied with and it is accompanied by consent
in writing of all the persons named in the prospectus.
r
F
PROSPECTUS AND ALLOTMENT OF SECURITIES

29
Ss.26-281
is to be valid
:or Date of issue after registtationls.26(8)1.-No prospectus
was
he if it is issued for more ihan 9o days after the date on which a,copy
rts delivered to the Registrar.
is issued in con-
or Penalty for contraoention ts. 26(9)].-If a prospectus
ti,v travention of the provisions of the section, the company
become'I:^"ilh-
rrd able with fine of not less than Rs 50,000 but
extending up to Rs 3,.09,0.00
punishable
he E".y person who is knowinglya p-arty to such aprospectus is or with fine
years
iBI with imprisonment for a terriwhlchmay extend to three
trs ofnotlessthanRs50000butextendinguptoRs3,00,000orboth'
27]
:,IY variation in terms of contract or objects stated in Prospectus [s'
or obiects for which
or The terms of a contract referred to in the prospectus
lnt the prospectus has been issued canbe varied
only with the authority of the
resolution' The
1er ;;Jp""i, given Uy it i" general meeting by way of special
detaits of the"notice which has to be given to the
shareholders
r€s ;;";'..i#; one in vernacular
res
'are
to be published in newsBaPers (one in English and
of the company
ed iu"g"ug"f circulating in the lity *n"o the registered office
is situate indicating"ctearty the justification for such
variation' The second
rm proaisoto Sub-sectlon (1) ulto pt"t.ribes that such company is-not to use
fo.t buying' trading or oth-
l1y. any amount raiseJ by iitt,o"gn the prospetyt
company'
r0- ..*ir. dealing in equity shares of any othel listed i'e' those rvho
ed Sub-section Bl pr}iaes that the dissenting shareholders,
offer by promoters or
ten did not agree to the variation are to be given an exit
manner and condi-
by controlling shareholders at such exit prte and in,such
for this purpose'77
;ed tions as may u" ,p".iriud by sEBI by making regulations
(Deemed Prospectus)
offer of sale of shares to certain Members
ea ts.28I
with the Board
;On where certain members of a company,_fn consultation
law, propose to offer the
1n- of Directors, and in accordance with applicable
ec- whole or a part holding of shaiei to the public, they may do so in
ot,t"l.
ihe accordancuiitt the prescribed procedure' [Sub-s (1)]
rd- sub_section (2) privides thatâny documeT
bv which the offer of sale
issued by the
ost of shares to the f,iUfi. is made'is to Ue deemed' a prospectus
contents of prospectus and
€a company urd, ti"r"fore, all requirements as to
ent liability misstatements and omissions become applicable'
28(3)]'-The members
Members, responsibitity in the mafter of sale-ts.
shares are Pro-
lhe whether individual or bodies corporate or both, whose
the com-
:to por"a to be .ff"r"a to the public, hu,r" collectively to authorise
lVe '0u., to take all actions on their behalf for carrying out the transaction'
incurred by it
They have also to reimburse the.comPany for all expenses
irs on this matter.
ect
of issue
ent 77. Madan Gopal Jajoo v lJnion of lndia,AlR 1992 De |253, achange in the deployment
of shareholders in general meeting would be a
fraud on
proceeds *i nlr* tt
" "or.,r'"r,t
shareholders.
30 INTRODUCTION TO COMPANY LAW [5s.22,29-31
Public offer of Securities to be in Dematerialised Form IS. 22I

Every company making a public offer and such other class or classes
of companies as may be prescribed have to issue their securities only in
dematerialised form by complying with the provisions of the Depositories
4ct,1996 and regulations made under it. [S.29(1)]
Any other company may convert its securities into dematerialised form
or issue its securities in physical form. t5.29(2))
Advertisement of Prospectus [S. 30]

where an advertisement of a company/s prospectus is pubtished in any
manner, it is necessary to specify in it the contents of the company's mem-
orandum as regards the objects, liability of members and the amount of the
company's share capitaf the names of signatories to the memorandum and
the number of share subscribed by them and its capital structure.
Shelf Prospectus [S. 31]

SEBI has to provide by making regulations for any class or classes of
companies which may file a shelf prospectus with the Registrar at the stage
of first offer of securities. It has to indicate a period not exceeding one year
as the period of validity of such prospectus. The period is to commence
form the date of opening of the first offer of securities under such prospec-
tus. In respect of iny second or subsequent offer of such securities issued
during the period of validity of such prospectus, no further prospectus is
required. [S.38(1)]
lnformation Memorandum [s. 31(2N.-A company filing a sherf pro-
spectus is required to file an information memorandum containing all
the material facts relating to new charges created, changes in the finan-
cial position of the company occurring since the first offer of securities or
between the preceding offer and succeeding offer. Other particulars may
also be prescribed. Filing has to be done with the gegistrar within the pre-
scribed time prior to the issue of second or subsequent offer of securities
under the shelf prospectus. The Prooiso to the sub-section has it that where
a comPany or any other Person has received applications for allotment of
securities along with advance payments before the occurrence of any such
change information of the change must be given to him. If they express
the desire to withdraw their application, within L5 days, their money must
be refunded to them.
After filing of an information memorandum, if any offer of securities
is made, the memorandum together with shelf prospectus is deemed to
be a prospectus. The Explanation to Sub-section (3) says that for the pur-
poses of the section, the expression "shelf prospectus" means a prospectus
in respect of which the securities or class of securities included in it are
issued for subscription in one or more issues over a certain period without
the issue of further prospectus.
T:
E
B .\
E
PROSPECTUS AND ALLOTMENT OF SECURITIES \'

31 ii s.321 31
Red Herring Prospectus [S.32]
es A company proposing to make an offer of securities may issue a red
in
-herring prospectus prior to the issue of a prospectus. ts. 32(1)] sueh pro-
ES spectus has to be filed with the Registrar at least three days befor" th"
opening of the subscription list and the offer. ts. 32(A A red herring pro-
spectus carries the same obligations as are applicable to a prospeitus.
Any variation between the red herring prospectus and a prospectus is to
be highlighted as variations in the prospectus. [S. 32(3) upo" closing of
the offer of securities, the prospectus has to state the totaliapital raiJed,
ny whether by way of debt or share capital and the closing price of securities
n- and any other details which are not included in the red-herring prospectus
he has to be filed with the Registrar and SEBI. tS. 32(4)l
rd The Explanatioz to the section says that for the purposes of the section,
the expression "red herring" *"ur,r a prospectuswhich does not include
complete particulars of the quantum or price of the securities.
of Remedies for Misrepresentation
ge The fear of heavy liability and criminal sanctions have controlled the
ar directors' tendency of "using extravagant terms and flattering descrip-
ce tion". The law allows the following remedies for misrepresentation.
tc-
:d l. Damages for ileceif.-Those who issue a prospectus with fraudulent
statements are liable to pay damages to anyone who purchased shares on
is
the faith of the prospectu s.ln Derry v peek,zB the prospectus of a company
stated that the company had been authorised to use steam power in mov-
o- ing its trams. The authority was in fact subject to the approvil of the Board
rll of Tradg which refused its approval. Yet the directorc *e." held to be not
n- guilty of fraud, because they were hones! whereas fraud requires a state-
or ment which the maker knows to be false, or does notbelieve ii to be true or
ay is too reckless as to its truth. The company may also be sued for damages
"e-
provided that the fraudulent statement was made by its officers within ihe
CS
scope of their authority, though in that case as laid down by the House
,re
of Lords in Houldxoorth v City of Glasgorn Bank,Ts the contract of allotment
of must first be rescinded. But the (UK) Misrepresentation Act, 1967, now
ch "entitles the Court to award damages in lieu of rescission". The provisions
:SS
of section 75, Indian Contract Act,1872 are to the same effect.
rst
2. compensation under section35.-The acquittal of the directors by
es
the House of Lords in Derry v Peek caused such widespread resentment
that- within a year the Directors Liability Act, 1g90 was passed which
to
l'r-
rendered directors liable for false statements, although they might have
us
believed their assertions to be substantially true. The provisions of this
Act were re-enacted in Section 62, (Indian) Companies Acf L956. Now they
re
are included in Section 35 of 2013 Act. Following persons are liable under
ut
the section: (1) every person who is a director at inl time of the issue of the
78. (1889) 74 AC337:(1886-e0) All ER Rep 1 (HL).

7e. (1880) s AC 317 (HL).
32 INTRODUCTION TO COMPANY LAW [s.32
{ i;;
prospectus; (2) every person who has authorised himself to be named as
I
l_ a director in the prospectus; (3) every promoter of the company; (4) every
j'
person who has authorised the issue of the prospectus; (5) every person
l
who is an expert referred to in Section 26(5). Their liability is joint and sev-
eral. The person who is made liable may recover contribution from others
equally guilty. They are liable to compensate the investor for any loss sus-
tained by him by reason of any statement. Subject to the special defences
allowed under the sectiory they are liable for every untrue statement.
A person sued under the section is entitled to the following special
defences: (1) That he withdrew his consent to be a director before the pro-
spectus was issued and that it was issued without his authority or con-
sent. (2) That the prospectus was issued without his knowledge or consent
and on becoming aware he forthwith gave reasonable public notice to that
effect. (3) That he was ignorant of the untrue statement and on becom-
ing aware of it, he withdrew his consent by a reasonable public notice.
This must obviously be done before allotment. ( ) That "he had reasonable
ground to believe and did up to the time of allotment believe the state-
ments to be true".InDerry v Peek, the directors were held not liable because
they honestly believed their statement to be true. But under Section 62 of
1956 Act, and present Section 35 mere honesty was and is not enougft
the honest belief must be based upon reasonable grounds. Thus, where a
prospectus was issued by the directors under the assurance given by the
promoters that everything was alright they were held liable for untrue
statements because to put faith upon promoters is not reasonable.80 (5) That
the untrue statement was contained in the report of an expert and he had
reasonable ground to believe and did up to the time of allotment believe
the expert to be competent and, if it was in some pubtic official document,
that it was a correct and fair representation of the document. The points
from (3) to (5) are not there in the new section. But they will become appli-
cable as a matter of common law.
3. Resciss ion for misrepresentation.--The shareholder can also sue
the company for rescission of the contract. Under this remedy the con-
tract is cancelled and the money'given by the shareholder refunded.
Under Section 75, Contract Act, a person who lawfully rescinds a contract
is entitled to compensation for any damage which he has sustained
through non-fulfilment of the contract. The right is lost in the following
circumstances:
1. By ffirmation.-If the allottee with full knowledge of the mis-
representation upholds the contrac! he cannot afterwards rescind.
Affirmation may be express or implied. An implied affirmation takes place
by the shareholder's conduct, where, for example, he endeavours to sell his
shareg attends meetings of the company, receives dividends or pays cal1s.81
2. By uflreqsoflable delay.-"Any man who claims to retire from a
company on the ground that he was induced to become a member by
80. Adamsv Thrift, (1915) 2 Ch 21 (CA).
81. Dunlop TruJlault Cycle and Tuke Mfg. Co, re, ex p Shearman, (1896) 66 LI Ch?5.
r
B
t,,
s.32 s.341 PROSPECTUS AND ALLOTMENT OF SECURITIES 33
das misrepresentatiory is bound to come at the earliest possible moment after

very he becomes aware of the misrepresentation." An action after five months
:fSOft was held to be too 1ate.82
. sev- 3.By comtneflcement of winding up.-The right of rescission is lost on
thers the commencement of the winding up of the company. "But where a share-
i SUS- holder has started active proceedings to be relieved of his shares, the pass-
ences
ing of the winding up order during their pendency would not prevent his
getting the relief."83
pecial
When Statement Deemed to be Untrue
e pro-
r con- A statement is deemed to be untrue if it is false in the form and context in
)nsent which it is included. Omissions which are calculated to mislead shall also
to that render the prospectus false. In R v Lord Kyls,ant,sa a prospectus correctly
,ecom- disclosed that the company had paid dividends from 1911 to 1927,but did
notice' not disclose that the company had suffered losses from l92l onwards and
;onable dividends had been paid out of war-time profits. Thus, although what the
3 state- prospectus said was true, it was held to be a misleading prospectus and
)ecause those who issued it were held liable to punishment. Where a statement is
n 62 of- true at the time of the issue of the prospectus, but ceases to be so when
:nough, allotment is made, the allotment is voidable.ss Further, it.is necessary to
where a avail of the above remedies that the plaintiff should have purchased his
r by the shares on the faith of the prospectus directly from the company. A pur-
: untrue chaser of shares in the open market has no remedy against the company
(5) That or its officers even if he was influenced by the prospectus.s5 But where a
t he had company has so placed its prospectus as to induce purchases of shares in
t beiieve the open market, the liability follows.8T
)cument/
Criminat Liability for Misstatements in Prospectus [S. 34]
re Points
rne aPPli- Where a prospectus issued, circulated or distributed includes any
statement which is untrue or misleading in forrn or context in which it
is included or where any inclusion or omission of any matter is likely to
aho sue
con- mislead, every person who authorises the issue of such prospectus is to be
'the liable under Section 447 (liability for fraudulent conduct)
refunded'
The Proaiso to the section says that nothing in the section is to apply to
a contract
a Person who proves that such statement or omission was immaterial or
sustained
that he had reasonable grounds to believe and believed so up to the time
following
of issue of the prospectus that the statement was true or the inclusion or
omission was necessary.
f the mis-
is rescind'
takes Place 82. Christineaille Rubbter Estates Ltd, re,1911 WN 216:87LJ Ch 63.
:s to sell his 83. Desai J in Shiromani Sugar Mills Ltd v Debi Prasad, AIR 1950 All 508, 513.
84. (1e32) 1. KB 442 (CCA).
pays calls'81 85. TS Rajagopala lyer v South lndian Rubber Works Ltd, (1942) zMLl 228.
tire from a
86. Peekv Gurney, (1873) LR 6HL377: (1861-13) ALI ER Rep 116: 43 LI Ch 19.
member bY 87. Andrews v Mockford, (1896) 1 QB 372 (CA); Kisan Mehta v Unioersal Luggage Mfg Co Ltd,
(1988) 63 Comp Cas 398 (Bom), no public interest litigation by a person who has not
invested.
25.
34 INTRODUCTION TO COMPANY LAW lSs.37-38,73
/ Fraudulently inducing persons to lnvest Money IS.38I

A person who either knowingly or recklessly makes any statemen!
promise or forecast which is false, deceptive or misleading, or deliberately
conceals any material facts for the purpose of inducing a person to enter
into any agreement for acquiring, disposing of or subscribing for, or under-
writing securities; or any agreement the purpose or pretended purpose of
which is to secure a profit to any of the parties from the yield of securities
or by reason of fluctuations in the value of securities; or any agreement
for, or with a view to obtaining credit facilities from any bank or financial
institutiory is to be liable for action under Section 447 (fraudulent conduct).
Who can sue under Sections 34,35 and 36 tS.37I
A suit may be filed or any other action can be taken under Sections 34,
35 or 36by any person or group of persons or any association of persons
affected by any misleading statement or for the inclusion or omission of
any matter in the prospectus.
Personation for Acquisition of Securities [5. 38]

The purpose of the provision is to prevent allotment of securities in
fictitious names. Accordingly, no application should be made to a com-
Pany for acquiring or subscribing for any securities in a fictitious name.
Similarly, no one should induce a company to allot or register any trans-
fer of securities in a fictitious name. The penalty for this offence is action
under Section 447 (punishment for fraud). Every company which issues
a prospectus is required to reproduce prominently the provisions of the
section in the prospectus and application forms. A person who gets secu-
rities allotted in a fictitious name becomes liable as a shareholder. Where
a person carried on business under an assumed name and took shares in
that name, his trustee in bankruptcy could not avoid the 1iabi1ity.88 When a
person has been convicted under the section, the court may also order dis-
gorgement of gain, lf any, made by him. The court may also order seizure
and disposal of securities in his possession. The amount received through
disgorgement or disposal of securities is to be credited to the Investor
Education and Protection Fund. tS. 38(3) & (4)l
ACCEPTANCE OF DEPOSITS BY COMPANIES IS. 73]

The provisions relating to deposits are contained in Sections 73 to 76
of Chapter v, Companies Act,2013. Section 73 opens with the declarhtion
that on the commencement of the Act of 2013, no company is to invite,
accept, or renew deposits under the Act from the public except in a man-
ner provided in this Chapter. The Prorsiso to this declaration immediately
adds that nothing in this sub-section is to apply to a banking company
and a non-banking financial company as defined in the RBI Act, 1934 and
88. Central Klondyke Gold Mining and Trading Co Ltd, re, Savigny's Case (1898) 5 Mans.336. A
person who abets such conduct is equally liable.
Making Contracts
Dr. Jaya Mathew

INDIAN CONTRACT ACT,
1872
Purpose : In order to conduct business
operations, many transactions are
made by the parties. These
transactions create certain rights and
obligations. To regulate and settle
these transactions, Indian Contract
Act,1872 has been enacted

What is a Contract?
Contract is an agreement which is
enforceable by law” – 2(h) of the Indian
Contract Act
Three components of contract
Agreement obligation enforceability

Essentials of a valid contract
Agreement Creation of Legal

Relationship
Free consent of parties
Capacity of Parties
Lawful Object & Consideration
Agreements declared expressly void
Other legal Formalities

Classification of Contracts
Based on formation
Based on performance
Based on Validity

Based on formation
Express
Implied
Quasi
Contract
Based on Performance
Executed
Executory

Based on Validity
Valid Contract
Void
Agreement
Voidable Contract
Void Contract
Unenforceable Contracts
Thank You
simsr.somaiya.edu

INTRODUCTION
Prior to the enactment of the Indian Contract Act, 1872, English Common Law was applied mdiscrirninately
to Indian natives, which led to many inconveniences. Statutes were, therefore, enacted to supersede English
Law and to regulate the contracts where parties were Mohammedans and Hindus. The rights of Hindus and
Mohammedans were regulated by their own laws and usages. If both parties were Hindus, they were regulated
by the Hindu Law and where both parties were Mohammedans, Mohammedan Law applied. Where, however,
one party was a Mohammedan and the other Hindu, then the law of defendant applied. Only where laws
and usages of Hindus or Mohammedans were silent on any point, English Law applied. Gradually, importance
of the enactment of general law regulating the contracts and to define and amend certain parts of law relating
to contracts common among all the parties to the contract was realised and this gave birth to the Indian
Contract Act, 1872.
The Law of Contract is embodied in the Indian Contract Act, 1872. The Indian Contract Act incorporates
many features of English Law. It is not an extensive code, because besides the Sales of Goods Act and
the Indian Partnership Act, the Act does not incorporate the Negotiable Instruments Act, Transfer of Property
Act, Insurance Act, etc., which also deal with certain types of contracts. It defines and amends only certain
parts of the law relating to contracts (Preamble). A particular usage or custom is allowed to prevail and
remain unaffected. It should be reasonable, certain, and should be well-known. However, usages shall not
be inconsistent with the provisions of the Act. Where the Contract Law is silent on any matter, Hindu or
Mohammedan Law relating to contracts shall apply. It is, therefore, not a complete code and, therefore,
not exhaustive.
IMPORTANCE OF THE LAW OF CONTRACT

The Law of Contract is the most important branch of Business Law. It affects everybody, more so,
trade, commerce and industry. All contracts are based on agreements which are either express or implied.
Disputes do arise, sometimes as to the existence of the obligation and sometimes as to the nature and extent
of the obligation.
In commercial and ordinary life, promises are made. Promise arises out of the acceptance of an offer
or proposal. Sometimes, promises are performed, sometimes breach is committed. The Law of Contract
deals with such promises which create legal obligations. This excludes those promises made in common
life which may be morally binding but create no legal binding. These promises are made without a view
to obtain the assent of the other. No value is given to such promises made. Such promises are not covered
by the Indian Contract Act except for those provided under section 25 of the Act. Certain promises do not
create legal obligations. Promises which do not give rise to legal obligations are not contracts. For example,
A promises B to attend the dinner and fails to attend. This promise certainly does not create a legal obligation
on the Part of A to enable B to sue A for the price of non-consumed food. Law of Contract, therefore,
excludes obligations which are not contractual in nature. Certain obligations even though not created by
the parties of their own will or by agreement are enforceable and are, therefore, contracts, e.g., judgement
of Courts, quasi-contracts, etc. Law of Contract deals with the promises given for some value, though such
value may not be adequate. This value called "consideration" is the most important aspect of a contract.
Law of Contract regulates the conduct, of the parties to the creation, performance and breach of the promises.
Parties to the contract must be competent to contract. Agreement between the parties must be legally enforceable.
9
Law of Contract also provides for remedies to the aggrieved parties. Law of Contract also deals with particular
contracts like indemnity, guaranties, bailment and agency which arise out of ordinary transactions of merchants
and traders.
Law of Contract thus deals with agreements which create obligation. It creates a right in personam
as distinguished from a right in rem. Right in personam means a right against particular person or persons.
Right in rem on the other hand, is available against the whole world.
Within the limiting principles laid down in the Indian Contract Act, 1872, the parties may create rights
and duties between themselves. Such rights and duties created must not be unlawful and must not infringe
the legal principles. All terms in the contract must be given effect rather than deprive some of them of the
effect [M. Arul Jothi v. Lajja Bal AIR 2000 SC 1122]. The right to make contract is inherent in every
person, capable of entering into a contract. Right to make a contract includes right not to make a contract
[PatelEngg. Co. v. Union of India (2012) 11 SCC 257].
1
ESSENTIAL ELEMENTS OF A CONTRACT —

FORMATION OF A VALID CONTRACT
Agreements and contracts are two different things. (The distinction between the two is given in
Chapter '2'). It is important to know first what constitutes a contract and what constitutes an agreement.
We will then study which agreements are contracts, their distinction and different types of agreements and
contracts.
Different sections of the Indian Contract Act lay down the essential elements of the contract. They
are as under:
1. Offer or Proposal and acceptance.
2. Consideration — lawful consideration with a lawful object.
3. Capacity of parties to contract — competent parties.
4. Free consent.
5. An agreement must not be expressly declared to be void.
6. Writing and Registration, if so required by law.
7. Legal relationship.
8. Certainty.
9. Possibility of Performance.
10. Enforceable by law.
11. Stamping and Registration.
1. Proposal and Acceptance:

"When one person signifies to another his willingness to do or abstain from doing anything, with a
view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal" [Sec.2(a)].
The first step towards creating a contract is that one person shall signify or make a proposal or offer
to the other, with a view to obtaining the acceptance of that another person to whom the offer is made.
A proposal when accepted becomes a promise.
"When the person to whom the proposal is made signifies his assent thereto, the proposal is said to
be accepted. When a proposal is accepted, it becomes a promise" [Sec.2 (b)]. An agreement can be reached
by the process of offer and acceptance. It has been held that every transaction, to be recognized as a contract,
must in its ultimate analysis, resolve itself into a proposal and its absolute and unqualified acceptance [Badri
Prasad v. State of Madhya Pradesh AIR 1970 SC 706].
(The law as to 'proposal' and 'acceptance' is discussed in Chapters 3 and 4 respectively).
11
2. Consideration:
"When at the desire of the promisor, the promisee or any other person has done or abstained from
doing, or does or abstains from doing, or promises to do or to abstain from doing something such act or
abstinence or promise is called a consideration for the promise" [Sec.2 (d)].
Every contract consists of two parts — (i) Promise and (ii) Consideration for the promise. A promise
is often made in return for a promise, for example, a buyer realizes the goods for the price. Price for goods
is, therefore, consideration here. Consideration is the cause of the promise. It is the most essential element
of the contract. As a general rule, agreement without consideration is void. The promise for a promise in
return is consideration.
ILLUSTRATION:
A agrees to sell his house to B for Rs. 10,000. Here A's promise to sell his house is for B's consideration to pay Rs. 10,000. Similarly,
B's promise to pay Rs. 10,000 is for Ai consideration to sell his house to B.
An agreement is a contract, only if it is made for a lawful consideration and with a lawful object.
The consideration or object of an agreement is unlawful if —
(i) it is forbidden by law; or
(ii) is of such a nature that, if permitted, it would defeat the provisions of any law; or
(iii) is fraudulent; or
(iv) involves or implies injury to the person or property of another;
(v) the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement
of which the object or consideration is unlawful is void (See. 23).
(The law as to 'consideration' and 'unlawful consideration' is discussed in Chapter 5).
3. Capacity of Parties to Contract — Competent Parties:

Section 11 of the Act states that every person is competent to contract 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.
The person, firstly, should be a major. Secondly, he should be of sound mind, for example, he should
not be insane or lunatic and finally he should not possess any other disqualification from contracting by
any law to which he is subject.
(The law as to 'capacity of parties' and who are competent to contract is discussed in Chapter 6).
4. Free Consent:
Parties to a contract must give their free consent. The parties must be ad-idem, for example, both the
parties must agree upon the same thing in the same sense. Two or more persons are said to consent when
they agree upon the same thing in the same sense (Sec. 13).
Mere consent is not enough. Consent of parties must be free, for example, it must not have been
obtained by (i) coercion, (ii) undue influence, (iii) fraud, (iv) misrepresentation, or (v) mistake.
(The law as to free consent' is discussed in Chapter 7).
5. An Agreement must not be expressly declared to be void:

A void agreement is not enforceable by law [Sec.2 (g)]. It has no legal sanctity. It does not give rise
to any rights and obligations. Void agreements are not enforceable by law as they are opposed to public
policy like agreements in restraint of trade, or in restraint of marriage or in restraint of legal proceedings.
An agreement, therefore, should not be void in order to constitute a valid contract. Various agreements are
expressly declared void under the Act.
(The law as to 'void agreements and those expressly declared void' is discussed in Chapter 8).
— i vrnwHvn i// u r utiu Kûmruci
6. Writing and Registration:

Oral contract is a valid contract. However, the contract must be in writing and registered, if so required
by any law, for example, gift, mortgage, sale, lease under the Transfer of Property Act, 1882, Memorandum
and Articles of Association of a Company under the Indian Companies Act, contracts under sub-sections
(1) and (3) of section 25 of the Indian Contract Act, etc. Documents specified under section 17 of the
Indian Registration Act, 1908, are required to be registered. Usually, important documents are entered into
writing and are registered. A written contract is a repository and memorial of truth [Roop Kumar v. Mohan
Jhadani (2003) 6 SCC 595]. Company can contract and such contracts shall bind the company [Andhra
Pradesh Tourism Development Corporation v. Pampa Hotels Ltd. AIR 2010 SC 1806].
No particular form of writing is required to constitute a contract. A document called 'Memorandum
of Understanding' (MOU) is enforceable [Narinder Kumar Malik v. Surinder Kumar Malik (2009) 8 SCC
743]. Intentions of the parties to enter into a particular contract and to give effect to it must be manifest
in it, in order to constitute a valid contract. If a statute requires an agreement to be in a form, or according
to a prescribed form, it is a sufficient compliance if the agreement is substantially in that form and a minor
variation does not amount to a violation or non-compliance of the statute unless the terms in the form are
mandatory [Jaikishan Dass Mull v. Luchhiminarain Kanoria AIR 1974 SC 1579; Jayantilal Investment v.
Hadhuvihar Co-operative Housing Society Ltd. AIR 2007 SC 1011]. Registration is compulsory in respect
of certain contracts under the Indian Registration Act, 1908 like mortgages, gifts, etc. Registration of other
documents not specified under section 17 of the Indian Registration Act is optional. Certain documents
also require attestation, for example, they are to be signed or executed in the presence of at least two witnesses,
like mortgages, gifts, leases etc.
When there is a contemporaneous or prior separate oral agreement as to a matter on which a document
is silent, proof of it may be given only when such agreement is not inconsistent with or does not contradict
the terms of the document (Lakshmiayya v. Murahari AIR 1930 M 547). The proviso requires that (i) the
separate agreement should relate to any matter on which the document is silent and (ii) that it is not inconsistent
with its terms [Quality Concrete Holdings Berhad v. Classic Gypsum Manufacturing SDN BHD (2012) 5
CU 33].
7. Legal Relationship:
Agreements which create legal relations or are capable of creating legal relations are contracts, for
example, an invitation to a dinner does not create any legal relation and therefore, is not a contract. Existence
of legal relationship is determined by the intention of the parties. There must be common intention of the
parties to create legal relations in order to constitute a contract. Agreements to buy and sell, to marry, etc.,
create legal relationships and are, therefore, valid contracts.
Intentions are determined by references which people would draw from the words or conduct of the
parties. For example, the presumption of legal relationship is generally inferred in commercial or business
agreements. Such an intention is, however, not presumed in social and domestic agreements like invitation
to a dinner, invitation to stay with a friend. Such promises do not create legal obligations. Promises which
do not give rise to legal obligations are not contracts.
8. Certainty:
The terms of a contract should be clear. In other words, the contract must not be vague. Contracts
which are vague cannot be enforced. Such a contract can be avoided by showing that there is ambiguity.
In such a case, there is nothing which either party can enforce.
9. Possibility of Performance:
Contracts based on impossibility of performance are not valid. The contracts must be capable of being
performed. For example, A promises to share with B 50% of the treasure, if B creates a treasure by magic.
Such agreements are incapable of performance and, therefore, void.
10. Enforceable by Law:
A contract in order to be valid must be enforceable by law which element distinguishes agreement
and contract. If it is enforceable by law, it is a contract, otherwise it is an agreement. The aggrieved party
should be able to obtain relief through law in the event of breach of contract.
An agreement can also be inferred from correspondence exchanged between the parties. Unless from
the correspondence, it can unequivocally and clearly emerge that the parties were ad-idem to the terms,
it cannot be said that an agreement had come into existence between them through correspondence [Rickmers
Verwaltung GMBH v. Indian Oil Corporation Ltd. 1999 (1) SCC 1].
There is no question of any promissory estoppel in respect of a contract. The rule of promissory estoppel
is rule of equity, while contractual relationship between the parties is governed by the law of contract [C. V.
Enterprises v. Braithwaite & Co. Ltd. AIR 1984 Cal.306].
The Contract Act does not lay down any particular form or condition of a contract. The parties to
the contract may agree to a particular form or condition or mode in which the contract is to be executed
[Union of India v. S.S.H. Syndicate AIR 1976 SC 879].
11. Stamping and Registration:

A contract in order to be valid must be stamped in accordance with the State Law and registered in
accordance with the Registration Act, 1908. A document which is not registered, neither shall it affect any
immovable property nor shall it be received as evidence. However, it can be read in evidence to show
existence of agreement in a suit for specific performance or injunction and as evidence in possession under
Sec.53A of the Transfer of Property Act, 1882 [S. Kaladevi v. R. Samasundaram ATR 2010 SC 1654].
Whether letter of intent is a contract?

In a case where letter of intent contains certain terms and conditions with a stipulation that only fulfillment
of said terms entitle parties to enter into agreement, such a letter of intent is not a complete agreement to
sell or a contract for sale. No right for specific performance of contract accrues based on such a letter of
intent [Hansa V. Gandhi v. Deep Shankar Roy (2013) 12 SCC 776].
2
AGREEMENTS AND CONTRACTS
AGREEMENT
DEFINITION
Section 2 (e) of the Indian Contract Act defines an agreement as under:
"Every promise and every set of promises, forming the consideration for each other is an agreement."
Promise is defined in section 2 (b) of the Act. When the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. A
mere promise by two parties would not constitute an agreement. Offer and acceptance together constitute
an agreement. Agreement is a promise or a set of reciprocal promises.
Promises which form the consideration or part of the consideration for each other are called reciprocal
promises [Sec.2 (f)]. The promisor makes a proposal and a promisee accepts the proposal. Both promisor
and promisee promise to perform their part of reciprocal promises. This set of promises on the part of the
promisor and the promisee constitute an agreement.
KINDS OF AGREEMENTS
1. Valid Agreement: A valid agreement is one which is enforceable by law.
2. Void Agreement: An agreement not enforceable by law is said to be void [Sec.2 (g)]. It has no
legal existence at all and is devoid of any legal effect. It does not give rise to any rights and obligations.
Unlawful agreements are examples of void agreements. A void agreement is not enforceable by law. Unlawful
agreements are not enforceable on account of the same being opposed to public policy like agreements in
restraint of trade or in restraint of marriage or in restraint of legal proceedings. (Void agreements are discussed
in Chapter 8).
3. Enforceable Agreement: An agreement enforceable by law is a contract [Sec.2 (h)].
4. Voidable Agreement: A voidable agreement is one which is enforceable by law at the option of
one or more of the parties thereto but not at the option of the other or others [Sec.2 (i)]. A voidable agreement
is valid so long as it is not avoided by the party entitled to do so. It is for the party seeking to avoid it
to set up the defence accordingly, in order to avoid the agreement and if he does not, the agreement would
be a binding contract. For example, agreement induced by coercion, undue influence, fraud or misrepresentation
is a voidable agreement. If not avoided by the party whose consent is so caused by undue influence, coercion,
fraud or misrepresentation, it becomes a valid and binding contract.
5. Unenforceable Agreement: An unenforceable agreement is valid in law but is incapable of proof
because of some technical defect, for example, promissory note which is not at all stamped or is insufficiently
stamped. Law recognises the validity of the promissory note but cannot enforce the same due to it being
not at all stamped or insufficiently stamped.
15
6. Illegal Agreement: An illegal agreement is something against the law itself. It is void-ab-initio.
The collateral transaction between the parties is coloured with illegality. Illegal agreement often involves
a commission of crime. They are opposed to public morals and as such, parties to such agreements are
punishable under Indian Penal Code. They are actually forbidden by law. On the other hand, a void agreement
may not be so forbidden. Thus every illegal agreement is void but every void agreement is not necessarily
illegal. Nothing is recoverable under an illegal agreement.
CONTRACT
DEFINITION
An agreement enforceable by law is a contract [Sec.2(h)]. An agreement, the object of which is to
create an obligation is a contract. When an agreement compels another to do something, or not to do something,
it is a contract.
Contract is a combination of agreement and enforceability. The test to distinguish between an agreement
and a contract is whether it is enforceable by law or not. If it is enforceable by law, it is a contract. If
it is not so enforceable by law, it is an agreement. Creation of obligation on the part of the parties to an
agreement to perform their liabilities gives the cause of enforceability of an agreement. The nature of agreement
is then changed into a contract. An agreement enforceable by law will be considered a contract when it
possesses certain essentials of a contract.
A contract is not property, but only a promise supported by consideration, upon breach of which either
a claim for specific performance or damages would lie [Said v. Butt (1920) 3 KB 497 referred in Sunrise
Associates v. Govt, of NCT of Delhi (2006) 5 SCC 603].
A contract has been defined by Anson as under:
"A contract is an agreement enforceable by law, made between two or more persons by which, rights
are acquired by one or more to the acts done or forborne on the part of the other or others. It is that form
of agreement which directly contemplates and creates an obligation."
It will be observed that an agreement is a wider concept than a contract. While only an agreement
which is enforceable by law is a contract, every promise and every set of promises, forming the consideration
for each other, is an agreement. Agreement, therefore, includes a contract and is a much wider term than
the contract. An agreement in order to become a contract must give rise to a legal obligation. It is. therefore,
rightly said that every contract is an agreement but every agreement is not a contract.
KINDS OF CONTRACTS
1. Valid Contract: A valid contract is one which has all essential elements and is enforceable by
law (discussed below).
2. Voidable Contract: An agreement which is enforceable by law at the option of one or more of
the parties thereto, but not at the option of the other or others, is a voidable contract [Sec.2(i)]. A contract
is voidable when one of the parties to the contract has not exercised his free consent. One of the essential
elements of a formation of a contract, for example, free consent, is absent. All voidable contracts are those
which are induced by coercion, undue influence, fraud or misrepresentation (discussed in Chapter 7). The
person whose consent is not so freely given may avoid a contract. It, therefore, continues to be valid till
the party whose consent is caused by coercion, undue influence, fraud or misrepresentation chooses to avoid
the contract within a reasonable time. Contract then is not binding on the other party.
3. Void Contract: A contract which ceases to be enforceable by law becomes void when it ceases
to be enforceable [Sec.2(j)]. A void contract is a nullity from its inception. No rights accrue there under.
A contract may also be originally valid when entered into but subsequently due to change in the events
or circumstances, it may become void. A contract valid at its inception may be rendered void or unenforceable
by later event. A contract becomes void when the event on which the enforcement of the contract is contingent,
becomes impossible [Puravankara Projects Ltd. v. Hotel Venus International (2007) 10 SCC 33]. There
cannot be a void contract because when the contract is void, it is no contract at all. The right expression,
therefore, is 'void agreement' and not 'void contract'.
4. Unenforceable Contract: An unenforceable contract is a valid contract in law, but is incapable
of proof, and therefore cannot be enforced in a Court of Law.
5. Executed Contract: Where both the parties have performed their obligations, it is an executed
contract. Even when one party to the contract has performed his share of the obligation, the contract is
executed, though the other party is still under an outstanding obligation to perform his part of the promise.
6. Executory Contract: Where neither party to the contract has performed his share of the obligation,
for example, both the parties have yet to perform their promises, the contract is executory.
In an executed contract one party has already performed his part of the agreement while the other
party has to perform his part. In an executory contract both the parties have to perform their mutual promises
and the fact that they have to perform their parts of the contract does not affect the validity of the contract
[Union of India v. Chaman Lai Loona & Co. AIR 1957 SC 652].
7. Express Contract: When the terms of a contract are reduced in writing or are agreed upon by
spoken words at the time of its formation, the contract is express.
8. Implied Contract: The terms of a contract are inferred from the conduct or dealings between the
parties. When the proposal or acceptance of any promise is made otherwise than in words, the promise is
said to be implied. Such an implied promise leads to an implied contract. For example, A boards a bus.
It is implied from his conduct that A has entered into an implied promise to purchase a ticket.
The terms of contract can be express or implied. The conduct of the parties would also be a relevant
factor in the matter of construction of a contract. Correspondences exchanged by the parties are required
to be taken into consideration for the purpose of construction of a contract [McDermott International Inc.
v. Burn Standard Co. Ltd. (2006) 11 SCC 181].
9. Quasi-Contract: Certain relations resemble those created by a contract or certain obligations which
are not contracts in fact, but are so in the contemplation of law. These are called 'Quasi-Contracts'.
ILLUSTRATION:
A supplies necessaries to B, who is incapable of contracting. A is entitled to be reimbursed from B's property.
Quasi contracts arise out of obligations enjoyed by one person from the voluntary acts of the other
which are not intended to be performed gratuitously.
(Quasi contracts are discussed in Chapter II).
10. Contingent Contract: A contingent contract is one in which a promise is conditional and the
contract shall be performed only on the happening of some future uncertain event.
(Contingent contracts are discussed in Chapter 10.)
ILLUSTRATION:
A contracts to pay B Rs. 10,000, if S J house is burnt. This is a contingent contract.
11. Contracts of Record: A contract of record is one which is taken on the records of a Court, for
example, Judgement of a Court. Such judgements create a binding effect through the authority of the Court.
12. Specialty Contract: A specialty contract is a contract which is in writing, signed, sealed and delivered
by the parties. It is also called a 'contract under seal'. Consideration is not necessary in a specialty contract.
13. Simple Contract: A simple contract is one which is not under seal. All contracts which are not
under seal are simple contracts. All simple contracts require consideration. They may be made by written
or spoken words. Contracts of Record and Specialty Contracts are also known as 'Formal Contracts'. The
classification of contracts into Contracts of Record, Specialty and Simple is under the English Law. Indian
Law does not recognise contracts without consideration. All contracts must have consideration in order to
be valid, subject to exceptions under section 25 of the Act (discussed in Chapter 5).
14. Statutory Contract: When all or some of the terms and conditions of a contract are statutory
then the entire contract, or to that extent, as the case may be, would be regarded as statutory contract [India
Thermal Power Ltd. v. State of M.P. (2000) 3 SCC 379].
WHICH AGREEMENTS ARE CONTRACTS AND ENFORCEABLE BY LAW?

Section 10 of the Act lays down that all agreements are contracts if they are made by the free consent
of parties competent to contract, for a lawful consideration and with a lawful object and are not expressly
declared to be void. An agreement in order to constitute a contract must possess the following elements:
(i) Parties to the contract must be competent.
(ii) Parties to the contract must exercise free consent.
(iii) Agreement must be for a lawful consideration with a lawful object.
(iv) Agreement must not be expressly declared to be void.
The above elements must exist together. An agreement with all the above elements is a valid contract
and, therefore, enforceable.
All agreements are, therefore, not contracts but all contracts are agreements. In other words, a contract
must have all the above elements. When any element is missing, it ceases to be a contract though it may
be a valid agreement. An agreement is a wider term than a contract. All contracts are, therefore, agreements
but all agreements are not contracts. An agreement which is made under the requirement of law is a contract
[Siddheshwar Sahakari Sakhar Karkhana v. CIT, Kolhapur AIR 2004 SC 4716].
Interpretation of a contract:
A party cannot claim anything more than what is covered by the terms of contract, for the reason that
contract is a transaction between the two parties and has been entered into with open eyes and understanding
the nature of contract. Thus, contract being a creature of an agreement between two or more parties, has
to be interpreted giving literal meanings unless, there is some ambiguity therein. The contract is to be interpreted
giving the actual meaning to the words contained in the contract and it is not permissible for the court to
make a new contract, however is reasonable, if the parties have not made it themselves. It is to be interpreted
in such a way that its terms may not be varied. The contract has to be interpreted without giving any outside
aid. The terms of the contract have to be construed strictly without altering the nature of the contract, as
it may affect the interest of either of the parties adversely [United India Insurance Co. Ltd. v. Harchand
Rai Chandan Lai AIR 2004 SC 4794; Polymat India P. Ltd. v. National Insurance Co. Ltd. AIR 2005 SC
286 referred to and relied upon in The Rajasthan State Industrial Development and Investment Corporation
v. Diamond and Gem Development Corporation Ltd. (2013) 5 SCC 470].
Agreement and Contract distinguished:
Agreement Contract
(i) Offer and acceptance together constitute an agreement. (i) Agreement and enforceability together constitute a
contract.
(ii) Every promise and every set of promises forming (ii) A contract is an agreement enforceable by law.
consideration for each other is an agreement.
(iii) Agreement may not create any legal obligation. All (iii) A contract necessarily creates a legal obligation. All
agreements are not contracts. contracts are agreements.
(iv) An agreement is a wider concept or a genus. (iv) Contract is a specie of an agreement.
(v) Agreement is not a concluded or a binding contract. (v) Contract is concluding and binding.
JIB' ~~
SALE & AGREEMENT TO SELL

An agreement to sell does not by itself create any interest of the proposed vendee in the immovable
property but only creates an enforceable right in the parties. In case of an agreement for sale, the title of
the property agreed to be sold still remains with the vendor, but in the case of sale, title of the property
is vested with the vendee. Therefore, agreement to sell is an executory contract whereas sale is an executed
contract [Sri Thimmaiah v. Shabira AIR 2008 SC 1275].
Contract-Definition & Essentials
“Contract is an agreement which is enforceable by law” –Section 2(h) of the Indian Contract
Act.
Contract has three components.
a) Agreement – agreement is a promise or set of promises forming consideration for each

other
b) Obligation – agreements give rise to rights and obligations which are legal in nature
c) Enforceability – rights and obligations created are enforceable in the court
Example: A offers to sell out his bike to B for Rs 20000/-, B accepts the offer. Agreement is
formed between A and B.
Essentials of a valid contract
1. Agreement - Agreement is created by offer and acceptance .It is the result of mutual
exchange of promises between parties.
2. Creation of a legal relationship- a Legal relationship consists of rights and obligations
which can be claimed by the parties in the court of law.
3. Free Consent of the parties -Two or more persons are said to have consent if they agree
upon same thing in the same sense. And their consent is said to be free if it has not been
induced by any one of the following factors.
(a) Coercion (b) undue influence (c) Misrepresentation (d) fraud (e) Mistake
4. Capacity to Contract- Contractual capacity of the party means he or she must be legally
competent for making the contract.Every person is competent to contract who is of age
of majority, of sound mind and is not disqualified from contracting by any law to which
he is subject.
5. Lawful consideration & Lawful Object - An agreement to be enforced must be
supported by lawful consideration. Any act or promise or abstinence will constitute
lawful consideration which is legal, moral and not against the public policy. And the
object of an agreement must be to do some act which is legal. Agreement made for
doing something illegal, immoral or against the public policy cannot be enforced in the
court of law.
6. Agreement declared expressly void – There are certain agreements which have been
expressly declared void by the law. Thus an agreement made by parties should not fall
in that category.
7. Other legal formalities – Generally Indian Contract Act doesn’t make any discrimination
between written and oral agreements. But some agreements to be enforced in the court
1
need to be made in writing and got to be registered with appropriate legal authority and
must have adequate stamp duty. E.g.: Insurance agreements, agreements related to
transfer immovable properties.
A. On the basis of formation

1. Express Contracts
If the proposal and acceptance of any promise is made in words spoken or in writing, the
promise is said to be express. An express promise leads to the formation of express
contract
2. Implied Contracts
Implied contracts are those which are not made in writing or by the words of mouth.
Rather these promises are inferred from the conduct of the parties or from the
circumstances
3. Quasi Contracts
Quasi Contracts are based on the principles of justice and equity. Inspite of not having
any contract between parties, obligation between parties are created by operation of law
rather than offer and acceptance. The legal base is that there should not be unjust
enrichment at the cost or expense of other.
B. On the basis of performance
1. Executed Contracts
Executed contract is one that has been performed.
2. Executory Contract
Executory contract is one that has not yet been performed. Till the promises are
fulfilled the contract remains to be Executory.
C. On the basis of validity
1. Valid contract satisfies all conditions required for its enforceability.
2. Void contract is a contract which ceases to be enforceable by law.
3. Void agreement is an agreement which lacks any one of essentials of a valid

contract. It is null and void in the eye of law.
4. Voidable contract is one which is enforceable by law at the option of one or

more parties and consent has been vitiated by any of the vitiating elements.
5. Unenforceable contract is not enforceable due to technical reasons.
2
Discharge of Contract
Dr. Jaya Mathew

What is Discharge of
Contract?
When a contract ceases to bind the

parties to it, it is said to be discharged

A contract may be discharged
in the following ways
By Performance
By Agreement
By Impossibility of Performance
By Breach

Discharge by Agreement
Novation
Alteration
Remission
Waiver

Discharge by impossibility of
performance
Initial Subsequent Impossibility
Impossibility Destruction of subject matter
Change of law
Death or incapacity of party
Declaration of war
 Exceptions : Difficulty of
performance, Commercial
difficulties, Difficulty arising out of
contract of third party etc.…..

Discharge by Breach
Anticipatory Breach Actual

Breach
By Repudiation By Impossibility of
performance
Remedies in case of Anticipatory Breach

Discharge by Breach of contract-
Remedies
Rescission
Suit for damages
Suit for specific performance
Suit for Injunction

Thank You
simsr.somaiya.edu

Discharge of contract
When a contract ceases to bind the parties to it, it is said to be discharged. It is termination of
a contract and by discharge; the rights and obligations of the parties come to an end.
A contract may be discharged by Performance, by Agreement and by Breach.
1. Discharge by Performance
After the parties to the contract have made due performance, their liability under the contract
comes to an end and the contract is said to be discharged by performance. Performance of
obligations by parties puts an end to the contract.
2. Discharge by Agreement
This is to say that as you have reciprocally entered a contract, you can get out of it with
mutual consent. In Novation, a new contract replaces the old one. In Alteration, one or more
terms of contract are changed. In Remission, there is lesser fulfillment of promise. In Waiver,
a party to the contract abandons or waives his rights.
3. Discharge by Breach
When the party does not fulfill his obligation or refuses to fulfill it or disabled himself from
fulfilling it is known as breach of contract.
Discharge by Breach of contract is of two Types. Anticipatory breach and Actual breach.
Anticipatory Breach is repudiation of the contract before due date of performance.
Anticipatory breach may be by repudiation of the contract or by impossibility of
performance.
A contract to do impossible thing is void ab initio because there is initial impossibility.
But if the impossibility arises after entering the contract, it is known as Supervening
Impossibility. It is caused by circumstances beyond the control of the parties such as non-
existence or destruction of the subject matter, change of law, and incapacity of parties. In
such cases the contract is discharged. But difficulty of performance, Commercial
impossibility, or unprofitability, strikes, lockouts are some of the excuses which the law does
not admit as reasons for non-performance of a contract.
1
Remedies for the aggrieved party in cases of anticipatory breach
A) On getting information regarding anticipatory breach, the aggrieved party can
immediately rescind or avoid the contract and can use legal remedies against the
promisor. E.g., sue upon the promisor for compensation or specific performance etc.
B) Aggrieved party can wait till the date of performance. And on that date anticipatory
breach will be automatically converted into actual breach and the contract will be
discharged. During intervening period between anticipatory breach and actual breach if
supervening impossibility takes place and contract is discharged, the aggrieved party
loses his right to claim compensation.
Actual Breach is non-performance of the contract on the due date of the performance.
Remedies for Actual breach of contract
A) Rescission of the contract - Aggrieved party has to file a suit for rescission of
contract. On granting rescission, the aggrieved party gets released from his
obligations in the contract and can proceed with other legal remedies against the party
making breach of contract.
B) Suit for damages - The basic idea of providing compensation to the aggrieved party is
to put him in the same financial position, as he would have been if the contract had
been performed. The amount of compensation granted by the court is known as
damages.
When a contract has been broken, the party who suffers by such breach is entitled to receive
from the party who has broken the contract, compensation for any loss which arose in the
usual course of things from such breach. Compensation is not to be given for any indirect or
remote losses sustained by reason of the breach and which were not in the contemplation of
the parties when the contract was made.
C) Suit for Injunction- Injunction is an order passed by the court of law, directing a party
to do or refrain from performing an act.
D) Quantum Meruit- In a contract the promisor may be in the process of performing his
promise. But before he completes it, the promisee makes a breach of contract. Among
other remedies, the aggrieved party can also claim for quantum Meruit (as much as
earned or deserved).
2
13
DISCHARGE OF CONTRACT
HOW IS TIIE CONTRACT DISCHARGED?

Discharge means "termination" of a contract. By discharge the rights and obligations of the parties
come to an end. The contract may be discharged in any of the followLg ways:
I. BY PERFORMANCE:
1. By performance of obligation:If both parties to the contract have performed what they have agreed
to do, the contract is discharged (Sec.37). Performance of obligation by parties to the contract puts an end
to the contract. The obligations of the parties continue till contract is determined according to its terms
lBihar state Electricity Board v. uMI special steels Ltd. (2000) 8 scc 5601.
2. By refusing tender of performance (Sec.38): Offer of performance to the promisee shall have
the same effect as performance. Therefore, if a pafi offers to perform his promise and the offer has not :
been accepted by the other party, the promisor is not responsible for non-perforrnance. He is discharged
from all obligations. Therefore, refusal to accept "offer of performance", discharges the party making the
offer.
3. By promisee failing to offer facilities for performance (Sec.67): If the promisee neglects or
refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused
by such neglect or refusal to any non-performance caused thereby.
o
ILLUSTRATION:
fr
I contracts with B to repair 8's house. I neglects or refuses to point oul to I the places in which his house requires repair. I is
excused for the non-performance of the contract, if it is caused by such neglect or refusal. tt
T
II. BY BREACH: ci
1. By refusal (Sec.39): When aparty to a contract has refused to perform, or disabled himself from it
performing his promise in its entirefy, the promisee may put an end to the contract, unless he has signified
by words or by conduct, his acquiescence in its continuance. Breach of contract occurs where a party pfu.", H
to perform his part of the promise. The other party then has a right to rescind it. as
Reflsal to perform the contract must be in its entirety, otherwise the other party would not be justified w.
in putting an end to the contract. What is entirety is a question of fact in .each case depending upon what atr
are the important or essential ternrs of performance of the contract. Refusal to perform any such ierm'will
be refusal to perform the contract in its entirety. Refusal to perform must be absolute. and without any t8
intention to perform the contract term will be refusal to perform the contract- It must be communicated rq
totheotherpartytothecontract.Breachofcontractmaybe.actua1,or.anticipatory,. brr
2. By actual breach: The actual breach occurs when during the performance of the contract or at di(
the time when the performance of the contract is due, one party either fails or refi.xes to perform.his obligation
nnder the contract; (For remedies on breqch of contrait tL" discussion in Chaptei I4). - i, ' agt
bre
98
r
;..
v:
Discharge of Contracl
99
(a)A agrees to deliver to B 5 bags of sugar on lst January.

He fails to do so on lst January. There is a breach
of contract by l.
(b) A agrees to deliver to 5 bags on 1st January.
'B on lst January, he tenders the sugar to B. But B for no valid
to accept delivery. This is a breach of contract by B. reason refuses
3. By anticipatory breach of contract:

When a parry to a contract refuses to perform his part
of the contract before the actual time of the
performance of the contract is due, it is calied an 'anticipatory
breach, of contract.
Anticipatory breach of contract may be _
(i) by repudiation of the contract (express renunciation); or
(ii) by impossibility of performance (inplied renunciation).
- whgn a party communicates his inability to perform his part of the contract before the time fixed for
the actual performance is due, he is said to have .*pr.rrry
repudiated th;.;;;;;.
when the breach takes place by either party to the contract
: performance of the contract impossible, anticipaiory
by his own vol,ntary act, which makes
breach of contract is committed by impossibility
perforrnance' Here impossibility is creaied by one pu.ty of
to the contract before the performance is due. It
is a case of implied renunciation of a contract
,
ILLUSTRATION:
. I promises to sell his car to B on or before lst May; but before lst May, I sells his
car to c. Here I had performed zuch a voluntary
acl that the peiformance of his obligation towards B is impossible
and therefoie, "anticipatory breach by impossibility,,
is committed.
of anticipatory breach: Remedies or rights of the prohisee
;t'H:l#ffes on anticipatory breach
In case of anticipatory breach, the aggrieved party has the folrowing

remedies:
(i) He may elect to rescind the contract,for example, treatthe
repudiation as an immediate breach
putting an end to the contract and immediately sue
for damages; or
(ii) He may treat the contract as still operative and subsisting
and wait for the time of performance,
when the contract is to be executed, and then hold the
other party responsible for all the consequences
of non-perforrnance.
However, if the aggrieved party opts for the second course,
he keeps the contract alive for the benefit
of the other party to take advantage of the intervening circumstances,
if an!, uod;;;;;y who has previously
repudiated may, notwithstanding his previous repudiation,
still perform it,lf he .un. it is open to the promisor
fo change his mind andperform. In other words, the contraciremains
alive up to the day of performance.
Therefore, in the intervening period, if any such supervening
circumstance happeo", tn""."puiia;;;;;
can take advantage of such supervening circumstances
whic"h would justiff him in'aeclining to complete
it.
ln Avery v' Bowden (1s55-51 & B 714), B chartercdl's ship
agreeing to load cargo within 45 days.
However, on arrival of the ship, B showed his inabilrty
to loal .u.go I however, did not treat the repudiation
as irnrnediate breach of contract and chose to.
yait ittt qs days. Before explry of 45 days, war broke out
which rendered perfonnance illegal' It was hel{ that A
could.not ,u"ceed as contract had ended by frustration
and not by breach.
In Hochster v' De Lo Tour (1853-2E
! B 678), A engagedB as his courier on a tour from lst June
lB52' for three months at f l0 a month. Before tne expiry oItf;r.. months, A wroteto B thathe no
required his' services' B immediately sued A for breach longer
oi contract. It was held that the contract had been
broken by express renunciation and the plaintiff was, therefore,
entitled to the relief immediately since he
did not choose to wait until the day of perfor*ur"..
The aggrieved party is not bound to treat the contract
as broken immediately. It is only when the
aggrieved party exercises his option to hedt the contract
as rescinded, then he mai treatthe refusal as a
breach and sue on the contract for any damage then
sustained. It was held that a contract is created from
100 Business Law for Management
the date it is made and not from the date when its performance is due. Therefore, where a fiutn promises
to marry on a fufure day and before that day he marries another woman, he is immediately liable to an
action for breach of promise of marriage. In Frost v. Knight (1872L. R. 7 Exch. 1l), where iKpromised
to marry F on death of his father and while his father was living he broke off the engagement, it was held
that F was entitled to relief.
ILLUSTRATIONS:
(a) A, a singer, enters into a contract with B, the manager of a theatre. to sing at his theatre two nights rn every week during the
next two months, and B engages to pay her Rs.l00 for each night's performance. On the sixth ni$\ A wi1lful1y absents herself from the
theatre. .B is at liberty to put an end to the contract.
(b) A, a singer, enters into a contract with B, the manager of a theatre, to sing at hjs theatre two nights in every week during the
next two months, and .B engages to pay her at the rate of Rs.l00 for each night. On the sixth night I willfully absents herself With the
assent of B, ,4 sings on the seventh night. ,B has signified his .acquiescence in the continuance of the contract, and cannot now put aa end
to it, but is entitled to compensation for the damages sustained by him through l's failure to sing on the sixth night.
(c)A agreed to purchase from B under two contracts 300 tons of sugar to be delivered on different dates. A failed to take delivery
under the flrst contract. B claimed to rescind both the contracts. B is not etrtitled to rescind the second contract as there was no refusal
on the part ofl within the meaning of Sec.39 fRash Behary y. Nritlya Gopal 1906 33 Cal. 4771.
Contract by this method is discharged only when the aggrieved party accepts the repudiation of contract
and elects to treat it as discharged. Right of rescission firay be waived by words or conduct, signifying his
acquiescence in its continuance. Election to rescind, once made is conclusive.
When the promisee has determined his choice of treating the contract as rescinded; then whether he
sues for damages or not, it is not open to the promisor to go back on his refusal and treat the contract as
subsisting lJhandoo Mal Jagan Nath v. Phulchand Fbteh Chand 1924 Lah. 5 497).
Me4sure of damages: When an anticipatory breach of contract is committed, damages are measured
as under
-
(i) If reprrdiation of the contract is accepted and the contract is put to qn end immediately, the damage
will be measured by difference of price prevailing on the date of breach and the contract price.
(ii) If the contract is kept alive then the damages will be measured by difference between the contract
price and the price prevailing on the date fixed for the performance.
In case of delivery by installments at certain date, the measure of damages is the sum of difference
between the contract and the market price of the several installments on the respective final days for performance.
When the contract is put to an end, the aggrieved parfy may bring an action for damages for breach,
but he will be bound to restore to the other parfy under section 64 the benefits he may have received under
the contract.
The following :illustration will explain the law regarding anticipatory br,each of contract:
ILLUSTRATION:
A agrees on 10th May to supply B 10 kilos of wheat on 1st June at Rs.lO a kilo. On 20th May, I writes to B showing his inability
to supply wheat.at Rs.10 a kilo. Now.-B has the following righ15;
(i) He may treat the repudiation as ilimodiate breach of contract and sue A fot damages. .B is entitled t"
to measure dam4ges as they stand on the date of repudiation, i.e,, if the price of wheat prevailing on 20th a
May, the date of repudiatiorq is Rs.15 a kilo and B purchases l'O:kilos at Rs.,15 a kilo; he is entitled to, b
receive Rs.5 a kilo as damages fuom A.
(ii) He may treat the contract as still operative and subsisting and wait till lst June, the date of performance ri
of the contract. In such a case, A can in spite of his earlier repudiation, perform his part of promise, i.e., tl
supply 10 kilos of wheat on lst June. ,B cannot refuse the offer of performance as he has opted to treat S
the contract as subsisting. Similarly, A has a right to take advairtage of any intervening circumstances which
would justiff him in declining to complete his part of promise, for example, if the wheat is destroyed on
I\
ZithMay due to floods, B cawtot claim damages as the performance of contract has now become inpossiblo
and A is, therefore, discharged. al
cl
g
H
x
s.
&"
s:.
101
III. BY F'RUSTRATION:
By impossibility (Sec.56):Irnpossibility may exist at the time of formation of the contract or arise
subsequent to the formation of the contract. we have seen above under'void agreements,
that an agreement
to do an act impossible in itself is void. When the performance of a contract becomes subsequently
impossible,
the contract becomes void. When a contract was capable of being performed at the time
it was entered into
but subsequently its performance becomes impossible, it is callid supervening impossibility. In
both the
cases, the contract is discharged due to impossibility of its perforlnance, for law does not
recognize what
is impossible. Impossibility creates no obligation.
Irr&ossibility must be physical or legal impossibility and not impossibility in reference to ability
or
circumstances. "commercial impossibility", i.e., extreme or unforeseen cost oi diffrculty
of prrfo.-urrr.
is no excuse. In the absence of any eapacity to perform contract, parties are not absolved from
their obligation
to carry out the contract.
The word impossible has not been used in the sense.of physical or literal impossibility.
The perforrnance
of anact rnay not be literally impossible but it may be impracticable and o."l"r. from the poir, oiui"*
of the object and purpose which the parties had in view, and i] an untoward event or change
of circumstances
totally upsets the very_ foundation upon which the parties rested their bargain, it can ue[, *"tt
Ue ;;td ;;;
the promisor finds it impossible to do the act which he promised to dollmpossibility
and frustation are
often used as interchangeable expressions. The doctrine oi frort utio, is really an aspect
or part of the law
of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done
and hence comes within the purview of section 56lsatyabrata Ghosel. Mugr""rom
Bangur & Co. AIR
t9s4 sc 441.
Events subseqibnt to frustration of contract cannot be invoked to revive the contract
. so as to seek
specific performance thereof lK. Narendra v. Riyiera Apartments (p) Ltd. (1999) 5 SCC
771.
(Also see discussion on 'Agreements to do impossible acts' under 'Void agreements' in
Chapter 5).
Cases of supervening impossibility:
(i) Destruction of the object necessary for performance of the contract.
(ii) Change of law.
(iii) Death or personal incapacity.
(iv) Out-break of war.
(v) Non-existence of particular state of things which forms the basis of the contract.
In all the above cases, performance of an obligaiion becomes impossible and, thorefore, the contract
is discharged.
Exceptions: Diffioulty of,performance, commercial inpossibility, strikes and lockouts, civil.disturbances,
riots, failure of one of the objects when contract is entered into for several objects, default or
failure oi
a third person on whose word the promisor relied increase in the cost or p".ior-unce, are not
covered
by the doctrine of supervening irryossibility, and therefore the contract is not discharged.
If
the performance of contract is rendered unlawful either for determinate or indeterminate period
of
time, the contract would not stand discharged unless the ban on its perforrrance existed on the day
or during
the time in which it has to be performedfMugneeram Bangur & Co. p. Ltd. v.
Gurbachan Singi AIR 1965
sc 1s231.
IV. BY AGREEMENT
1. By consent (Secs.62-64): Contract can be terminated or discharged by mutual express or implied
agreement or consent between the parties.
2. By Novation: If the parties to a contract agree to substitute a new contract for it. or to rescind
or alter it, the original contract need not be performed.
lo2 Business Law for Management
When a new contract is substituted for an exiSting contraot, either between the same parties or between
different parties 'novation'occurs. For example, in case of transfer of.partnership share,by a partner,rBs
a result of which a new partnership is constituted and the ereditors agree to look upon the new partnership
firm for the liabilities of the old firm, novation occurs, whereby the liabilities and obligatiorrs of the old
Novation means the wiping out of the oiiginal contract as well as the creating of a new valid contract.
If the new agreement is invalid it cannot serve as novation, and the original contract continues unless the
rights'there under are expressly abandoned.
Therefore, novation may occur in two ways:
(a) New party is substituted for the old one [Illustration (a) below].
(b) Parties may substitute new contract for the old one [Illustration (b) below].
A novation can be express or implied from the circumstances. Consent to novation could be inferred
from conduct without express words. Consent can be implied from conduct [Ong Siew Keet v. Wan Ariff
Bin Wan Hamzah (2012) 5 CLJ 4041.
One of the essential requirements of 'novation' is [hat there should be complete substitution of a new
conffact in place ofthe old- A substituted contract should rescind or alter or extinguish the previous contract.
Where, parties entered into fresh contract by novation/substitution of original agreemeni by mutual ionsent
and the new agreement did not make any provision in respect of any disputds arising undgr original,agreement
or any settlement between parties, nor did it contain arbitration clause to resolve disputes by arbitration,
it was held that the new agreement is pure and sirnple novation of originat conffact by mutual consent and
the arbiffdtion clause perishes lYoung Achievers v. IMS Learning Resources (P) Ltd. Q0l3) 10 SCC 5351.
But if the terms. of the 'two contracts are inconsistent and they cannot stand together, the subsequent contract
cannot be said to be in substitution of earlier contract flatq Construction v. Dr, Rameshchandra Ramniklql
Shah (2000) 1 SCC 5861. Novation, rescission or alteration of a contract can only be done with the agreement
of both the parties of a contract. Both the parties have to agree to substitute the original conffact with a
new contract or rescind or alter ICITI Bank N.A. v. Standard Chartered Bartk A8.2003 SC 46301.
Any novation in contract was to be done on the same tefins as are required for entering into a valid
and concluded coniract. No change in contract could have been made rmilaterally IBSNL v. BPL Mobile
Cellular Ltd. (2008) 13 SCC 5971.
In Delhi Development Authority v. Joint Action Committee, Allottee of SFS Flats (2008) 2 SCC 672,
it is held that when a contract is worked out, a fresh liability cannot be thrust upon a contracting party.
ILLIJSTRATIONS:
(a)l owes money to I under the contract. lt is agreed between A, B andC that.B shall henceforth accept C as his debtor instead
of ,{. The old debt of .4 to.B is at an end and a new dJt from C to B has been contracted. t
(b) ,4 owes I Rs.10,000. I enters into an agreement with 8, and gives ,B a mortgage of his (l's) estate for Rs.5,000 in place of (
the debt ofRs.10,000. This is.a new contract which extinguishes the old.
I
.(c) I
owes I Rs.1,000 under.a contraot. B owes C Rs.1,000. I orders A to qedit C with Rs.1,000 in his books, but C does not
assent to'the arrangement. B still owes C Rs.1,000 and no new conhact has been'enteied ihto.
Essentials:
(1) Novation occurs with the consent of both the parties.
(2) The new contract must be one which is caphble of enforcement at law. If new contract is not' :
enforceable, the parties shall be bound by the original contract.
(3) The agreement to substitute the new contract for the old must not be made after the breach of
the,original contract.
1
f ,'
Thus, in Manohar Koyal v. Thakur Dos Naker (1888 15 Cal. 313), where the plaintiff sued to recover
the sum due on a bond after defendant failed to honour,his subsequent promise after due date of bond to',:
pay part amount in cash and paft by a new bond, it was held that the plaintiff was entitled to sue for breach
of original contract as the original contract was discharged by breach and not by novation.
i03
a')
:::
F. ln Build India
Construction System v. (Jnion
of India AIR 2002 SC 2437, where the general terms
ea.
and conditions applicable to Government conhacts were amended and made expressiy operative
frospectivelf,
:i-:.
S+ the changes in the conditions did not affect a contract made earlier.
3::
;.
{ In novation, the old contract is completely extinguished or discharged. A suit based on it is not maintainable
astheoldcontractisnottobeperformed.lnMarkandraiv.virendrarai(lgl7-lgBom.L.R. g37),Aadvanced
money to a partnership firm on certain repayrnent terms. Before the entire loan amount could be repaid,
:r'
one of the partners dred. A acceirted new partners as his debtors agreeing to receive back the loan amount
on certain other terms. It was held here that this constituted a new contract with surviving partners only.
;-
ti
An agleement of sale by a landlord agreeing to sell the premises to the tenant can end the landlord tenant
-' relationship lR. Kanthimathi v. Beatrice xavier AIR 2003 sc 41491.
e.
g
Where in respect of a flat, two contracts are entered into with an express provision in the later agreement
&:.i that the earlier agreement would stand till the entire amount *u, ,.pui4 t'he earlier agreement could be
i:,. invoked by the purchaser, if the amount was not repaid llata Construction v. Romeshchandro Ramniklal
p shah (Dr.) AIR 2000 SC 380; Tp George v. state if Kerala AIR 2001 sc 8161.
-
L.:
Consideration: Section 62 does not require any further consideration for the validity of the substituted
r
Lla
contract than putting an end to the obligation irnder the original contract.
E.
V. BY ACCORD AND SATISFACTION
ii
$i
, 1. To do somelhing instead (Sec.63): Everi promisee may dispense with or remit the performance
i'.
t, of promiqe made to him and accept, instead of it, any satisfaction which he thinks fit. Whe; one of the
t'
F parties to a contract in order to obtain release agrees to do something other than what he was bound to
b:
6 do by the contracti'qnd when he has discharged the obligation and has been set free, the contract is said
=
to have been discharged by oaccord and satisfaction'. Both the parties must assent to such an arrangement.
ry
ti
i It may be e.xpress or inferred from the conduct of the parties to the contract.
l:i
In other words, where a lesser sum is actually paid than what is due under an existing contract, tfre
*l
t:
new contract is called 'accord' and the actual payment is called 'satisfaction'. An illegal contract cannot
i:' constitute an accord and satisfaction lunion carbide corporation v. (Jnion of India AIR lgg2 sc 24g].
r:
E-
Acceptance under protest of payment in full satisfaction of amount due under the contract was no accord
i. and satisfaction. Any protest must be made before accepting the payment
fBhagwati Prasad Patvan Kumar
E v. Union of India AIR 2006 SC 2331]. Where the acceptance of performance is under protest or made
E
E without prejudice or under a mistaken belief, performance tendered in frrll satisfaction doei not operate as
accord [R.L. Kalathia & Co. v. State of Gujarat AIR 2011SC 754; State of Orissa v. Larsen & Toubro
T
e'
I Ltd. AI&.2005 Ori. 1831.
lnKeshovlol Lallubhai Patel v. Lalbhai Trikamlal Mills (AR 1958 SC 512), Supreme Court observed
that the promisee cannot by unilateral act extend the time of performance of his own accord and for his
own bene{it. Consent of the other party is necessary.
ILLUSTRATIONS:
(a) ,4 owes -B Rs.1,000. B agrees to accept Rs.750 in full satisfaction. The agreement to pay Rs.750 is an accord and tbe actual
payment is the satisfaction
(b) ,4 owes B Rs.5,000. A pays B, and accepts, in satisfaction of the whole debt, Rs.2,000 paid at the time and place at
which
Rs.5,000 were payable. The whole debt is discharged.
(c)l owes A, Rs.5,000. C pays B Rs.1,000 and I accepts them in satisfaction of claim on l. This payment is a discharge of the
'whole claim.
(d) I owes 8, under a. contract, a zum of money, the amount of which has not been ascsrtained. I without ascertaining the amount
gives to B, and B, in satisfaction thereoq accepts, the sum of Rs.2,000. This is a discharge of thc whole debt, whatever may be its amount.
(e) I owes I Rs.2,000, and is also indebted to other creditors. I makes an arrangement with his creditors, including B, to pay
them
a composition of frfty paise in a rupee upon their rbspective demands. Payment to.B of Rs.1,000 is a discharge of B's demani.
(f) I owes large sum of money to B. C is offering to pay 8'a lesser sum in full satisfaction of .B's claim on l. B cannot recover
balance froml after receiving payment in fuIl satisfaction. llala Kapur.Chand Godhav. Mir Nawab Himayatalikhan Azamjah AIR
I96j
sc 2s01.
Business Law for Management
2. By Remission and Waiver (Sec.63): Waiveir means 'abandoning' the rights. When a party to the
contract abandons or waives his rights, the contract is discharged. Waiver is an abandonment of right which
normally everybody is entitled to waive. A waiver must amount to a release.
ILLUSTRATION:
,4 promises to paint picture for B. I afterwards forbids him to do so. I is no longer bound to perform the promise.
Both the parties mutually agree that they shall no longer be bound by the contract. It amounts to a
release. Waiver signifies nothing more than an intention not to insist upon the right. Waiver must be an
intentional act with knowledge ILIC v. Ramdas Agarwal AIR 1979 Pat. 124]. Promisee may dispense with
6r remit, wholly or in part, the performance of the promise made to hirn, or may extend the time for such
performance. Both the parties may consent to reciprocal discharges. Such a remission does not require any
consideration. Extending the time of performance may be done without an agreement and it, therefore,
requires no consideration fDavis v. Cundasami 1869 19 Mad. 398].
(
There is no waiver of breach as to disentitle termination of an earlier contract, where actions after (
breach are done throughout maintaining without prejudice and the subsequent agreement had a without I
prejudice clause lsikkim Subba Association v. State of Sikkim AIR 2001 SC 2062; Tata Industries Ltd. v. (
Grasim Industries Ltd. AIF..2008 SC 29701. (
3. By Rescission (Sec.64): When a person at whose option a contract is voidable rescinds it, the other I
party thereto need not perform his promise. He is discharged from his liability under the contract. If the
party rescinding a voidable contract, has received any benefit there under from another party to such a
contract, he must, restore such benefit, so far as may be, to the person from whom it was received. i
When a person rightfully rescinds the voidable contract, he is entitled to compensation for damages i
which he has sustained. On treating the contract as voidable, the agreement becomes void. (
1
Rescission may occur by mutual consent of the parties or when one party fails to perform his obligation
the sther pafi may rescind the contract. Rescission ofa contract cannot be in part only. The entire contract I
must be rescinded.
ILLT]STRATIONS: d
(a)I induces .B to enter into a contract by fraud. The contract is voidable at the optlon of -B. He may, therefore, rescind the contract.
I.
(b) l, singer, contracts with -8, the manager of a theatre to sing at his theatre for two nights in every week during the next two
months,.and B engages to pay her Rs.l00 for each night's performance. On the sixth night, A willfully absents herself from the theatre,
and B, in consequence rescinds the contract. B is entitled to claim compensation for the damages which he has sustailed through the non-
fulfillment of the contract.
Rescission may take place in any of the following modes:
- (a) By mutual consent.
(b) If a contract is voidable, one of the parties may rescind the contract,
(c) By alteration or change in the terms of the contract.
(d) By non-performance of a contract by both the parties for a long period. This may amount to implied
rescission.
(Consequences of rescission of voidable contract are discussed under 'l/oid agreemenls' in
chapter 7).
VI. BY OPERATION OF LAW
A party is also released from the contract, where performance of the contract is dispensed with or
excused under the provisions of this Act or any other law. A contract is discharged or terminated by operation
of other
ilHrh.'l*"rt#:I;Lr on a person being adjudicated insolvent, he is released from ail
his debts and liabilities provable in insolvency. The rights and liabilities are transferred to an Official Assignee
or an Official Receiver under the-Presidency Towns Insolvency Act or under Provincial Insolvency Act,-
as the case rray be. The order of discharge gives a new lease of life to the insolvent. He is discharged from
Discharge o/ Contract
105
all obligations arising from all his earlier contracts. A party is, therefore, released from performing his part
of the contract by law of insolvency on being adjudicated as an insolvent.
(ii) By merger: Merger of superior right into an inferior right,for example, when a higher security
is accepted in place of the lower security, inferior or lower security vanishes or merges into a higher security,
an ordinary debt is merged into a mortgage, higher security; or the right of lessee is changed into a rigiit
of ownership.
\.II. BY UNAUTTIORIZED MATERIAL ALTERATION
!n cases of material alteration by one party to the contract without the consent of the other party, the
contract is discharged. A material alteration changes the character of the contract or alters the rights and
liabilities of parties to the contract. Any alteration is material which affects the substance of the contract.
It varies the legal effect of the instrument. Alteration of document also, which affects the nature or identification
of the document discharges the contract. However, alteration in a deed made in good faith in order to give
effect to the real intention of the parties cannot be said to be a material alteration
lBiay Krishna Paramount
v. Kali Chavon Mandrtl AIR 1978 Cal. 153]. An altered document may however, be received in evidence
on behalf of the person in whose favour it is executed for proving the right, title and interest created by
such a document.
VUI. BY LAPSE OF TIME
Contract is discharged. also by lapse of time. If the creditor does not file a suit to recover his debt
amount from the debtor within a period of limitation as laid down under the Limitation Acq his remedy
is debarred. The contract is terminated by virtue of the Limitation Act and the creditor cannot recdver his
debt. For example, the period of limitation to file a money suit is 3 years. If within 3 years the creditor
fails to file a suit to recover his amount, the debtor is discharged.
IX. BY DEATH
Where a contract is personal in character, or where personal skill or ability is involved, death of promisor
discharges tbe contract (Sec.37).
ILLUSTRATION:
I promises to paint a picture for B by a certarn day, at a certain price. ,4 dies before the day. The contract cannot be enforced either
ii by l's represeniatives or by B.
I
ootr
rd Taxation
Indian Contract Act,lE?Z(Unit 2)
85
ii) ,]r}ot the course of Performance: If any parry has performed a parr
of the contract and then refuses or fails to perform the remaining part of
the contract, it is,called an actual breach of contract during the course of
performance. For example, X agreed to sell to Y 10 toni, of wtreai
O
?8,000 per ronne to ue.ai{vered In two equal instalmentr on 20.h o;6i1
and 2lql October. On 20t October, X deiivered 5 tonne and refused to
deliver remaining 5 tonne. It is an actual breach of contract dilil;;
2,,ll3. !glq$re,*f
.,
A remedy t party (i.e., the pafty

not at default)'forthe enforcement of a right
undeil contiact. Various rr*uairi
,hen the availabletojanaggrGvedpartv-areasfollois:-,_--]--_-=,-
.'ore 'the
tct even
ray,lake
contract
)tonnes
On 1o
,Xhas 1) Rescission of Contract: When a breach of contact is committed by one
PffiY, the other party may sue to treat the contract as rescinddd. fn ru.f, u
case, the aggrieved party is freed from all his obligations under the conftact.
lytoa
in its For ex{mple, A fromises B to supply 100 bags of rice on a certain date, B
promises to pay the price on the rci-p, of theloods. A does not deliver the
tonnes
On I't 2) suil ,po.Qrqnto\ Mgruii..The term quantum meruit indrcates
,.e rnggl,
as _
X has
Iiation. arise by onJparty, r,ras uiCome,Ai.n*gri
ilytoa tilift;;r-y
by the breach of ttre .oiiui.t ;y In sueh cases the plaintiff is
ng, his *
entitled'tolthe value of the services rendeied tt r goods detv#d till the-
"it* *igi;J;;;;;;;;-ffi#
rntract, not on the basis
toPtrt,tdischarge
..,'9fthe'9u4si;,9,9,,1tr'4st..,.,;-,
,rds or
3) S-uit,,for $peclfic Performanse: Specific performance means the actual
'carrying out of the
of the :ontact by the parties thereto. Where a parry fails to rur.y
out the contract, the Court may at its discretion, Jido',t J derendant to
ails to gerform fris undertakin8-as per the terms of the .ortr.rr noririonr regarding
the granting of this relief are dealt with in Specific,Relief Act, lBlT
l, i.t is .
4) Sull. for lqirrlction: An injunction is a mode of securing the specific

)0 per
in breach of'a negative pnn of a conract (i.e., where ha is Aoi.ng something
2l*t
rn
actual- y_qic.h^he g'orni"Ia ylilgr,+; a;;ry i, i,, Jirt.rir",irr*;;;;;;
the defenqTr yrrdTng
Sry rrr* doing what he promised not ro do. such'
an order,gf the Court is ealted an injunction, "
'
5) f;J' )--,t o
Sale of Goods
Dr. Jaya Mathew

Contract of Sale
A contract of sale means a

contract whereby the seller
transfers or agrees to transfer
the property in the goods to the
buyer for a price.

Essential elements of a contract of
sale
Parties
Agreement
Goods
Transfer of general
property
Price
Similar Contracts
Agreement to sell Bailment
Hire
Purchase
Contract for work & Labour
K J Somaiya Institute of Management, India
4
Goods
‘Goods' means every kind of movable
property other than actionable claims and
money and includes stock and shares,
growing crops and things attached to or
forming part of the land which are agreed
to be severed before sale or under the
contract of sale.

Classification of Goods
Existing Goods Future Goods
Specific
Ascertained
Unascertained
EFFECTS OF PERISHING OF
GOODS
Goods perishing before making of
contract
Where specific goods are the subject matter of
sale, the goods must be in existence at the time
of making of the contract. If the goods perish, at
or before the time of contract, the contract will
be void on the ground of mutual mistake of fact.
This Section has no application to
unascertained goods and therefore in case of
destruction of unascertained goods, the
contract will not be void.
Thank You
simsr.somaiya.edu

1
PRETIM!NARY
INTRODUCTION
The law as to the sale of goods was originally embodied in sections 7 6 to 123 of the Indian Contract
Act,1872. However, as the provisions of the sections 76 to 123 were found inadequate to meet the complexities
of growing mercantile transactions, the said sections were repealed and the Sale of Goods Act, 1930 took
birth. It is well-known that our Sale of Goods Act, 1930 is based upon and is largely a re-production of
the English Sale of Goods Act, 1893 and in principle the law of sale of goods in both the countries is now
the same and, therefore, English authorities on interpretation of different sections although not technically
binding in India, would have great persuasive vab,rc fConsolidated Coffne Ltd., etc. v. MSP Exports (p)
Ltd. ArR 1980 SC 14681.
Law relating to sale of goods is a branch of Contract Law as the general principles of contracts are
appficable to contracts for sale of goods such as offer and its acceptance, capacity of parties, free consent,
consideration and legality of the object. Sale of goods has two elements, one is the sale and the other is
delivery of goods fBharat Sanchar Nigam Ltd. v. union of India AIR 2006 SC 13831.
SCOPE OF THE ACT

The Sale of Goods Act applies only to movables other than actionable claims and money and not to
immovables which are governed by the Transfer of Property Act, 1882. Actionable claims mean'chose in
action' or 'thing in action'. It means the person has a right to recover a thing by suit but does not have
the enjoyment of the thing.
GooDS [Sec.2 (7)]

Goods means every kind of movable property other than actionable claims and money; and includes
stock and shares, gowing crops, grass and things attached, to or forming part of the land which are agreed
to be severed before sale or under the conkact of sale. Timber is therefore goods fState of Maharashtra
v. Champalal AIR 1971 SC 9081. Plant and machinery fixed to the floor in a building are immovable property
and not goods.
Goods may be (i) Existing, or (li) Future.
-
{i) Existing goods are firther classified into
-
(a) Specific goods;
(b) Un-ascertained or Generic goods.
(a) Specfic goods mean goods identified and agreed upon at the time a contract of sale is made
[Sec.2
(14)]. These goods are already in existence and are physically present in some person's possession and
ownership, for example contract for the sale of a specific watch or specific car.
171
Business Law for Management
172
identified, /or
(b) Generic or un-ascertained goods are indicated by description and not separately
is a of goods'
,*r*)ir, sale of one kg. of oil from 100 kgs. of oil with the merchant sale un-ascertained
When one kg. is separut.d fro* 100 kgs. of oil, the sale is of specific
goods'
(ii) Future goods mean goods to be manufactured or purchased or acquired by the seller after the Unde
at the time of contract of sale, but
making of the contract of salJfSec.z (6)]. These goods do not exist the A
subsequently come into existence. not n

of rir
ILLUSTMTION:
goods'
A agreesto sell B a sofa-cum-bed which he would manufacture. It is a case of sale of future fiLUl
Shares and stock are goods. The definition of the word "goods" is wider than that contained in English
in the
intangible, such things as stocks
Act, for it includes all typls of movable properties, whether tangible or
movable property is goods lTata Consultancy
and shares, which in nngliih law are not goods. Every kind of
pradesh (2005) 1 scc 3081. However, debenture being an instrument of debt
services ,j. sut, of Anihra
does not come within the purview of the definition of
goods [R.D. Goyal v. Reliance Industries Ltd. (2003)
patent, etc., are all goods. Gas and electricity
1 SCC g1]. Even things like goodwill, copy-right, trade mark,
though not governed U-y tt. Sale of Goods Act, has been held
to be goods by Calcutta and Madhya Pradesh
SC 666 has observed that electricity
High Courts. supreme'Court in Avtarsingh v. State of Puniab AIR 1965
Jabalpur AIR 1970 SC 7321'
is not movable property. Electricity is goods lS.T. Commr., Indore v. WEB,
money. Current rnoney is not goods'
Money is the only consideration in sale of goods. Money means current
Act, 1882'
If goods are sold for goods the ffansaction is 'exchange' governed by the Jlansfer of Propert-v
pr[e, therefore, undei the Act means 'money consideration' for sale of goods. Sale of old coins or notes
for money is sale of goods'
providing SIM cards to distributors who in turn supply them to customers is not one of sale of goods
lvodafone Esiar Cellular Ltd. v. Asstt.
clr Q0l0) Tax LR 618 (Ker)1. Electromagnetic waves are not
Airtel Ltd'
gooarwhorot sanchar Nigam Ltd. v. {Inion of India (2006) 3 sCC 11. However,rnBharati
data through optic fibre cables
v. State of Karnataka it is held that artificialy treated light energy carrying
is distinct from electromagnetic waves and falls within the definition of
goods.
DOCIIMENT OF TITLE TO GOODS [Sec'2(a)]

warehouse keeper's certificate.
Document of title to goods includes a bill of lading, dock warrant,
delivery of goods and any other document
wharfinger,s certificate, rail,ray receipt, warrant or order for the
used in the ordinary course of business as proof of the possession or control of goods or authorising or
possessor of the document to ftansfer
purporting to authoiise, either by endorsement or by delivery, the
or receive goods thereby presented.
the goods. The holder
In short, a document of title to goods is a proof of possession or control over
He is also authorised to transfer the
of the document of title to goods is authorised to receive the goods.
possession of the goods eiGr by endorsement or by delivery. A delivery
order is a document of title to
goods and its possessor has the right not only to receive the goods but also
to transfer it to another by
Indorsement oi d.lir.ry lB. Bhimayya v. Govt. of A.P. AIR 1961 SC
10651.
dock warrant, warehouse keeper's certificate, wharfinger's certificate, railway

receipt,
Bill of lading,
used in the ordinary course
delivery warrant are some of the documents of title to goods. Any document
is a document
of business,which entitles the possessor of the document to receive the goods unconditionally
of title to goods.
goods are embarked,
A bill of lading is a writing signed on behalf of the owner of the ship in which
acknowledging the r-eceip of the goods, and undertaking to deliver them
at the end of the voyage subject
to such conditions u, 11uy be meitioned in the bill of lading. It is well settled in commercial
world that
a bill of lading represents the goods and the transfer of it operates as
a transfer of the goods IJ.Y. Gokal
receipt is a document
& Co. (pvt; ila. i. The A.C. Siles Tax Inspection AIR 1960 SC 595 (599)1. A railway
goods. When the railway receipt is handed over
of title to the goods and for all purposes, represents the
to the consignee on payment, the property in the goods is transferredllr
v. Gopal Textiles Ltd. AE 196l
SC 426; Bharat & Co. vt. Trade Tax Officer (2005) 6 SCC 7961'
t73
PRoPERTY [Sec.2 (11)]

Property means general property in goods and not merely a special property.
General property means ownership of the goods. Special property means special interest
in the goods.
lJndet the Sale of Goods Act, property means general property and not special property. property under
the Ac., therefore, means 'ownership'. Transfer of propertyis thus transfer of ownership in the gotds and
pot merely specific interest in the goods. The term is inrportant as transfer of property determines transfer
of risk from seller to the buyer. (Discussed under 'Effects of the Contract'in iltapte, lS.
LLUSTMTION:
I who owns the goods pledges thern to 8. I has the genoal property in the goods while B has a special property, i.e., special interest
ia them.
ooa
the sa
v. Va
AGR
2
date r
CONTRACT OF SAIE _
TORMATION OI THE CONTRACT
l. to sel
SALE in tht
Where under a contract of sale the property in the goods is transferred from seller to the bu1,er, the ,
contract is called a 'sale'. In a sale, immediate payment or delivery is not necessarv. Pavrnent and deliverv amou
may be done at a future date. But the ownership of goods, for example, the properry' in the goods must of In,
be transferred immediately from the seller to the buyer. It is immaterial that actual sale does not take place
at the time of movement of goods and takes place later on lstate of Maharashtra v. Embee Corporarion SAL
(tee7) 7 scc 1e01.
Re-sale of goods is also sale of goods. A second sale is a re-sale. Re-sale may be to a third person ,, Tg:
or to the original seller fGopalakrishna Pillai v, K.M. Mani AIR 1984 sc 2161. .15Wl
i subse
Essentials of a valid sale: ,,,r the cr
1. Property: There must be a transfer ofgeneral property in the goods, for example, tansfer ofownership :. of a
in the goods, and not merely special properly or special interest, from the seller to the buyer. Right, title ', seller
and interest in a movable property can pass by delivery of possession and upon paytng of consideration.
Passing up of a title in favour of the transferee would not be illegal, unless it is forbiddenby law,for may
example, where transaction attracts Sec.23 of the Indian Contract Act, 1872 lCanbank Financial Services Thou
Ltd. v. Custodian {2004) 8 SCC 3551. it tei
2. Movable goods: Transfer of goods must be that of movable goods only. is tra
Pilib,
3. Price: Price means the money consideration for sale of goods [Sec.2(10)]. The price or consideration
. anac
of goods rnust be money. Where goods are exchanged for goods, it is not a sale. When consideration for
of In
transfer consists of other goods, it may be an exchange or barter fDhampur Sugar Mills v. Commissioner
trans
of Trade Tax (2006) 5 SCC 6241. (For detailed discussion on price, please see "Formalities of the Contract" , ofAr
discussed below).
4' Parties: There must be two parties, for example, buyer and seller. The parties must be conrpetent SAL
:
to contract as under the Indian Contract Act, 1872. The seller and buyer must be two different persons.,
5. Form: No particular form is necessary to constitute a conhact of sale. A contract of sale may be ': Coll.tl
made in writing or by word of mouth, for example, may be express or it may be implied from the conduct the c
of the parties, or from the course of dealings between the parties [Sec.5 (2)]. It may also be made partly
in writing or partly by word of mouth. Proposal and acceptance must be made.
the c
The essential elements of sale org to
- se
(i) goods, Sale

an el
(ii) seller and purchaser,
(iii) agreement for sale and purchase, fi4
-ontract of Sale - Formation of the Contract
175
(iv) transfer of property in the goods,

(v) price being the consideration
lNew India Sugar Mills Ltd. v. Commr. of Sales Tar AIR 1963 SC 1207). Both the agreement and
the sale should relate to the same subject matter
lstate of Gujarat (Commissioner of Sates Tax, Ahmedabad)
v. VarieQ Body Builders AIR 1976 SC 2l0gl.
AGREEMENT TO SELL
Where the transfer of the property,for example, ownership in the goods is
to take place at a future
date or subject to some condition to be fulfilled the contract is called u, ugr..rn rt
to sell. Where by a
contract of sale the seller purports to effect the present sale of future goods, th. ugrr.*ent
operates as an
agreement to sell.
When agreement to sell becomes agreement of sale?
An agreement to sell does not involve any immediate hansfer of property in
the goods. An agreement
to sell becomes a sale when the time lapses or the conditions are nrrnrreo subject
tJwhich the-property
in the goods is to be transferred.
Agreement defening payment of part of price and also deferring delivery
till the payment of balance
amount, held, was nevertheless an agreement of sale
fTravancore Rubber & Tea Co. Lrd. v. Commissioner
of Income Tax, Trivandrum (2000) 3 SCC 7151.
SALE AND AGREEMENT TO SELL [Sec.4]

A contract of sale of goods is a contract whereby the seller transfers or agrees to
transfer the properfy
in goods to the buyer for a price' Such a contract of sale may be absolute
or conditional. Absolute contract
is without any conditions' Conditional contract may be a conhact with condition precedent
or condition
subsequent' \\'hen a condrtion is to be first performed before an agreement
to sell would become a sale,
the condition is a condition precedent where there is sale but subject to performance
or non-performance
of a condition, the condition is a condition subsequent. The conditions may have to
be fulfi1ed by the
seller or by the buyer.
There may be a contract of sale between one part-owner and another.
A contract of sale of goods
may be either a 'sale' or an 'agreement to sell'. Contract of sale includes
sale and uo ugr..r.nt to sell.
Though section 4 groups both sale and agreement to sell under single generic ,contracts
name of of sale,,
it reats them as separate categories, vital point of distinction between them being that
whereas in sale there
is transfer of property in goods from seller to buyer, there is none in ugr..ro.nt'to
sell Tax officer
Pilibhit v- Budh Prakash Jai Prakash AIR 1954 SC 4591. The definition of contract [,Sales
of sale covers both
an actual sale and an agreement to sell
fAssociation af Leasing & Financial Service Companies v. (Jnion
of India (2011) 2 SCC 3521. A contract of sale becomes u.-ut. only when
the property in the goods is
transfened to the buyer under the terms of the contract itself
lHyderiboa Engine)ring Industries v. State
of Andhra Pradesh (2011) 4 SCC 7051.
SALE AND AGREEMENT TO SELL DISTINGUISHEI)

1. Nature of contract: Sale is an 'executed contract'while an agreement
to sell is an 'executory
contract'. In an executed contract, one ofthe parties has already performed
his part of the contract. On
the other hand, in an executory contract, both the parties ,r" yit to perform
their mutual promises.
An agreement to sell becomes a sale when, (i) agreed time of the fulfillrnent
of the performance of
the conhact lapses, or (ii) the conditions of the sale uri filrrl.d. Till
then the hansaction is an agreement
to sell and not a sale. on the other hand in a sale, there is an immediate
transfer of ownership in the goods.
Sale is a contract plus a conveyance, while an agreement to sell is only pure
a contract. A sale is therefore,
an executed contract while an agreement to sell is an executory contract.
t76
Business Law for
2. Creation of right: Sale creates a jus_-in-rem' ,

for example, a right on the goods against the whole
world, while an agreement to sell creates a ius-in-personam', jo, exaiple, perional
a rilht only 0rl
the person for any default in fulfilling his part of the agreement. "g.il; 'tt
un,
3' Passing of property: In a sale, the property in the goods passes to the buyer with the risk while Ass
in an agreement to sell, risk and property does noi pass to the-buyer
immediately. Essence of sale is transfer
ofproperty in a thing, from one person to another, for a price.
Contract of sale includes agreement to sell.
It is not necessary that contract of sale must be absolute. It may be conditional ' ther
that distinguishes conkact of sale from agreement to

as well. Essential feafure 'soI
sell is that in contract of sale, property in goods is , circ
transferred from seller to buyer immediaiely, whereas
in agreement to sell, property is transferred on a '; fiad
future date. Agreement to sell becomes sale on fulfillment
of conditions provi,rled therein or when time payl
provided in agreement elapses
fState of (Jttaranchal v. Khurana Bros. (2010) 14 SCC 334]. cont
4' Remedies in ease of breach of contract: In a sale, the (20c
seller is entitled to sue for the price of
the goods and also has a right of lien, stoppage in
&ansit and re-sale. In an agreement to sell, the seller IM.t
has the right only to sue for damages for non-performance
of the contract.
Pric
5' Risk of loss: In gase of loss to goods, in sale, the loss
will be borne by the buyer even if the
possession of goods is with the seller whili
in an agreement to sell the seller will ilave to pay for the loss
since the ownership in the goods has not passed valur
to the buyer.
6' Insolvencyz (1) Insolvency of buyer: In a sale, the by tl
seller must deliver the goods to official fusignee a val
or Receiver and can claim rateable dividend for the price
of the goods, while in an agreement to sell, the by tl
seller may refuse to deliver the goods unless paid
6r.
(ii) Insolvency of seller: In a sale, the buyer is entitled
to receive the goods from the official Assignee duy
or Receiver, while in an agreement to sell, thabuyer
has to prove the he has paid to the seller and decre
he can only claim a rateable dividend. He cannot
compel the Receiver ".oi-t
to sell and deliver the goods. such
contract of sale of Goods and contract of work and of thr
Labour:
The contract of sale contemplates the sale and
delivery of goods while contract of work and labour
involves exercise ofskill and labour by one parry in
respect lfrrt .iul, supplied by another. In a contract
of work and labour, detivery of goods is incidental. conract
for manufacture and supply of wagons is a
contract of sale and not a work contract
ftJnion of India v. sarkaria & Jaswant
The nature of hansaction, whether it is a 'sale' ^slrgft AIR 1977 sc 1537).
or a 'works-conhact,, is to be ascertained on facts of each
case' on proper conskuction of terms and conditions
of contract between the parties lState of Andhra pradesh
v' Kone Elevatore (India) Ltd. (2005) 3 sCC 389; Hindustan
Shipyard v. State of A.p.(2000) 6 sCC 5791.
In Robinson v' Graves.lvhele G engage{ an artist
R, to paint a porhait for 250 guineas and R srpplied
the canvas and other rnaterials, it was hefi that ttre
contaci was for work and materials and not for sale I
of goods.
or inc
The Sale of Goods Act applies to the contact of such ir
sale of goods and not to the contract of work and
labour. be ma
fSram,
FORMATION OF TIIE CONTRACT
A
Contract of sale how made? Chaptt

(Sec.S)
(
A contract of sale may be rnade in unitin-s or b^y-word
of mouth or partly in writing and partly by
word of mouth or may be irylied from the conduct
the parties. A contract of sale is made in any
of the parties or from ih" .;;r"
;f dealings between HIRE
of the following tt'ee ways:
1
1' offer and acceptance: An offer to buy or sell goods
by one party for a price and acceptance of instalh
such an offer by another party is necessary.
It is b,
2' Delivery: The contract may provide for immediate
delivery of the goods or delivery by installments T
or delivery at a future date.
pays al
the hir
alract of Sale Formation of the Contract
- 177
3. Price (Sec.9): The contract may provide for immediate payment of the price or payment by installment
or payment may be postponed. Price must be money consideration for sale of goods
[Sec.2(10)].
price is
an essential element of sale of goods [U.P. Cooperative Cang (Jnions Federations v. West U.p. Sugar Mills
Association (2004) 5 SCC 4301.
In the conhact of sale, the price may be fixed by the conhact or may be left to be fixed in a manner
thereby agreed or may be determined by the course of dealings between the parties. Where the price is not
so fixe4 the buyer shall pay a reasonable price. Reasonable price is a question of fact depending on the
circurstances of each particular case. In case of conhact for sale of shares, on pre-emptive offer of shares
made where price of shares is to be determined by a third party valuer, acceptance of said offer without
payment of price (which was yet to be determined), it was held by the Apex Court that in such a case a
contract for pwchase of the shares is concluded,fClaude-Lila Parulekar (Smt.) v. Sakal papers (p) Ltd.
(2005) 1 I SCC 731. lt cannot be said that a contract is void for uncertainty because the price was not fixed
[M.5. Madhusoodhanan v. Kerala Kaumudi (P) Ltd. (2004) 9 SCC 204].
Price to be fixed when agreement is to sell at valuation (Sec.l0):
Where the price is to be fxed by the valuation of a third parfy and such party fails to make such
valuation, the agreement becomes void. If, however, the buyer has taken delivery, or the goods are appropriated
by the buyer, he shall pay a reasonable price therefor. Where such third party is prevented from making
a valuatioq by the fault of the seller or buyer, the party who so prevents is liable to be sued for damages
by the party who is not in fault.
Amount ofincreased or decreased taxes to be added or deducted (Sec.64-A): In the event ofany
duty ofcustoms or excise on goods and any tax on the sale or purchase of goods being irrposed, increased,
decreased or remitted in respect of any goods after the rnaking of any contract for the sale or purchase of
such goods without stipulation as to the payment of tax, where tax was not chargeable at the time of making
of the conhact, or for the sale or purchase of such goods, tax pai( where tax was chargeable at that time-
(a) if such imposition or increase so takes effect that the tax or increased tax, as the case may be,
or any part of such tax is paid or is payable, the seller may add so much to the contract price
as will be equivalent to the amount paid or payable in respect of such tax or increase of tax.
Seller shall be entitled to be paid and to sue for and recover such addition.
O) if such decrease or remission so takes effect that the decreased tax only, or no tax, as the case
may be, is paid or is payable, the buyer may, deduct so much from the contract price as will be
equivalent to the decrease oftax or remitted tax. Buyer shall not be liable to pay, or be sued for,
or in respect of such deduction.
Parties to the contract may express different intentions in the terms of contract. In case of irposition
or increase in the tax after the making of the contract, the party shall be entitled to be paid ,u.h tu* o,
such increase lNumaligarh Refinery Ltd. v. Daelim Industrial Co. Ltd. (2007) 8 SCC 4661. No party shall
be made to unnecessarily gain or suffer on account of the State action in increasing or decreasing duty
fSramajibi Stores v. Union of India AIR 1982 Del. 76].
4. Goods: The contract of sale of goods may be for existing or future goods (discussed in
Chapter l).
5. Contract: Contact of sale of goods must possess all the essentials of an ordinary contract.
HIRE.PURCHASE AGREEMENT
The possession of the goods passes to the buyer who promises to pay the price of the goods in certain
installments. Unless full price of ttre goods is paid, the ownership of the goods remains with the seller.
It is both a contract of bailment and an agreement to sell.
The purchaser has an option to buy goods by way of paymsnts in stipulated installments. After he
pays all the installments with hire charges, he becomes the owner of the goods. In a hire purchase agreement,
the hirer becomes the possessor or bailee of the goods immediately and at the same time has a right to
178
Business Law for Managemenl
terminate the agreement at his pleasure, for example, he has an option to return the goods. If there
is n6
such option existing, the agreement would be an agreement to sell and not a hire-purchase agreement
even i,$[ire P,
though pagnents are to be made by installments. Mere payments by installments would therefore, not
make
a transaction a hire-purchase one. The hirer,
if he chooses not to make any further installments, may discontinu; :;.9IIBJI
the payments and in such a case, possession of the goods passes back to the seller. The sellemuy
,.ir. S(
the property and also sue for arrears of installments due. The installments paid by the hirer to thi
sellei
are not returnable. These installments are adjusted towards the hire charges. At the same time, the (i
hirer
has an option to pay the full amount at any time and purchase the goods hired. (ii.
Supreme Court has laid down that the sum and substance of hire-purchase agreement is twofold.
One,
(r
the owner under the hire-purchase agreement enters into a transactio, of tiring ort th. goods on the tenns Th
and conditions mentioned in the agreement and second, the option to purchase, exercisable by the hirer contin
on payment of all the installments of hire, arises when the installments are paid and not until then. There the
is no agreement to buy goods. The hirer is under no obligation to buy but has an option to return the goods ppens,
or to become its owner by payment in full of the ageed hire installments and the price for exercising ,:,:POntraCtt
the
option fsundaram Finance Ltd. v. The state of Kerala AIR 1966 sc l17gl. j:,soods c(
A hire purchase agreement as its very nafure implies has two aspects. There is first an aspect of bailment ,. Wl
of the goods subjected to the hire purchase agreement and there is next an element of sale qfuch fructifies :OOerateS
when the option to purchase, which is usually a term of hire-purchase agreement, is exercised :.h sell o
by the intending
purchaser. The distinguishing feature of a typical hire-purchase agreement therefore is that
the propery;
does not pass when the agreement is made out but only passes when the option is finall1, exercised after .GOODS
conplying with all the terms of the agreementfK.L. Joher & Co. v. Depue Comierciot Tm Oficer, Cointbatore
Ina
ArR 1965 SC 10821. :sar- aris,
ILLUSTRATION:
(i)
I sells a refrigerator to B with a stipulation that B shall pay A a fixed sum every month by way of installments till the full price
n=
*oecific g
,
of the refrigerator is paid.

;{hrc contri
Now till B pays the full amount to A by way of installments, he does not become the owner of the
refrigerator. He can discontinue payments of further installments. In such a case,l takes back the refrigerator.
B has no right to recover installments already paid by him to I because the amount paid by him is adjusted ' Ino
towards the hire charges of refrigerator. this is cailed a hire-purchase agreement. ',. (a)'
In an agteement of hire pwchase, the purchaser renrains merely a trustee/bailee on behalf of the furancier/ , (b)t
financial institution and ownership remains with the latter. Clause of resumption of possession is ahvays iontract.
with the financer even if the clause is not in the agreement. Thus, in case the vehicle is seized by the , (c)1
ftnancier, no criminal action can be taken against him as he is repossessing the goods owned by him
Sarmah v. Bhola Nath Sharma IT 20lZ (11) SC 791.
lAnup ' (d)1
are damag
.AGREEMENT TO SELL'
AND'HIRE.PTIRCIIASE AGREEMENT' DISTINGUISHED (ii) (
Io sell sper
(i) Conhact of sale includes both sale and agreement to sell. Hire-purchase agreement is bailment
plus agreement to sell. 0r become
lo the buy,
(ii) Agreement to sell is a step to the conhact of sale. Hire-purchase agreement becomes a sale only
: Good
,'.but after a1
(iii) In an agreement to sell conveyance of goods may take place subsequently. ln a hire-purchase ii void. The
agreement conveyance is immediately transferred while ownership remains wiih tne seller. l 0an be avo
(t ) In an agreement to sell, the buyer
can sell or pledge the goods but in a hire-purchase agreement;'. (a) th
the buyer cannot exercise any ownership rights on the goods and, therefore, he cannot sell or ple'clge ttrese:
goods. (b) th
(v) In an agreement to sell the buyer can take advantage of implied conditions and warranties undei
! the agrer
the Act' In a hire-purchase agreement the hirer cannot so claim the benefits (.) tt.
of implied conditions and warranties
unless it becomes a sale. \n Elp
before the r
of Sale Formation of the Conrract
- t79
(vi) Agreement to sell is regulated by Sale of Goods Act, 1930, while hire purchase is regulated by
flire Purchase Act, 1972.
SUBJECT MATTER OF CONTRACT (Sec.6)

Section 6 provides that the goods which form the subject
of a contract of sale may be either:
(i) existing goods owned or possessed by the seller, or
(ii)future goods.
(The term 'goods' is explained under 'scope of the Act'in
chapter I).
There may be a contract for the sale of goods the acquisition
of which by the seller depends upon
a contingency which may or may not happen. If a condition is to be complied
with before the seller comes
into the possession of the goods, then the contract of sale of goods is performed
only when the condition
happens' For example. if I
agrees to sell the goods to B, if ...tuin ship arrives with
the particular goods
contracted to be sol4 then A will be liable to deliver goods only when
ihe particular ship arrives with the
goods contracted to be sold. i
where by a contract of sale the seller purports to effect a present

sale of future goods, the conhact
operates as an agreement to sell. Future goods are goods which
have to come into existence. A contract
to sell or assign the future goods is an agreement to sell. It creates only a personal obligation at law.
i cooDs PERTSITING
- EFTECT oF DESTRUCTION oF GooDS (Secs.7 & 8)
In a confact for saleof specific goods, goods nr,ay perish before
sale is gone tkough. Such a contingency
may arise in any of the following two stages:
(i) Goods perishing before making of contract (Sec.7): where there
is a contract for the sale of
specific goods, the contract is void if the goods without the loiwledge
of the seller have, at the time when
the contract is nrade. perished or become so damaged as no longer to
answer to their description in the
contract.
ln order the contract may be void the following conditions should be complied
with
(a) The goods must be specified goods. This section does -
not apply to unascertained goods.
(b) The goods nnrst have perished or so damaged as no longer
to answer to their descripti in the
confuact.
(c) The goods must have been so perished or damaged without the
knowledge of the seller.
(d) The goods must have been so perished or damaged before the
rnaking ofthe contract. Ifthe goods
are danraged but they answer to the description, the contract is valid
and the buyer must pay the price.
(ii) Goods perishing before sale but after agreement to selt (sec.8):
where there is an agreement
to sell specific goods, and subsequently the goods without any fault
onthe part ofthe seller or buyer perish
or become so damaged as no longer to answer to their descr-iption in
the agreement b"yorc the risk passes
to the bayer, the agreement is thereby avoided.
Goods may perish before sale (for example, before the property
in the goods has passed to the buyer),
but after agreement to sell. Under section 8, the agreement is avoided,
whereas under sectionT thecontract
is void' The contact can be avoided on the ground of impossibility
of perforrnance. In order that an agreement
can be avoided, the following essentials must be present:
(a) the goods must be specified goods.
(b) the goods must have perished or become so damaged as
no longer to answer to their description
in the agreement before the property or risk passes to theluyer.
(c) the goods must so perish or be damaged without any fault
on the part of the seller or the buyer.
In Elphick v' Barnes (1880 5 CPD 321), where the agreement
was to sell a horse, and the horse died
before the sale was completed, it was held ttrat the agreetent was
void.
aoo
Sale of Goods-Introduction
Sale and purchase of goods is a common transaction in business

which is covered by Sale of Goods Act, 1930.
Section 4(1) of this Act defines a contract of sale as a contract,

whereby the seller transfers or agrees to transfer the property in
goods to the buyer for a price. From the definition the following
essentials of a contract emerge:
1. There must be at least two parties

2. Goods as subject matter of contract of sale
3. Transfer of general property
4. Price is the consideration
5. Contract of sale possess all essential elements of a valid
contract
Types of goods
The term goods include all kinds of movable properties including

things which can be detached from the earth.
Types of goods
1. Existing goods – Goods which are in the existence at the

time of making a contract of sale. Existing goods may be
specific, ascertained, or unascertained.
Specific goods mean goods identified and agreed upon at the

time when contract of sale is made.
Ascertained goods are identified after the formation of

contract. In practice specific and ascertained goods are used
1
Page
interchangeably.

Unascertained goods are those which are not identified
separately at the time of making a contract of sale. They are
identified only by description.
2. Future goods – Goods to be manufactured, produced, or

acquired by the seller after making contract of sale are
future goods.
3. Contingent goods – are types of future goods the acquisition

of which depends on the happening or non-happening of
future contingency, which may or may not happen. Such
goods are subject matter of agreement to sell. If the
contingency does not happen, they will become void.
Effects of destruction of goods
1. Goods perishing before making a contract – where the

contract of sale was made for specific goods, the contract is
void, if at the time, when the contract was made, the goods
have without the knowledge of the seller, so damaged as no
longer answer to their description in the contract.
2. Goods perishing before sale but after agreement to sell – In

an agreement to sell specific goods, the goods without any
fault on the part of buyer and seller perish, before the risk
passes to buyer, the agreement is avoided.
2
Page

Transfer of
Ownership
Dr. Jaya Mathew

Transfer of property in goods
General Property Special

Property
’Unless otherwise agreed, the goods remain at
the seller’s risk until the property therein , is
transferred to the buyer, but when the property
therein is transferred to the buyer the goods
are at the buyer’s risk, whether delivery has
been made or not.’ K J Somaiya Institute of Management, India 2
Significance of Transfer of
Ownership
Risk passes with the property
Right to take action against the third

party
Right to file suit for price

Rules regarding transfer of
ownership
Specific & Ascertained
Sale on
Approval
Deliverable Unascertained
Non Deliverable
To be Measured
Identification Appropriation
K J Somaiya Institute of Management, India
4
“Only the Real Owner can sell”-
Exceptions
Title by Estoppels
Sale by mercantile agent
Sale by joint owners
Sale by person in possession under voidable
contract
Sale by seller in possession after sale
Sale by buyer in possession after sale
Sale by unpaid seller
Sale by pledgee K J Somaiya Institute of Management, India 5
Thank You
simsr.somaiya.edu

When does Ownership of goods pass to purchaser?
A. Meaning of Transfer of ownership

The ownership of goods is different from possession of goods. These are two
different aspects of a contract of sale. The ownership of the goods may pass
on from the seller to buyer, but the goods may remain in the possession of
the seller. Similarly, a person may have possession of goods, but he may not
be the owner of those goods.
In a contract of sale, when the goods are sold to the buyer, the buyer
becomes owner of those goods irrespective of the fact whether the buyer has
taken delivery of goods or not. It is therefore transfer of ownership means
transfer of general property to the buyer, on such transfer; buyer can enjoy
peaceful possession, can use, and further sell those goods.
B. Significance of Transfer of ownership

The following rights and obligations of the parties are affected by such
transfer.
1. Risk passes with the ownership.

In case the goods are destroyed, the real owner of those goods will bear
the loss, regardless of the fact that who is having possession of those
goods.
However, if the delivery of goods is delayed due to fault of the seller or
buyer, the goods are at the risk of the party at fault.
2. Right to take action against third party
Goods are damaged by a third party; it is the owner who can take action.
3. Right to file suit for price
In a contract of sale, seller becomes entitled to recover the price from the
buyer only when ownership has transferred to the buyer.
C. Rules regarding Transfer of ownership

In a contract of sale of specific or ascertained goods, the ownership passes to
the buyer, at the time, when the parties are intended to do so. But
sometimes, the intention of the parties may not be clear from the contract.
In such cases, the following rules, which are contained in section 18 to 24,
are applicable.
For this purpose, goods may be classified into three groups.
Specific or ascertained, Unascertained or generic, goods sent on approval.
1
Page

1. Specific goods or Ascertained goods.
(i) Specific goods in deliverable state: The ownership of goods passes

to the buyer when the contract is made. But when contract of sale
is conditional, ownership will pass when the condition is fulfilled.
(ii) Specific goods not in deliverable state: When the seller is bound to
do something to the goods such as polishing, extra fitting etc.,
ownership will be transferred on completion of such acts and the
buyer has notice thereof.
(iii) Specific goods to be measured or weighed for determining the
price: The ownership will be transferred when the task of
measuring is complete, and the buyer has notice thereof.
2. Unascertained goods & Future goods
Ownership is transferred only when the goods are ascertained.

In the process of ascertaining the goods two processes are involved, i.e.
process of identification and process of appropriation.
In the first step, goods are identified and separated from the lot. And
appropriation, can be done by putting goods in bags or boxes or bottles
or sometimes delivery of goods to the carrier for transmitting them to the
buyer, without reserving right of disposal.
Appropriation can be done either by the seller or buyer. Once goods are
appropriated, the ownership passes to the buyer.
(Unascertained goods are unidentified goods ie. Goods defined by
description or by sample. Future goods are goods which are yet to be
manufactured. It should be noted that unless goods are ascertained,
there is only an agreement to sell)
3. Goods sent on ‘Sale or Return basis’.
Ownership passes to the buyer.

(i) When buyer signifies his approval or acceptance
(ii) When buyer does some act, which shows that he has accepted
goods.
(iii) When buyer retains goods, at the expiration of a reasonable time.
2
Page

D. Sale by Non-Owners
It is only the real owner of the goods or person authorised by him can sell
the goods and thereby can transfer the title of those goods to another
person. But it is subject to following exceptions.
1. Title by Estoppel
A, who is the real owner of goods, tells B, who is a prospective buyer that
C who is selling goods has been authorised by him to sell. B, will get good
title.
2. Sale by mercantile agent
A was appointed as a mercantile agent to buy raw material for B. A
purchases raw material but sells it to C, who buys in good faith believing
that A, has authority to sell. C gets good title.
3. Sale by joint owners
A, B and C are joint owners, of some furniture. And with the consent of B
and C the furniture was kept in the possession of A. A sells the furniture
to P who buys it in good faith gets good title.
4. Sale by person in possession under voidable contract
A buys B’s car by seeking his consent at gun point. On obtaining
possession and ownership of the car, A sells it to C before B rescinds the
contract. C gets good title.
5. Sale by seller in possession after sale
A buys some goods from B and leaves them with B for some time.
Meantime, B resells same goods to C, who buys in good faith and he gets
good title.
6. Sale by unpaid seller
Where an unpaid seller, by exercising his right of lien or stoppage in
transit gets back possession of the goods, resells the goods, the
subsequent buyer gets good title as against the original buyer.
7. Sale by pledgee
When the debtor makes default in repaying debt, the pledgee has a right
to sell the goods which have been pledged against the debt.
8. Sale by official receiver
Official receivers are not owners of property of insolvent, but they can
pass on good title to the buyer of the property
3
Page

7
s
v
,r
EFFECTS OF THE CONTRACT
TRANSFER OR PASSING OF PROPERTY _ RISK FOLLOWS OWNERSHIP

Transfer of property in the goods is distinct from delivery of goods. Transfer of property
means transfer
or passing of ownership in the goods. Property means the general property in the goods and not merely
a
special property [Sec. 2 (11)]' Property or ownership in the goods may pass to the buyer without
delivery
of the goods' On the other hand, mere delivery of the goods may not constitute transfer of ownership in the
goods. Therefore, property in the goods is distinct from delivery or possession of the goods. Transfer
of property
thus means that the ownership of the seller in the goods ceases and the buyer's ownership in the goods .or*.n..r.
The time of transfer of property in the goods decides various rights and liabilities of the seller and the
buyer.
As a general rule, unless otherwise agreed, the goods remain at the seller's risk until the property therein
is transferred to the buver. When the property therein is transferred to the buyer the goods are at the buyer,s
risk, whether delivery has been made or not (Sec. 26). Risk, therefore, primafacie passes with the property.
Now let us see when property in the goods passes from the seller to the buyer or what are the rules
regarding transfer of property as between seller and buyer?
TIME WHEN PROPERTY PASSES
Sections 18 to 26lay down the rules determining the time when the ownership in the property passes
from the seller to the buyer.
For this purpose goods are divided into two classes:
1. Specific or ascertained.
2. Generic, unascertained or future.
1. Time when property passes in specific or ascertained goods: Specific or ascertained goods
are
identified goods and agreed upon at the time a contract of sale is made
tSec. 2(14)1. property in case of
specific or ascertained goods passes when intended to pass (sec. 19).
As a rule' where there is a contract for the sale of specific or ascertained goods, the property in them
is transferred to the buyer at such time as the p'arties to the contract intend it to belransferred. f'or
thi purpose
of ascertaining the intention of the parties regard shall be had to:
(i) the terms of the contract; (ii) the conduct of the parties; and (iii) the circumstances of.the case.
In {Jsha Beltron Ltd. v. State of Punjab & Ors. (2005) 7 SCC 58, Supreme Court has held that where
contract provides that property in the goods does not pass till after delivery and after successful testing
an!
issuance of take over certificate, the property in the goods remains at the risk of supplier till
delivery was
completed.
It is, therefore, necessary that the contract must show the intention. Unless a different intention appears,
the following are the three rules for ascertaining the intention of the parties as to the time at which the pioperty
173
r'
Business I'aw for Manageiae-nt
174
These rules are presumptive

in the goods is to pass to the buyer in case of specific or ascertained goods.
parties and the circumstances of the case'
and cai be rebutted by terms of the contract, the conduct of the
Rules
for the
(i) Specific goods in a deliverable state: (Sec. 20) Where |here is an unconditional contract
when the contract
,ul. oi rp"rific goods in a deliverable state, the property in the goods passes to the buyer
time of delivery of the goods, or
is made.lt is immaterial whether the time of payment of the price or the
'deliverable' state when they are in such a state that the
both, is postponed. Tlie goods are said to be in a
2 (3)]'
buyer would under the contract be bound to take delivery of them [Sec'
the property in the specific
Therefore, the first rule is that when the goods are in the deliverable state,
goods passes when the contract is made. The contract must be unconditional'
LLUSTRATIONS:
the price to be paidon another stated day A
(a) B offers A for his horse Rs. 1,000, the horse to be delivered to B on a stated day and
is made, that is, as soon as the offer is accepted'
accepts'the offer. The horse becomes B's property when the contract
B',s property as soon as the offer is
(b) B offers A for his horse Rs. 1,000 on a month's credit. A accepls the offer. The horse becomes
accepted.
being placed by the purchaser
When the goods are ascertained and in a deliverable state, on the order
despatched the same to the purchaser, -
in one State, the seller in another State loaded the goods on the lorry and
Market Conmtittee v. Shalinrur Chenical
property in the goods passed in the State of the seller f,Agricultural
Works Lrd. AIR 1997 SC 2502).
there is a contract
(ii)When specific goods are to tre put into a deliverable state: (Sec. 21) Where
goods for the purpose of putting
for the sale of specific goods and the seller is bound to do something to the
is done and the buyer has notice
them into a deliverable state, the property does not pass until such thing
the goods is done by the seller'
thereof. property is changed only'when anything that remains to be done to
InRugg v.Minett (180g-11East210),thetinsof cisternoilorsolidoilweretobefilledineachcask
by the seller and then taken away hy the buyer. some of the casks rvere
filled in the presence of the buyer
quantity of oil x'as destrol'ed' It $'as
but before remainder could be filled, a fire broke out and the entire
and the sellei must bear the loss
held that the buyer must bear the loss of the oil which were put into casks
of the remainder.
$'as a contract for the
ln[Jnderwood v. B.C. Brick and Ceruent Syndicate (lgl2-1K.8. 343), there
sale of a machine. A part of the machine was damaged in transit.
It rvas held that the buyer was eniitled
where the contract is for the saie
to refuse to take the machine as it was not in a deliverable state. similarly
of a thing yet to be manufactured the property in that thing passes only when the goods are manufactured .-
or when delivery thereof is effected in a finished state'
(iii) Specific goods in a deliverable state, whcn the seller has to do anything thereto in
order to
goods in a deiiYerable staie'
ascertain price: (Sec. 22) Where there is a contract for the sale of specific
but the seller is bound to weigh, measure, test or do some other act or thing
with reference to the goods for
act or thing is done and the buyer
the purpose of ascertarning the price, the property does not pass until such
measured' weighed' tested' etc''
has notice thereof. Therefore, th. prop.rty in the goods, which are to be
tested and the buyer
in order to ascertain its price, purr., oniy when they are actually measured, rveighed,
has the knowledge of it. Symbolic delivery without such weighing will not
be sufficient'
price per tonne'
In Sirnmons v. swift (1826-58 & C 857), A sells a stock of bark to B at a certain
taken away by B, but before
The bark was to be weilhed by agents of A and B. The bark was weighed and
that the ownership of the
anything more was done, a flood carried away the remainder. It was held here
Hence the loss of the
residue was not transferred to B until it has been weighed according to the contract.
remainder carried away by the flood is to be borne by A'
(iv) Goods sent on approval or "on sale or return" basis: (Sec' 24) When goods are delivered
to
the property in the goods
the buyer on "approval" or on "sale or return" basis, or on other similar terms,
passes to the buyer:
Effec:s of the Contract
t7s
(a) when the buyer signifies his approval or acceptance to the seiler; or
(b) if he does any other act adopting the transacri on; for example; if the buyer pledges the goods
to third person he shall have adopted the transaction, and the property passes to him;
(c) if he does not signify his approval or acceptance to the seller, bur retains the goods without giving
. notice of rejection. In case where time is fixed for the return of the goods, then on the expiration
of such time, property in the goods passes to the buyer. In cases where time is not fixed for the
return of the goods, then on the expiration of a reasonable time, property in the goods passes to
the buyer.
when the property passes to the buyer, the seller may sue for the price.
In Municipal Commissioner of the Hooghty, Chinsurah Municipality v. Spence Ltd & Ors. (AIR l97g
Cal.49), it was held that where the purchaser having used the goods and reasonable time to reject having
passed, the property in the goods had already passed to the purchaser.
2. Time when property passes in generic or unascertained or future goods: Generic or unascertained
goods are unidentified goods,for exr*plr,goods defined by description and/i by sample only. Future goods
are goods which are yet to be manufactured.
The following rules apply to generic, unascertained or future goods. It should be noted that unless goods
are ascertained or appropriated, there is merely an agreement to sell.
Rules
(i) Goods must be ascertained: (Sec. 18) Where there is a contract for the sale of unascertained
goods, no property in the goods passes to the buyer unless and until the goods are ascertained. ,Goods
must
be ascertained' means, the goods must be specified to the particular description. Goods are ascertained by
appropriation. Only when the goods are ascertained, property in them passes to the buyer. An agreement ti
sell unascertained goods becomes a sale, the moment the property in goods passes to the vendee. In case of
unascertained goods, the property passes when the goods are ascertained fCommr. of Sales Tax, Nagpur v.
H. Adamji & Co. AIR 1959 SC 8871.
IILUSTMTIONS:
(i) A orders 50 bales of cotton from 5,000 bales of cotton with B. Norv A becomes rhe owner of 50
bates of corton only rvhen 50 bales
are separated from 5,000 bales of cotton. Therefore, property in the goods passes only after 50 bales are ascertained
from 5,000 bales.
(ii) A entered into a contract with B for the supply ol sawar logs during season 1947-48. The goods to be supplied
under contract were
tobedespatchedbyAfrom railwaystationsintheCentral Provinces.Theyweretobemeasuredundirsuperyisioo'ofB,rfu.toryrnanageron
arrival ofgoods at the factory. The prices ofthe logs to be supplied were specified as "F.O.R. Ambernath." lt was held
that contract was for
sale_ofunascertained goods and consequently property in them could not under section l8 pass unless and until goods
were ascertained. fContntr.
of Sales Tax, Nagpur v. H. Adanji & Co. 1959 SC 887 (893)1.
(ii) Goods must be un-conditionally appropriated: (Sec. 23) Unconditional appropriation is done
where the seller delivers the goods to the buyer or to a carrier or other bailee for the purpose of transmission
to the buyer without reserving his right of disposal over the goods. Appropriation ,urt be unconditional.
Now the property in case of sale of un-ascertained or future goods by description passes to the buyer,
ifthe goods of that description and in a deliverable state are unconditionally appropriated to the
contract.
The appropriation may be made by the seller with the buyer's assent or by the buyei with
the assent of the
seller. The assent may be express or implied. The assent may be given either before or after
the appropriation
is made.
Appropriation is usually done by the seller giving notice to the buyer that the bales are ready for delivery
and the buyer assents to the appropriation by saying that he will take delivery thereof.
Appropriation is also done by delivery, that is, by seller delivering the goods to the buyer. Similarly,
in case of goods delivered to a carier for the purpose of transmission to the buyer without the seller reserving
his right of disposal, constitutes unconditional appropriation and the property in the goods is passed from
the seller to the buyer. Therefore, where the seller reserves right of dispisal-over the-good s,for example,
where he is an unpaid seller, appropriation will be made conditional and property in the goods will not pass
176
Business Law for Managemint
from the seller to the buyer. The requirement of the section 23 is not only that there shall be appropriation
of the goods to the contract but that such appropriation must be made unconditionally fCommr, of Incorye
Tax, Madras v. Mysore Chromite Ltd. AIR 1955 SC 9g (102)1.
Similarly, where seller does nothing to sort out the goods, the property in the goods does not pass.
WHEN PROPERTY IN THE GOODS DOES NOT PASS?

In the follorving cases property in the goods does not pass to the buver:
(i) In case of contract for sale of specific goods in a deliverable state, where the seller is bound to
weigh, measute, test or do some other act or thing with reference to the goods for the purpose of
ascertaining the price, property does not pass until such act or thing is done and the buyer has
notice thereof.
(ii) Where the seller reserves the right of dispodal of the goods;
(iii) Where the seller sends the bill of exchange for acceptance together with the bill of lading, property
in the goods does not pass to the buyer unless he accepts the bill of exchange.
EFFECT oF TRANSFER oF owNERsHIp oR PASSING oF pRopERTy (Sec. 26)

We have seen above that as a general rule, until property in the goods passes to the buyer the goods
remain at the seller's risk. When the property is transferred to the buyer, the goods are at the buyer's risk
u'hether delivery has been made or not. Therefore, as a general rule, "risk prinrufacie passes rvith the property.,'
When delivery of goods is FOR at place of despatch, property in the goods together u,ith the risk passes from
consigner to consignee as soon as goods are loaded at place of despatch. Consisnor is not iiable for short
delivery of the goods [M/s. Marw'ar Tent Factory v. Union of India AIR 1990 SC 1753].
Exceptions to the general rule ((Risk follows Ownership',
The fcllorvrng are the exceptions:

(i) Where delivery has been delayed through the fault of either buyer or seiler, the goods are ar rhe
risk of the party in fault;
(ii) Where parties agree that the risk will pass at a time different from the time when ownership passes.
TR.ANSFER OF TITLE (Secs. 273A)

Where goods are sold by a person who is not the owner thereof and who does not sell them under the
authol'ity or with the consent of the owner, the buyer acquires no berter title than the seller had (Sec. 27).
As a general rule, no one can sell the goods and give a good title thereof uniess he is the owner thereof.
This general rule is expressed by the maxim: "Nenxo dat quod non habet" which means "no one can give
that which he possesses not." The seller cannot give to the buyer of the goods a better title to the goods than
he himself has.
ILLUSTM'IION:"
A sells goods to B acquired by thefi. C, a real owner of the goods finds goods in possession of B. Now B has no title
to the goods as,4
was not the orvner and had no title to sell the goods. Therefore, B will be liable to retuin the goods
to C, the real owner.
In the following instances the buyer does not obtain a better title:
(i) Person rvho has bought the goods under hire-purchase agreement sells them;
(ii) In an auction sale if stolen goods are sold, and neither the auctioneer nor the buyer has knowledge
that the goods are stolen.
Exceptions to the general rule: Sale by non-orvners
To the general rule that no one can pass or transfer a better title than he himself possesses are the
following important exceptions: r
Effects of the Contrac!
t77
1. Title by estoppel: (Sec..27) Where the owner of the goods by his words or conduct or by an act
or omission causes the buyer to believe that the seller has the authority to sell the goods and induces the
buyer to buy them, he cannot afterwards set up sellers' want of title or authority to sell. He shall be estopped
or precluded from denying the authority of the seller to sell.
tLrusinqrtov:
AistheownerofcertaingoodsbuthebehavesinsuchamannerastoleadB tobelievethatCistheownerofthosegoods,orhasA,s
authority to sell them. Consequently, B buys the goods from C. Here A is precluded or estopped by his conduct from disputing B's title to the
gooG
2. Sale by rnercantile agent: (Proviso. to Sec. 27) Amercantile agent is defined under section 2, sub-
section (9) thus: "Mercantile agent is an agent who, in the customary course of his business, has as such
agent, authority either to sell goods, or to consign goods for the purposes of sale, or to buy goods, or to raise
money on the security of gciods,"
Where a mercantile agent is. with the consent of the owner, in possession of the goods or of documents
of title to the goods, any sale made by him when acting in the ordinary course of the business of a mercantile
agent shall be binding on the owner and be as valid as if he were expressly authorised by the owner
of the
goods to make the same provided that:
(i) the buyer acts in good faith; (ii) he has no notice at the time of the contract of sale that the seller
has no authority to sell.
Essentials: (i) The agent is in possession of the goods or of the document of title to the goods;
(ii) He is in possession of the goods as mercantile agent with the consent of the owner;
(iii) The agent sells the goods in the ordinary course of his business as a mercantile agent;
(iv) The buyer acts in good faith;
(v) The buyer has no notice at the time of contract of sale that the agent has no authority to sell.
In Folks v. King (1923 1K.B. 282), Folks, the owner of a car delivered his car to A, amercantile agent
for sale, stipulating that the car should not be sold at less than t 575. The mercantile agent however, sold
the car for f 340 to King, who bought the car in good faith. The rnercantile agent misappropriated the amount.
Folks sued King to recover the car. It was held that King acquired a good title to the car.
If the mercantile agent obtains possession of goods without the consent of the owner , for exantple, by
theft, the agent cannot give a good title to the goods. It should be noted that a person who is merely in posiession
of the goods or of the documents of title to the goods will not constitute him a mercantile agent. Thus a
caretaker, a servant, a friend, or a carrier are excluded from the definition of a mercantile agent. Lawyer
is also not a mercantile agent. Therefore, to constitute a mercantile agent, he must not be only in possession
of the goods or of the documents of title to the goods, but he must be in such a possession as a mercantile
agent under the consent of the true owner of the goods and must be given an authority to sell the goods in
the customary or ordinary course of his business as such agent.
3. Sale by one of the several joint owners: (Sec. 28) If one of rhe several joint owners cf the goods
has the sole possession of them by pennission of the other co-owners, the prop€rty in the goods is transferred
to any person who buys them from such joint owner:
(i) jn good faith; and (ii) at the time of the contract of sale has no notice that the seller has no authority
to sell.
As a rule a co-owner can transfer his share only. However, if he is in sole possession of the other joint
owner's share in the goods with his consent, and the buyer acts in good faith and has no notice that the co-
owner has no authority to sell, the buyer obtains a good title to the goods. The sale is valid.
4, Sale of goods by a person in possession of gbods under a voidable contract: (Sec. 29) When
the seller of goods has obtained possession of the goods under a contract voidable under section l9 or 194
of the Indian Contract Act,7872, but the contract has not been rescinded at the time of the sale, the buyer
acquires a good title to the goods provided:
(i) he buys the goods in good faith; and (ii) without notice that the seller's title is "defective.
178
Business Law for Managemettt
ILLUSTMTION:
title' C gets
A buys a horse from B under coercion and sells itto C who.is.an innocent,purchaset without nolice of.,4is.defgctive
a good title and B cannot recover the horse. from him. ev.en if the agrgelBglrlj r1ith,4 is subseqyeply rescinded.
It may be noted that this exception applies.only in cEqq gf contracts vo!{able under section 19 or 19A
caused under
of the Indian Contract Act. The contract is voidable at the option of the party whose consent,is
the following circumstances: l.
(i) Coercion, (ii) Undue influence, (iii) Fraud, ot (iu) Misrepresentation.
If a person who is in possession of the goods under anyof the above circumstances sells the goods to
another p.rron, who buys the goods in good faith and without the notice of the seller's
defective title, it will
be a valid sale and wiligive the buyer a better title than the seller had, provided the
contract has not been
rescinded by the party entitled to do so, i,e., the ffie bWner at the time of sale.
goods continues
5. Sale try seller in possession after sale: [Sec. 30 (1)] Where a person having sold the
pledges, mortgages,
or is in porr".rion of the goods or of the documents of title to the goods, after the sale' sells,
or disposes them to any other person, the buyer shall'get a good title to the goods provided:
(i) he receives goods in good faith, and (ii) without notice of the previous sale.
The new buyer gets a good title to the goods under the above circumstances, notwithstanding the fact,
that the property in the goods passes to the first buyer. The seller should continue to be in physical
possession
of the goods, though it is not necessary that he should be in personal possession of the goods.
ILLUSTMTION:
who buys in good faith and has no krowledge
A buys a picture from a shop and leaves it with the shopkeeper. The shopkeeper sells it to C
if the shop-keeper rvas expressly authorised
of the previous sale. c gets a good iitle. Delivery of picture by shopkeeper to c
has the same effect as
by A to deliver the picture.

goods to any person
Similarly, under the circumstances, if shopkeeper pledges, mortgages, or disposes the
in any other manner, the transaction would be equally valid'
It should be noted that in the above illustration in order to constitute a good title to C the picture must
have been delivered to C or the documents to that effect must have been transferred
to him. There must be
the shopkeeper for damages'
a sale and not a mere agreement to sell. A's only remedy is to proceed against
the possession is
6. Sale by buyer in possession after sale: [Sec. 20 (2)] Where goods are sold and
has not passed to the buyer, third person
in the hands of the buyer, but the property in thd goods or ownership
who purchases the goods from first buyer gets a good title provided:
(i) the first person has possession of the goods or documents of title to the goods with the consent of
the seller, before property in the goods has passed to him;
(ii) the third person receives the goods in good faith; and
seller in respect
(iii) the third person has no notice of the seller's lien or other rights of the original
of the goods. The buyer rn such possession may sell, pledge or otheru'ise dispose off the
goods to
a third person,
The goods must have been delivered to the buyer or documents of title to the goods must
have been
exceptron is just
transferred to the buyer. There must be a sale and not merely an agreement to seli. This
tire converse of exception (5) above.
ILLASTMTION:
rvould be the property of
S purchases furniture under an agreement that the price is to be paid in two instalments and then the furniture
thatA by the agreement and therefore, the transfer
A. A sold the fumiture before the second instalment was paid. It was held here was bound
purchaser for a value without notice, conveyed a good title fl,ie v. Butler 1893 2 Q.B' 3181'
by him to a bonafide
7. Sale by an unpaid seller: [Sec. 54 (3)] Where an unpaid seller who has exercised his
right of lien
against the originai
or stoppage in transit, ie-sells the goods, the buyer acquires a good title to the goods as
buyer. (This topic is discussed in chapter 6).
Effeas of the Contiact
t79
8. Sale in market overt: English law provides an additional exception to the general rule. ,Market
overt' is an '(open, public and legally constituted market.rl,Where a person.buys.goods,in.niarket overt, according
to usage of the market, the buyer acquires a gbbd title tb the,goods;ijrovided: : ;, : .,, ,
(i) h1 the goods in good faith; and (il) without notice of any defect or wfiu of title on the part
lurs
' of the '.''ir:'i .
seller. .r
As a market overt is.an open and legally constituted market, the buyer gets a good title to the goods
when he purchases in market overt even if the goods areroriginally obtained by tfreftl Indian law therefore,
rightly makes no provision for sales and purchlses in 'market overt.r
ootr
{1
Contract of Bailment
and PIedge
bailment refers to the delivery of goods by a person to

another f.or a specific purpose on a condition that the
goods will be returned after the purpose is fulfilled/accom-
plished. Examples of bailment include hiring or renting of
goods such as furniture or cycle, giving a vehicle or appli-
ances for repair, etc.
Bailment i3 defined in Section r48, Contract Act, r87z
rvhich states as:
r.48. "Bailment", "bdilor" and "bailee" defined.-A
"bailment" is the delivery of goods by one person to
another for some purpose, upon a contract that they shall,
when the purpose is accomplished, be returned or other-
.wise disposed of according to the directions of the person
delivering them. The person delivering the goods is called
the "bailor". The person td whom they are delivered is
called the "bailee".
Bailment deals with the change of possession only and
not a transfer of ownership" In bailment, the possession
of goods is given to others, i.e" the bailee, for a specific
F
purpose for a limited period of time, temporarily, after iil

which the goods are returned to the owner, i"e. the bailor" $'
It must atso b. remembered that custody of goods without *...
possession does not constitute a bailment and the custo- S:i
.il
dian is not a bailee. $::
E xample: A gives a cloth to a tailor for stitching. It is &:,:
a bailment of the cloth. As soon as the cloth is stitched, it
will be returned to A.
The essential features of bailment are as follows:

r. Contract between the parties: There must be a con-
tract between the parties, i.e. the bailor and bailee.
It may be express or implied contract. This contract
is made for the purpose of change or transfer of pos-
session only from one person to another. In some
cases, bailment arises without a contract also, as in
the case of finder of goods, he is treated as a bailee.
.,
Deliuery of goods for a purpose: The delivery of
goods is done for a specific purpose which may be
expressly mentioned or specified in the contract or
it may be implied from the circumstances. This is
contained in Section r48, Contract Act.
).
a
Deliuery of goods for possession: In bailment,
there is a change of possession rather than a trans-
fer of ownership of goods. The ownership of goods
remains with the bailor. If the possession of goods
is not given then it is not considered as a bailment.
The delivery of goods takes place by actual delivery
or by constructive delivery" Actual delivery of goods
refers to the delivery wherein the bailor hands over
the physical possession of the goods to the bailee.
\7hereas, a constructive delivery refers to some act
a,:
ii
by the bailor which has the effect of putting the
goods in the possession of the bailee' It must be
Iot.d that bailment is not possible with respect to
any immovable ProPerty'
goods of the bailor
-r- Ritr* or disposal of goods: The
L.
musr be returned by the bailee after serving the
specific purpose for which they were given _under a
bailment or may be disposed of as per the direction
of the bailor or as specified under the contract. The
rerurn of goods may be in the original form or in an
altered form.
A bailment is categorised on the basis of benefits or

,rru"rdr. The following are the different kinds of bailment:
r" Bailment based on benefifs: A bailment based on
benefits includes the following:
(a) Bailment for the exclusive benefit of the bailor:
In this kind of bailment, the goods are deliv-
ered for the exclusive benefit of the bailor
himself.
(b) Bailment for the exclusive benefit of the bailee:
This kind of bailment is done where the goods
are delivered for the exclusive benefit of the
bailee.
(c) Bailment for mutual benefit: In this kind of
bailment, there is a benefit for both the parties
involved.
L. Bailment based on rewards:
(al Gratuitous bailment: In this kind of bailment,
the bailment of goods is made without any fee
or charges. For example, A gives his book to B
for reading.
(b) Non-gratuitous bailment: It is a bailment
where the bailment of goods is made for sorns
charges or reward. 'Ihe bailee is required to
pay some charges to the bailor for the goods.
Bailor is a person who delivers the goods and bailee is the

person to whom the goods are delivered for a specific pur-
pose for a specific time. A bailor transfers possession, but
not ownership, of a good to another party, known as the
bailee, in a bailment. The bailor is still the rightful owner,
even when the good is in bailee's possession. There is a
contractual relationship between the bailor and the bailee.
\i
The relationship can be explained in case of a banker-

customer relationship. !7hen a customer gives a sealed box
to the bank for safe-keeping in the locker, the customer
becornes the bailor while the bank becomes the bailee.
::
lt :l
Duties of the bailor
The following are the duties of the bailor:

r. Duty to disclose fault in the goods bailed:
Section r5o, Contract Act states that it is the duty .:
of the bailor to disclose faults, if any, in the goods :,I
bailed by him. It is explained as:
':i
ryo. Bailor's duty to disclose faults in goods

bailed.-The bailor is bound to disclose to the
bailee faults in the goods bailed, of which the bailor
is aware, and which materially interfere with the
Llse of them, or expose the bailee to extraordinary
2
risks; and if he does not Inake such disclosure, he is E I
iesponsible for damage arising to the bailee directly c
from such faults' =
o
7t =
m
(n
If the goods are bailed for hire, the bailor is respon- z
o
.n
-^*^r"for such damage, whether he was or
sible was not I {
I
of the e*isterrce of such faults in the goods @
P
m
bailed. ltr
m
It must be noted that in case of a non-gratuitous
bailment, the bailor will be liable or responsible for
both known and unknown defects'
ExamPles:
la) A lends a horse, which he knows to be vicious,
to B. He does not disclose the fact that the
horse is vicious. The horse runs away' B is
thrown and iniured. A is responsible to B tot
damage sustained'
(b) A hires a cartiage of B" The carriage is unsafe,
though B is not aware of it, and A is iniured' B
is responsible to A for the iniurY.
z. Repayment of necessary expensest A-t per
Seition r58, the bailor has the duty to repay the nec-
essary or extraordinary expenses which are incurred
by the bailee. It must be noted that in case of gratu-
itous bailment, the bailor has to repay all the nec-
essary expenses incurred by the bailee; whereas, in
case of non-gratuitous bailment, the bailor is respon-
sible for repaying only the extraordinary expenses'
Section r58 states:
ry8. Repayment, by bailor, of necessary expen-
,rr.-Yzhere, by the conditions of the bailment, the
goods are to be kept or to be carried, or to have work
dorr. upon them by the bailee for the bailor, and the
bailee G to receive no remuneration, the bailor shall
repay to the bailee the necessary expenses incurred
by him for the purpose of the bailment'
3. To indemnify the bailee for the /oss: Section
30 states that if ih. lerde r, i.e.the bailor frr, .o*O.itll
EN
>o
71
the bailee to rerurn the bailed goods before the spec.
ified period as agreed upon, in case of a gratuitous
==
2.;^ bailment, and the bailee suffers a loss due to this,
D6 then it is the dury of the bailor to indemnify the
111
I bailee for the loss suffered. Section r59 states:
!
m
rS9. Restoration of goods lent gratui-
I towsly.-The lender of a thing for use may at any
o
m time require its return, if the loan was gratuitous,
even though he lent it f.or a specified time or pur-
pose. But, if, on rhe faith of such loan made for a
specified time or purpose, the borrower has acted
in such a manner that the return of the thing lent
before the time agreed upon would cause him loss
exceeding the benefit actually derived by him from
the loan, the lender must, if he compels the return,
indemnify the borrower for the amount in which the
loss so occasioned exceeds the benefit so derived.
4. Responsibility of tbe bailor to tbe bailee for aruy
/oss: Section 164, Contract Act states:
164. Bailor's responsibility to bailee.-The
bailor is responsible to the bailee tor any loss which
the bailee may sustain by reason that the bailor was
not entitled to make the bailment, or to receive back
the goods, or to give directions respecting them.
If in any case, the bailor does not have the right to
make the bailment of goods, then the bailor is liable
to indemnify the bailee for any loss if suffered due
to such bailment.
5. Duty to receiue back the goods: Section fi4 of the
Act also mentions that, if the bailor refuses to receive
the goods back from the bailee, rhen it is the dury of
the bailor to indemnify or pay for the loss suffered
by the bailee in such circumstances or necessary
expenses to maintain the custody of the goods.
Duties of the u4.t- 3,7
Etr'
The following are the duties of the
bailee: Dc
r. Dwty to take responsible cdre of the goods: br
7t.
Section 15r states: >o
z'n
r5r, Care to be taken by bailee.-In all cases of g+
bailment the bailee is bound to take as much care of
g*
the goods bailed to him as a man of ordinary pru- ln
m
dence would, under similar circumstances, take of
his own goods of the same bulk, quality and value
as the goods bailed.
Hence, it is the duty of the bailee to take good care
and be responsible for the goods in possession under
bailment. The bailee should be responsible for tak-
ing care of the goods as a man of ordinary prudence
would take care of his own goods.
L. Not to make unawthorised use of goods: Section r54
states:
ry4. Liability of bailee making wnauthorised
wse
of giods bailed.-If the bailee makes any use of the

goodt bailed which is not according to the condi-
tions of the bailment, he is liable to make compen-
sation to the bailor for any damage arising to the
goods from or during such use of them'
This means that the bailee should use the goods only
for the purpose it is bailed. If he does not do so, then
he will te liable {or any loss or damage arising out of
such use and has to compensate for it.
Example: A lends a horse to B for his own riding
only. B allows C, a member of his family, to ride the
horse. c rides with care, but the horse accidentally
falls and is injured. B is liable to make compensation
to A for the injury done to the horse.
-3. Duty not to mix his own goods with the bailed
goods: This is explained in Sections r55, 156 and
i57, Contract Act. As per Section r55, it is stated:
r55. Effec.t of mixture, with bailor,s consent,
of his goods with bailee's.-If the bailee, with the
consent of the bailor, mixes rhe goods of the bailor
with his own goods, the bailor and the bailee shall
have an interest, in proportion to their respective
shares, in the mixture thus produced.
Thus, if the bailee mixes his own goods with the
bailed ones with the bailor,s consent, then both, the
bailor and the bailee, shall have an inrerest in the
mixture in proportion to their respective shares.
Example: A bails one bag of sugar ro B. B with
the consent of A, mixes A,s sugar with three bags of
his own. Here A and B have an interest in the mix_
ture in the proportion of 13.
Section 156 states:
156, Effect of mixture, without bailor,s consent
whe_n tbe goods can be separated.-If the bailee,
without rhe consent of the bailor, mixes the goods
of the bailor with his own goods, and the goois .r,
be separated or divided, the properry in Ihe goods
remains in the parties respectively; but the bailee is
bound to bear the expense of separation or division,
and any damage arising from the mixture.
In such cases where the bailee mixes the bailor,s
goods with his own without his consent and the
goods can be separated, rhen the bailee has ro pay
for the cost of separation.
Example: A bails roo bales of cotton marked
with a particular mark to B. B, without A,s consent,
mixes the roo bales with orher bales of his own,
bearing a differenr mark; A is entitled to have his
roo bales returned, and B is bound to bear all the
expenses incurred in the separation of the bales, and
any other incidental damage.
Section ry7 of the. Act srates:
r57. Effect of mixture, uithout bailor's con_
sent, uthen the goods canruot be separated,_If the
bailee, without the consent of the bailor, mixes the
goods of the bailor with his own goods, in such a
manner that it is impossible to separate the goods
bailed from the other goods, and deliver them back,
the bailor is entitled to be compensated by the bailee
for the loss of the goods.
In cases where the bailee mixes the bailor's goods
with his own without the consent of the bailor and
when the goods are not separable, rhen it is the dury
of the bailee to compensate for the goods ro rhe
bailor.
Example: A bails a barrel of cape flour worrh (45
to B. B, without A's consent, mixes the flour with
country flour of his own, worth only I z5 a barrel. B
must compensate A for the loss of his flour.
4. Duty to return the goods: It is the duty of the bailee
to return the goods to the bailor upon completion of
the specified time or purpose. This is explained in
Section 16o which states:
t6o. Retwrn of goods bailed, on expiration of
time or Accomplishment of purpose.-It is the
duty of the bailee ro return, or deliver according to
the bailor's directions, the goods bailed, without
demand, as soon as the time for which they were
bailed has expired, or the purpose for which they
were bailed has been accomplished.
Section r6r states:
16r. Bailee's responsibility when goods are not
duly returned.-If, by the fault of the bailee, the
goods are not returned, delivered or tendered at the
proper time, he is responsible to the bailor for any
loss, destruction or deterioration of the goods from
that time.
Example: A delivered certain books ro B to be
bound and returned within a reasonable time. B
could not complete the job within a reasonable time.
The books were subsequently burnt in an accidental
fire in B's premises. B was held liable for the dam-
34 ages for the loss of the books and the plea that the ,::
,:.
@n
>o
e1
fire was accidental or an act of God was of no avail.
--{ 5. Duty to return increase or profrt accrued: Section r63 :.t-.
=,
1; states:
Po fi3. Bailor entitled to increase or profit from
(,
'Z11 goods bailed.-In the absence of any contract to
! the contrary, the bailee is bound to deliver to the
1ll
I bailor, or according to his directions, any increase
o or profit which may have accrued from the goods
m :
bailed. ..:
.:
,:.
':
In cases where the bailed goods get accretion, the
goods should be returned along with such addition. i].
,1
If in case some profit arises from the bailed goods, :1

:
the bailee has the responsibility to return the profit is
=
along with the bailed goods. t::
Example: A leaves a cow in the custody of B to ;

:1:
r:!
be taken care of. The cow has a calf. B is bound to {
deliver the calf as well as the cow to A. t:
6. Not to set wp an aduerse title: It is the duty of the

bailee not to set up an adverse title for the bailed
goods. The bailee can use the goods only for the pur-
pose of bailment. Thus, the bailee cannot create any
adverse title.
rights of the bailor. In addi-

The duties of the bailee are the --O^--* .-.
tiontothese,therearefewmorerightswhichareavailable
to the bailor" These are as follows:
r. Right to enforcement: The bailor has the right to sue
the bailee and enforce his rights in the court of law if
the bailee does not perform his duties.
z. Termiruation of bailment: The bailor can termi- ',
nate the contract even before the completion of the ;:
:r.
bailmenr if the bailee uses the baired goods in
an
unauthorised manner" It is voidabr. ,t tf,. option 35
of
the bailor. Section r53 of the Act srares:
PF
r53. Termination of bairment by bairee's act =G)
inconsistent with conditions.-A .or,,rr., of O-*
bail- ,ui
ment is voidabre at the option of the bailor,
if the
>o
Zll
bailee does any act with regarcr to the goods (]{
tailed, EO .l
inconsistent with the condiiions of the"bailment. >m
Example:.4 lets to B, for hire, a horse for his llt
own m
riding. B drives the horse in iris crrrirg.. This
is,
1t the option of A, a ground for terminirio. of the
bailment.
3. Rigbt to dem.and goods at any time: As per
Section r59, which is stated in the pr.vious secrion,
in case of a gratuitous bailment, ih. bailor has a
right to demand the rerurn of goods even before
the
time specified in the bailment contract.
The duties of the bailor are the rights of the bailee
and are
laid down as follows:
r" Right to return or deriuer back the goods: The bailee
has the right to return the good, t orre of the
joint bailors, and it is not ma.rdato ry"rry
to return the
goods in the presence of ail the bailors.
This is raid
down in Section 165.
z. Right to sue or craim damages: The bailee can craim
any loss or damages due to non-entitrement
or defec-
tive entitlement of the bailor. In case a third person
claims the ownership, the bailor can ask the
courr
to decide the ownership and can arso withhord
the
delivery or return of the bailed goods to t}r.-rightfur
owner. Further, the bailee has the right to
sue when
a third party wrongfully depriv., ,f,. bailee
of his
right ro use or possess the goodr bailed bt;h;
bailor.
-
,F-
3. Rigbt to recouer chargeslexpenses incurredz The

bailee has the right to recover the charges or ex
incurred by him as agreed upon.
4. Right of lien: The bailee has the right of lien but get$
only a right of particular lien, to recover his due.
Lien is a right of a person to retain that which is in his

possession, belonging to another, until the demands of the;
person in possession are satisfied. Therefore, a lien ffie?[S,
the right to "retain" the possession of the goods or prop-
erty until the claim is paid or satisfied. Possession is essen;:
tial to create a right of lien which must be rightful and'
continuous. If the possession is lost, the right of lien is also
lost.
Examples:
I. A delivers a rough diamond to B, a jeweller, to be cut
and polished, which is accordingly done. B is enti-
tled to retain the stone till he is paid for the services
he has rendered.
2. A gives cloth to B, a tailor, to stitch a coat. B prom-
1
ises A to deliver'the coat as soon as it is finished, and
:i
t: to give a three months' credit for the price. B is not
i:
entitled to retain the coat until he is paid.

t.
Lien can be classified into two types: particular lien and
general lien.
r. Particular lien: A particular or specific lien means
the right to retain the particular goods until claims'
arising on those goods are satisfied. Particular lien '
t,; is attached to specific goods for the unpaid price or

t'l
1.1
claim" It is contained in Section r7o, Contract Act, r
l,,j
!, t
which states:
i,
[:
E.
H
tl.
gt:l
Eia
t7o. Bailee's particular lien.-Where the bailee
has, in accordance with the .purpose of the bail-
ment, rendered any service involving the exercise of
labour or skill in respect of the goods bailed, he has,
in the absence of a contract to the contrary, a right
to retain such goods until he receives due remuner-
ation for the services he has rendered in respect of
' them.
A particular lien can be exercised by the bailee under
the following circumstances:
(a) There must be possession of the goods by the
bailee.
(b) There is no contract to the contrary.
(c) The bailee must have rendered some services
in respect of the goods bailed.
(d.) The service must involve labour or skill in
respect of the goods bailed.
(e) Services must be performed in full accordance
with the terms of the contracr.
(f) The payment for the services under bailment
must be due.
.,
General lien: General lien means the right to retain
any.goods of another by the bailee unril all the claims
of the holder are satisfied. It is a right of retenrion of
goods not only towards the demands arising out of
the article in possession but for a general balance of
account in favour of the holder. This type of general
lien is available only to bankers, factors, wharfin-
gers, attorneys and policy-brokers.
This is stated in Section r7r asi
r7r General lien of bankers, factors, wharfin-
ger s, att orn ey s, an d p o li cy - b r o ker s.- Bankers, fac-
tors, wharfingers, attorneys of a High Court and
policy-brokers may, in the absence of a contract ro
the contrary, retain as a security for a general bal-
ance of account, any goods bailed to them; but no
other persons have a right to retain, as a security for
F---
,
i
such balance, goods bailed to them, unless there is

an express contract to that effect'
t grn.tig of U.l
A lien can be terminated under the following circum-
STANCES:
r. If a bailment is for a specific purpose, it is termi-

nated as soon as the purpose is over.
2. When the bailment is for aspecified or limited period
of time, then it is terminated as soon as the time is
expired.
j. It is terminated by the death of the bailor or the
bailee.
4. I7hen the bailee conducts any act, with regard to the
goods bailed, which is inconsistent with the terms of
the contract of bailment, the lien is terminated.
5. A lien is lost after the surrender of the possession of
the goods.
6" It is terminated on the fulfilment of the debt.
A contract of bailment can be terminated in the following

circumstances:
r" Expiry of time: The contract of bailment is termi-
nated when the specific period of bailment is expired.
z. Fulfilment of purpose: The contract of bailment is
terminated when the purpose of bailment is fulfilled
ri
or achieved.
!*
b 3. Destruction of tbe . subiect-matter: The contract
ii
{i of bailment terminates when the subject-m atter of
#
tr
$
&
the contract, i.e. the goods bailed, is damaged or
destroyed. 39
L.
I
[Jnauthorised use of goods: The bailment is termi- .n n
o o
nated when the contract becomes voidable in the case ! I
n
m m
where there is any unauthorised use of the goods by I {!
CT
the bailee. This is at the option of the bailor. m
of any party: A gratuitous baihnent is termi-
z
g
5" Death
nated on the death of the bailor or the bailee. o
m
6. Termination by the bailor: The bailment contracr
Iz
can be terminare d at any time by the bailor if he
o
wishes to do so, in case of a gratuitous bailment. z=
kind of bailmenr where goods are deliv-

Pledge is a special
ered for the purpose of security for repaymenr of a debt
or performance of a promise. It is a bailment for securing
repayment of a debt. Since pledge is a bailment, all provi-
sions applicable to bailment also apply to pledge. Irraddi-
tion, there are some specific provisions which also apply
to pledge.
Section r72 states:
r72. "Pledge", "pAwnor" and "pAwnee" defined._The
bailment of goods as security for payment of a debt or
performance of a promise is called "pledge". The bailor
is in this case called the "pawnor". The tailee is called
"pawnee".
Thus, the person who delivers the goods is the pledgor or
pawnor while the person who receives the goods is called
the pledgee or the pawnee. In pledge, there [ .ro change of
ownership of the goods or properry.
Example: A borrows < 5ooo from B and keeps his
scooter as security for repayment of the debt. This kind of
bailment of property is called a pledge or pawn. Here A is
40 the pawnor and B is the pawnee'
tr,n
>o
i=
<t\
=P
Po
1a1
I
! Basis Bailment Pledge
m
I Meaning When the goods are When the goods are delivered
o
m to act as security against the
temporarily handed over r.lri:
from one person to another debt owed by one person to

person for a specific another, it is known as pledge .:
purpose, it is known as
ba!lment
Purpose Forsafe keeping or Goods are kept as a securitY 'ttl:

purpose ag9!ns1 th9 of debt
lepa!ring Jepayment t.
:'|
Section ofthe Act Section 148, Contract Act, Section 172, Contract Act, 1872
1872
I
Parties to the Bailor and the bailee Pawnor and the pawnee
.:r
contract The person delivering the Ihe person delivering the 1lj
goods is the bailor and the goods is the pawnor while the
.person receiving it is the person receiving the goods is

.'
bailee the pawnee j:
Presence of May or may not be present (onsideratioh is a part ofthe
consideration in bailment pledge
Right to sell the Ihe bailee has no right to Ihe pawnee has the right
goods sell the goods to sell the goods when the
pawnorfails tg the debt
lgpuy
Use of goods The person in possession of The pawnee does not have the
the goods (bailee) has the right to use the goods pledged
right to use the goods for a with him
specific purpose
below:
l'he essentials of a pledge are enunlerated
r. The goods must be delivered by the borrower to the
pledgee or pawnee as a security for repayment of
debt or performance of the promise.
x. The possession of the goods passes from one person
to another but not the ownershiP.
), Only movable goods can be pledged. Immovable
property cannot be pledged.
.+.The goods pledged with the pledgee or pawnee,
must be returned on the payment of all dues by the
pledgor or pawnor.
The following are the rights of the pawnee:

r. Right of retainer: The pawnee can retain the goods
pledged with him not only for the payment of the
debt or performance of the promise but also for
interests of the debt and all necessary expenses
incurred by him during the possession of the goods
pledged. It is defined in Section 171, where it states:
t73. Pawnee's right of retainer.-The pawnee
:
t; may retain the goods pledged, not only for a pay'
ment of the debt or the performance of the promise,
:r
but for the interests of the debt, and all necessary
!:
!.:
expenses incurred by him in respect of the posses-
E:
a'
sion or for the preservation of the goods pledged.
;
a
However, Section r74 states that the pawnee shall
t
i.
have no right to retain the goods other than those
{.
F
pledged for the debt or promise, even for subseguenr
advance. [t states:
r74. Pawnee not to retain for debt or pror4.
ise other tban that fo, which goods pledged;
Presumption in case of subseqwent aduances.
The pawnee shall not, in the absence of d contrnql
to that effect, retain the goods pledged for any debl
or promise other than the debt or promise for which
they are pledged; but such contract, in the abse
of anything to the contrary, shall be presumed i1
regard to subsequent advances made by the pawnee.
,'
Rigbt for extraordinary expenses: The pawnee has
the right to recover the extraordinary expenses
incurred by him for the preservation of the goods
pledged. Section 17 5 o{ the Act states:
175. Pawnee's right as to extraordinary expen
incurred.-The pawnee is entitled to receive fro6
the pawnor extraordinary expenses incurred by
him for the preservation of the goods pledged.
3. Wben a pdwnor mdkes default: Section 176 states:
176. Pawnee's rigbt where pdunor makes
default.-If the pawnor makes default in payment,
of the debt, or performance, at the stipulated time,,
of the promise, in respect of which the goods were:
pledged, the pawnee may bring a suit against the
pawnor upon the debt or promise, and retain the
goods pledged as a collateral security; or he may sell'
the thing pledged, on giving the pawnor reasonable
notice of the sale"
This means that in case of a default by the pawnor,
the pawnee has the right to sue the pawnor for the,
recovery of the money lent along with the interest,:
i
I
necessary and extraordinary expenses.
t Pawnee has special property and lien on the
goods and so long as his claim is not satisfied, no
t
l
f
E
&
other creditor of pawnor has any right to take away
the goods or its Price.l
4. Right to sell the goods: The pawnee has the right tcr
sell the goods pledged with him by giving a notice
ro the pawnor, if there is a default by the pawnor in
making the payment.
The rights of a pawnor are as follows:

r.. Right to redeem: Section r77 proyides the pawnor
the right to redeem the goods. It allows the pawnor
to redeem his property even if he has defaulted.
Section r77 states:
ry7. Defaulting pawnor's right to redeem.-If
a time is stipulated for the payment of the debt, or
performance of the promise, for which the pledge is
made, and the pawnor makes default in payment of
the debt or performance of the promise at the stipu-
lated time, he may redeem the goods pledged at any
subsequent time before the actual sale of them; but
he must, in that case,.pay, in addition, any expenses
- which have arisen from his default.
L. Right to take back any increase or surplus on tbe
property: The pawnor has the right to take back any
increase or surplus on the property.
3. Right to get back the goods: The pawnor has the
right to get back the goods pledged only after repay-
ing the debt or other related charges.
1. Bank of Bihar v. State of Bibar, (tgZz) 3 SCC 196.

Generally, only the owner of the goods can pledge the
goods, but in certain cases and circumstances even t
non-owners can pledge the goods. These are as follows:
r" Mercantile agents: The agent has a right to pledge
the goods with the consent of the owner, in the ordi.,
nary course of business, provided that the pawnee:
acts in good faith and that he has no notice of the:
fact that the pawnor is not authorised to pawn the
goods. The necessary requirement for this is that t
person must be a mercantile agent, have possession
of the goods by consent of the owner, and it must
be done in the ordinary course of business. This is:
stated in Section ry8 of the Act.
z. Pledge by seller or bwyer in possession after sale:,
This kind of pledge involves two situations. First,
when the seller is left with possession of goods after
sale has been made, and second, when the buyer
obtains possession of goods with the consent of the
seller before the sale has been made. In both these
situations, the possessor of goods has the right to
pledge provided the pawnee or the pledgee acts in
good faith and has no notice of the previous sale o{
goods to the buyer or of the lien of the seller over
the goods. This is explained in Section 3o, Sale of
Goods Act, r93o.
j. Pledge wbere pawnor has limited interest:
Section 179, Contract Act states:
ry9. Pledge wbere parunor has only a limited
interest.-'$7here a person pledges goods in which
he has only a limited interest, the pledge is valid to
the extent of that interest.
:.1 A person having a lien over the goods or a finder
of goods may pledge them to the extent of his/her
,!'
,-!
,t'
ri.
.i
:i
lt:
.;t
rt&
interest"In such a case, where a person has a mort-
gage or a lien with respec:t to the goods, the pledge
wiil be valid to the extent of such interest.
4. Pledge
by co-owner in possession:Incase, where the
goods belong to more than one owner, one of the
several co-owners of goods in possession can create
avahd pledge with the consent of other owners"
5. Pledge by person in possession wnder a uoidable
contract: According to Section r78-A:
r78-A. Pledge by person in possession under
uoidable contract.-When the pawnor has obtai-
ned possession of the goods pledged by him under a
contract voidable under Section 19 or Section 19-A,
but the contract has not been rescinded at the time
of the pledge, the pawnee acquires a good title ro
the goods, provided he acts in good faith and with-
out notice of the pawnor's defect of title.
This means if a person obtains possession of goods
under a voidable contract, the pledge created by
him/her is valid provided the conrrac has nor been
rescinded before the contracr of pledge; and the
pawnee acts in good faith and has no knowledge of
the defective title of the pawnor.
The Competition Act, 2002
Introduction
In pursuit of globalization, India responded to opening up its economy, removing control and
resorting to liberalization. The MRTP Act, 1969 became obsolete in certain aspects in the light of
international economic developments and there was a need to shift our focus from curbing
monopolies to promoting competition which lead to the passing of The Competition Act, 2002.
What is a Competition?
Competition Is “a situation in a market in which firms or sellers independently strive for the buyers’
patronage in order to achieve a particular business objective for example, profits, sales or market
share” (World Bank, 1999)
Important provisions of the Act
• Section 3- Prohibiting Anti-Competitive agreements
• Section 4 – Prohibiting abuse of Dominant position
• Section 5 and Section 6 – Regulation of Combinations
• Competition Commission of India
Anti-Competitive agreements - Section 3
Section 3(1) No enterprise or association of enterprises or person or association of persons shall

enter into any agreement in respect of production, supply, distribution, storage, acquisition or
control of goods or provision of services, which causes or is likely to cause an appreciable adverse
effect on competition within India.
Section 3(2) any agreement entered into in contravention of the provisions contained in sub-section
(1) shall be void.
Competition among suppliers of goods and services will stabilize prices at a reasonable level. The
principal objective of suppliers of goods and services who are in a position to manipulate the market
is to maintain their profits at pre-determined levels. They seek to achieve this through various
means. Agreements for price fixing, limiting supply of goods or services, dividing the market etc. are
the usual modes of interfering with the process of competition and ultimately reducing or
eliminating competition. Where competition is adversely affected to an appreciable extent, such
agreements would be anti-competitive.
1
Anti Competitive agreements -Horizontal Agreements
3(3) Any agreement entered into between enterprises or associations of enterprises or persons or
associations of persons or between any person and enterprise or practice carried on, or decision
taken by, any association of enterprises or association of persons, including cartels, engaged in
identical or similar trade of goods or provision of services, which—
a) Directly or indirectly determines purchase or sale prices
b) Limits or controls production, supply, markets, technical development, investment, or provision of

services
c) Shares the market or source of production or provision of services by way of allocation of

geographical area of market, or type of goods or services or number of customers in the market or
any other similar way
(d)Directly or indirectly results in bid rigging or collusive bidding
Shall be presumed to have an appreciable adverse effect on competition.
Bid rigging occurs when there is an agreement between enterprises or persons engaged in identical
or similar production or trading of goods or provision of services which has the effect of eliminating
or reducing competition for bids or adversely affects or manipulates the process of bidding.
Members of the group by keeping the bid amount at a predetermined manipulated level take away
Independence in the bidding process.
Anti-Competitive agreements -Vertical Agreements
Where the parties are in different stages or levels of production claim, this practice is called a
vertical restraint.
3(4) any agreement amongst enterprises or persons at different stages or levels of the production
chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or
trade in goods or provision of services, including—
a) tie-in arrangement.
(This is an arrangement by which a seller agrees to sell a product known as the tying item
only on condition that buyer agrees to buy a second product known as the tied product from
the seller.eg., Insistence of gas distributer to buy a gas stove as a condition to the gas
connection, Requiring a stabilizer to be bought along with the refrigerator.)
b) exclusive supply agreement.
(This includes any agreement restricting the purchaser from acquiring or otherwise dealing
in any goods other than those of the seller or any other person.
c) exclusive distribution agreement.
2
(This includes any agreement to limit, restrict, or withhold the output or supply of any
goods, or allocate any area or market for the disposal or sale of goods)
d) refusal to deal.
(This includes any agreement which restricts, or is likely to restrict, the persons, or classes of
persons to whom goods are sold, or from whom goods are bought.)
e) resale price maintenance.
(This includes any agreement to sell goods on condition that the prices to be charged on the
resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated
that prices lower than those prices may be charged.)
Shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to

cause an appreciable adverse effect on competition in India.
Case: Bata restraining the small scale producers with whom it entered into arrangement for buying
footwear, from purchasing raw material parties other than those approved by Bata and prohibiting
them from selling additional production to any other party, or at prices without Bata’s approval
amounted to restrictive trade practice. (1976) 46 Com Cases 441)
Abuse of Dominant position- Section 4
(1) No enterprise or group shall abuse its dominant position.
(2) There shall be an abuse of dominant position if an enterprise or a group
(a) directly or indirectly, imposes unfair or discriminatory
(i) Condition in purchase or sale of goods or services; or
(ii) price in purchase or sale (including predatory price) of goods or service.
The abuse of a dominant position is another way of interfering with competition in the marketplace.
‘Dominant Position’ means a position of strength. This is enjoyed by an enterprise in the relevant
market in India. This enables the enterprise to operate independently of competitive forces
prevailing in the relevant market or affect its competitors or consumers or the relevant market in its
favour.
Whether an enterprise enjoys a dominant position or not is decided by factors such as market share
of the enterprise, size and resources of the enterprise, size and importance of the competitors,
economic power of the enterprise including commercial advantages over competitors, vertical
integration of the enterprises or sale or service network of such enterprises, dependence of
consumers on the enterprise, monopoly or dominant position whether acquired as a result of an y
statute or by virtue of being a Government Company or a public sector undertaking or otherwise,
entry barriers such as regulatory barriers, technical entry barriers, economies or sale, high cost of
3
substitutable goods or service for consumers, countervailing buying power, market structure and
size of market, social obligations and social costs, relative advantage, by way of the contribution to
the economic development, by the enterprise enjoying a dominant position having or likely to have
appreciable adverse effect on competition.
Combinations -Section 5
The acquisition of one or more enterprises by one or more persons or merger or amalgamation of
enterprises shall be a combination of such enterprises and persons or enterprises.
According to Section 6, no person or an enterprise shall enter into a combination which causes or is
likely to cause an appreciable adverse effect on competition within the relevant market in India and
such a combination is void.
Regulation of combinations-Section 6
Notice to the Commission – Any person or enterprise who or which proposes to enter into a
combination shall give notice to the commission disclosing the details of the proposed combination
within thirty days of approval of the proposal of combination by the Board of directors.
Post filing waiting period – no combination shall come into effect until 210 days have passed from
the day on which the notice has been given to the commission or the commission has passed orders,
whichever is earlier.
Competition Commission of India
 To prevent practices having adverse effect on competition

 To promote and sustain competition in the markets
 To protect the interest of consumers
 To ensure freedom of trade carried on by other participants in market.
Establishment – Establishment by Central Government.
Composition – Chairperson and not less than two and not more than six other members, appointed
by the central government.
Term of Office – 5 years and shall be eligible for reappointment.
4
Consumer Protection Act
As the remedies provided to the consumers under various statutory laws were beset with a number
of difficulties, there was a demand for the enactment of suitable legislation for the protection of
consumers. Consequently, Parliament enacted the Consumer Protection Act, 1986. This legislation
had been amended from time-to-time to bring it in accordance with changes brought about by
economic liberalisation, globalisation of markets and digitalisation of products and services. And
recently in 2019, the parliament replaced this more than three decades old Consumer Protection
Act.
The Consumer Protection Act, 2019 allows consumers to file complaints electronically and also
provides flexibility to the consumers to file complaints with the jurisdictional consumer forum
located at the place of residence or work of the consumer. And aiming at the speedier resolution of
disputes, the Act provides for mediation as an Alternative Dispute Resolution Mechanism making the
process of dispute adjudication simpler and quicker. The Act has widened its scope by introducing
the idea of Product legal responsibility and brings within its scope, the product manufacturer,
product service provider and product seller for any claim for compensation.
Who is a consumer?
According to S.2 (7) the following persons are consumers –
1. A person who buys goods for a consideration which has been paid or promised or partly paid or
partly promised
2. A person who uses such goods with permission of the buyer other than who buys such goods for a
consideration
3. A person who, hires or avails of any services for consideration which has been paid or promised or
partly paid or partly promised
4. A person who is a beneficiary of such services with the approval of the buyer.
But does not include a person who avails of such services for any commercial purpose.
Explanation to S.2 (7) makes it clear that for the purpose of this clause “commercial purpose” does
not include use by a consumer of goods bought and used by him exclusively for the purpose of
earning his livelihood, by means of self-employment.
The new Act has widened the definition of ‘consumer’. The definition now includes any person who
buys any goods, whether through offline or online transactions, electronic means, teleshopping,
direct selling, or multi-level marketing. The earlier act did not specifically include e-commerce
transactions and this lacuna has been addressed.
1
Who can make complaint?
1. A consumer
2. Any voluntary consumer association
3. Central government or any state government
4. One or more consumers, where there are numerous consumers having the same interest
5. In case of death of a consumer, his legal heir or representative
What is a complaint?
Goods bought suffer defects or services hired suffer deficiency in any respect
Consumer Disputes Redressal Agencies
1. District Forum 2. State Commission 3. National Commission
Limitation Period
The right to file complaint is time bound. The maximum period within which a complaint can be filed
is two years from the date on which the cause of action arose.
Jurisdiction of courts
1. Pecuniary jurisdiction - Consumer forums shall have jurisdiction to entertain complaints where the
value of goods or services does not exceed 1 crore, State commission shall have jurisdiction where
the value of goods or services exceeds 1 Crore but does not exceed 20 Crore, National Commission
shall have jurisdiction where the value of goods or services exceeds 20 Crore.
2. Territorial jurisdiction – The territorial jurisdiction has been enhanced, so the complaint can be
instituted within the local limits of the consumer forum within whose jurisdiction the complainant
resides or carries on business.
Kinds of relief to consumers
1. Removal of defects or deficiencies in service
2. Replacement of goods
3. Refund of price or charges
4. Compensation for loss or injury due to negligence
5. Provide adequate costs to parties
2

Business & Corporate Law: Dr. Jaya Mathew

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Business & Corporate Law: Dr. Jaya Mathew

Uploaded by

Copyright:

Available Formats

Business & Corporate Law

Dr. Jaya Mathew

K J Somaiya Institute of Management, India 1

K J Somaiya Institute of Management, India 2

Independent corporate existence

Company has its own separate property

Limited liability of the members

Background : Once a company is formed and

PNB Finance Ltd Vs. Shital Prasad jain

Gilford Motor Co. Ltd Vs. Horne

 When the cloak of corporate personality is used to evade tax

State of U.P Vs. Renusagar Power Co.

 When the statute itself contemplates the lifting of the veil

LIC of India Vs. Escorts Ltd.

 Fraudulently conducting company’s business during winding up

 Separate corporate personality may be ignored in holding and subsidiary companies

 For determining the legal character of a company

 Reduction of membership below the statutory minimum

K J Somaiya Institute of Management, India 5

K J Somaiya Institute of Management, India 6

CORPORATE PERSONALITY AND

l. 1897 AC22 (1895-99) All ER Rep 9 (HL)'

survived; not even a hydrogen bomb courd have

though registered in England, would

(e) under statutory provisions.-Besides

15. h.eewheels (p) Ltd v Veda Mitro, (1969)

- REGISTRATION AND INCORPORATIO.N

(a) Public company.-Any seven or

26. This declaration should be signed by an advocate, or any proposed

1. Independent corporate existence

5. Limited liability partnerships are governed by the LLP Act, 2008.

7. A limited liability partnership is a body corporate and is created by law. Registrar of

10. Incorporation empowers an LLP to commence business, to sue or be sued, hold or

K J Somaiya Institute of Management, India 1

The term company means a company

K J Somaiya Institute of Management, India 2

K J Somaiya Institute of Management, India 3

K J Somaiya Institute of Management, India 4

K J Somaiya Institute of Management, India 5

is not a private company;

has a minimum paid-up share capital of Rs. 5,00,000.

---However, a subsidiary of a company, not being a private company, shall be deemed to

----Companies Amendment Act (2015)

K J Somaiya Institute of Management, India 6

K J Somaiya Institute of Management, India 7

A company not having any limit on the

K J Somaiya Institute of Management, India 8

A company having the liability of its

K J Somaiya Institute of Management, India 9

A company having the liability of its

K J Somaiya Institute of Management, India 10

Holding & Subsidiary

K J Somaiya Institute of Management, India 11

K J Somaiya Institute of Management, India 12

A company in which the holding company

K J Somaiya Institute of Management, India 14

One Person Small

K J Somaiya Institute of Management, India 16

A company which has only one person as

K J Somaiya Institute of Management, India 17

K J Somaiya Institute of Management, India 18

K J Somaiya Institute of Management, India 19

Section 8 Companies are formed not with a