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BUSINESS LEGISLATION

Unit-I

The Indian Contract Act:

The law relating to contracts in India is contained in Indian Contract Act, 1872. The Act was passed by
British India and is based on the principles of English Common Law. It is applicable to the All the States
of India except the State of Jammu & Kashmir. It determines the circumstances in which promise made
by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts
everyday knowingly or unknowingly. Each contract creates some right and duties upon the contracting
parties. Indian contract deals with the enforcement of these rights and duties upon the parties in India.

The Third Law commission of British India formed in 1861 under the stewardship of Chairman
Sir John Romilly, with initial members as Sir Edward Ryan, R. Lowe, J.M. Macleod, Sir W. Erle
(succeeded by Sir. W.M. James) and Justice Wills (succeeded by J. Henderson), had presented
the report on contract law for India as Draft Contract Law (1866). The Draft Law was enacted as
The Act 9 of 1872 on 25th April 1872 and the Indian Contract Act, 1872 came into force with
effect from September 1, 1872.

Before the enactment of the Indian Contract Act, 1872, there was no codified law for contract in
India. In the Presidency Towns of Madras, Bombay and Calcutta law relating to contract was
dealt with the Charter granted in 1726 by King George I to the East India Company. Thereafter
in 1781, in the Presidency Towns, Act of Settlement passed by the British Government came into
force. Act of Settlement required the Supreme Court of India that questions of inheritance and
succession and all matters of contract and dealing between party and party should be determined
in case of Hindu as per Hindu law and in case of Muslim as per Muslim law and when parties to
a suit belonged to different persuasions, then the law of the defendant was to apply. In outside
Presidency Towns matters with regard to contract was mainly dealt with English Contract Laws;
the principle of justice, equity and good conscience was followed.

Development

The Act as enacted originally had 266 Sections, it had wide scope and included.

 General Principles of Law of Contract::::::::: 1 to 75

 Contract relating to Sale of Goods::::::::::::76 to 129
 Special kinds of Contracts

(includes indemnity,
guarantee, bailment & pledge:::::::::::::::::125 to 238

 Contracts relating to Partnership::::::::::::239 to 266

Indian Contract Act embodied the simple and elementary rules relating to Sale of goods and
partnership. The developments of modern business world found the provisions contained in the
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Indian Contract Act inadequate to deal with the new regulations or give effect to the new
principles. Subsequently the provisions relating to the sale of goods and partnership contained in
the Indian Contract Act were repealed respectively in the year 1930 and 1932 and new
enactments namely Sale of Goods and Movables Act 1930 and Indian Partnership act 1932 were
re-enacted.

At present the Indian Contract Act includes:

 General Principles of Law of Contract:::::: 1 to 75

 Special kinds of Contracts

(includes indemnity, guarantee,

bailment & pledge::::::::::::::::::::::::::125 to 238

Definition

Section 2(h) of the Act defines the term contract as "any agreement enforceable by law". There
are two essentials of this act, agreement and enforceability.

Section 2(e) defines agreement as "every promise and every set of promises, forming the
consideration for each other."

Again Section 2(b) defines promise in these words: "when the person to whom the proposal is
made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted,
becomes a promise."

And other words Say Agreement is Sum of Promise

Essential Elements of a Valid Contract

According to Section 10, "All agreements are contracts, if they are made by the free consent of
the parties, competent to contract, for a lawful consideration with a lawful object, and not hereby
expressly to be void."

Essential Elements of a Valid Contract are:

1.Proper offer and proper acceptance. there must be an agreement based on a lawful offer made
by person to another and lawful acceptance of that offer made by the latter. section 3 to 9 of the
contract act, 1872 lay down the rules for making valid acceptance

2.Lawful consideration: An agreement to form a valid contract should be supported by

consideration. Consideration means “something in return” (quid pro quo). It can be cash, kind, an
act or abstinence. It can be past, present or future. However, consideration should be real and
lawful.
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3.Competent to contract or capacity: In order to make a valid contract the parties to it must be
competent to be contracted. According to section 11 of the Contract Act, a person is considered
to be competent to contract if he satisfies the following criterion:

 The person has reached the age of maturity.

 The person is of sound mind.
 The person is not disqualified from contracting by any law.

4.Free Consent: To constitute a valid contract there must be free and genuine consent of the
parties to the contract. It should not be obtained by misrepresentation, fraud, coercion, undue
influence or mistake.

5.Lawful Object and Agreement: The object of the agreement must not be illegal or unlawful.

6. Agreement not declared void or illegal: Agreements which have been expressly declared void
or illegal by law are not enforceable at law; hence they do not constitute a valid contract.

7. Intention To Create Legal Relationships:-when the two parties enter in to an agreement,there

must be intention to create a legal relationship between them ...if there is no such intention on the
part of the parties ..there is no contract between them ..agreements of a social or domestic nature
do not contemplate legal relationship;as such they are not contracts.

8. Certainty, Possibility Of Performance

9. Legal Formalities 10. by surity

Types of contracts

On the basis of validity:

1. Valid contract: An agreement which has all the essential elements of a contract is called a
valid contract. A valid contract can be enforced by law.

2. Void contract[Section 2(g)]: A void contract is a contract which ceases to be enforceable by

law. A contract when originally entered into may be valid and binding on the parties. It may
subsequently become void. -- There are many judgments which have stated that where any crime
has been converted into a "Source of Profit" or if any act to be done under any contract is
opposed to "Public Policy" under any contract—than that contract itself cannot be enforced
under the law-

3. Voidable contract[Section 2(i)]: An agreement which is enforceable by law at the option of

one or more of the parties thereto, but not at the option of other or others, is a voidable contract.
If the essential element of free consent is missing in a contract, the law confers right on the
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aggrieved party either to reject the contract or to accept it. However, the contract continues to
be good and enforceable unless it is repudiated by the aggrieved party.

4. Illegal contract: A contract is illegal if it is forbidden by law; or is of such nature that, if

permitted, would defeat the provisions of any law or is fraudulent; or involves or implies injury
to a person or property of another, or court regards it as immoral or opposed to public policy.
These agreements are punishable by law. These are void-ab-initio.

“All illegal agreements are void agreements but all void agreements are not illegal.”

5. Unenforceable contract: Where a contract is good in substance but because of some technical
defect cannot be enforced by law is called unenforceable contract. These contracts are neither
void nor voidable.

On the basis of formation:

1. Express contract: Where the terms of the contract are expressly agreed upon in words (written
or spoken) at the time of formation, the contract is said to be express contract.

2. Implied contract: An implied contract is one which is inferred from the acts or conduct of the
parties or from the circumstances of the cases. Where a proposal or acceptance is made otherwise
than in words, promise is said to be implied.

3. Quasi contract: A quasi contract is created by law. Thus, quasi contracts are strictly not
contracts as there is no intention of parties to enter into a contract. It is legal obligation which is
imposed on a party who is required to perform it. A quasi contract is based on the principle that a
person shall not be allowed to enrich himself at the expense of another.

On the basis of performance:

1. Executed contract: An executed contract is one in which both the parties have performed their
respective obligation.

2. Executory contract: An executory contract is one where one or both the parties to the contract
have still to perform their obligations in future. Thus, a contract which is partially performed or
wholly unperformed is termed as executory contract.

3. Unilateral contract: A unilateral contract is one in which only one party has to perform his
obligation at the time of the formation of the contract, the other party having fulfilled his
obligation at the time of the contract or before the contract comes into existence.

4. Bilateral contract: A bilateral contract is one in which the obligation on both the parties to the
contract is outstanding at the time of the formation of the contract. Bilateral contracts are also
known as contracts with executory consideration.
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Offer

Proposal is defined under section 2(a) of the Indian contract Act, 1872 as "when one person
signifies to another his willingness to do or to abstain from doing anything with a view to obtain
the assent of that other to such act or abstinence, he is said to make a proposal/offer". Thus, for a
valid offer,the party making it must express his willingness to do or not to do something. But
mere expression of willingness does not constitute an offer. An offer should be made to obtain
the assent of the other. The offer should be communicated to the offeree and it should not contain
a term the non compliance of which would amount to acceptance. Classification of Offer 1.
General Offer: Which is made to public in general. 2. Special Offer: Which is made to a definite
person. 3. Cross Offer: Exchange of identical offer in ignorance of each other. 4. Counter Offer:
Modification and Variation of Original offer. 5. Standing, Open or Continuing Offer: Which is
open for a specific period of time. The offer must be distinguished from an invitation to offer.
Invitation to offer "An invitation to offer" is only a circulation of an invitation to make an offer,
it is an attempt to induce offers and precedes a definite offer. Acceptance of an invitation to an
offer does not result in formation of a contract and only an offer emerges in the process of
negotiation. A statement made by a person who does not intend to bound by it but, intends to
further act, is an invitation to offer.

Acceptance

According to Section 2(b), "When the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted."

Rules:

1. Acceptance must be absolute and unqualified.

2. Communicated to offeror.

3. Acceptance must be in the mode prescribed.

4. Acceptance must be given within a reasonable time before the offer lapses.

5. Acceptance by the way of conduct.

6. Mere silence is no acceptance. Silence does not per-se amounts to communication- Bank of
India Ltd. Vs. Rustom Cowasjee- AIR 1955 Bom. 419 at P. 430; 57 Bom. L.R. 850- Mere
silence cannot amount to any assent. It does not even amount to any representation on which any
plea of estoppel may be founded, unless there is a duty to make some statement or to do some act

7. offree and offerer must be consent

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Lawful consideration

According to Section 2(d), Consideration is defined as: "When at the desire of the promisor, the
promisee has done or abstained from doing, or does or abstains from doing, or promises to do or
abstain something, such an act or abstinence or promise is called consideration for the promise.
"Considertion" means to do something.

In short, Consideration means quid pro quo i.e. something in return.

An agreement must be supported by a lawful consideration on both sides.

The consideration or object of an agreement is lawful, unless and until it is:

1. forbidden by law, or
2. is of such nature that, if permitted, it would defeat the provisions of any law, or
3. is fraudulent, or involves or implies injury to the person or property of another, or
4. the court regards it as immoral, or opposed to public policy.
5. consideration may take in any form-money,goods, services, a promise to marry, a promise to
forbear etc.

Contract Opposed to Public Policy can be Repudiated by the Court of law even if that contract is
beneficial for all of the parties to the contract- What considerations and objects are lawful and
what not-Newar Marble Industries Pvt. Ltd. Vs. Rajasthan State Electricity Board, Jaipur, 1993
Cr. L.J. 1191 at 1197, 1198 [Raj.]- Agreement of which object or consideration was opposed to
public policy, unlawful and void- -- What better and what more can be an admission of the fact
that the consideration or object of the compounding agreement was abstention by the board from
criminally prosecuting the petitioner-company from offence under Section 39 of the act and that
the Board has converted the crime into a source of profit or benefit to itself. This consideration or
object is clearly opposed to public policy and hence the compounding agreement is unlawful and
void under Section 23 of the Act. It is unenforceable as against the Petitioner-Company.

Competent To Contract

Section 11 of The Indian Contract Act specifies that every person is competent to contract
provided:

1. He should not be a minor i.e. an individual who has not attained the age of majority i.e. 18
years.

2. He should be of sound mind while making a contract. A person with unsound mind cannot
make a contract.

3. He is not a person who has been personally disqualified by law.

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Free Consent

According to Section 14, " two or more persons are said to be consented when they agree upon
the same thing in the same sense (Consensus-ad-idem).

A consent is said to be free when it is not caused by coercion or undue influence or fraud or
misrepresentation or mistake.

Elements Vitiating free Consent

1. Coercion (Section 15): "Coercion" is the committing, or threatening to commit, any act
forbidden by the Indian Penal Code under(45,1860), or the unlawful detaining, or threatening to
detain, any property, to the prejudice of any person whatever, with the intention of causing any
person to enter into an agreement.

2. Undue influence (Section 16): "Where a person who is in a position to dominate the will of
another enters into a contract with him and the transaction appears on the face of it, or on the
evidence, to be unconscionable, the burden of proving that such contract was not induced by
undue influence shall lie upon the person in the position to dominate the will of the other."

3. Fraud (Section 17): "Fraud" means and includes any act or concealment of material fact or
misrepresentation made knowingly by a party to a contract, or with his connivance, or by his
agent, with intent to deceive another party thereto of his agent, or to induce him to enter into the
contract.

4. Misrepresentation (Section 18): " causing, however innocently, a party to an agreement to

make a mistake as to the substance of the thing which is the subject of the agreement".

5. Mistake of fact (Section 20): "Where both the parties to an agreement are under a mistake as
to a matter of fact essential to the agreement, the agreement is void".

Revocation of Offer

A proposal may be revoked at any time before the communication of its acceptance is complete
as against the proposer, but not afterwards. An acceptance may be revoked at any time before the
communication of the acceptance is complete as against the acceptor, but not afterwards.

A proposal is revoked -

(1) by the communication of notice of revocation by the proposer to the other party;

(2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so
prescribed, by the lapse of a reasonable time, without communication of the acceptance;

(3) by the failure of the acceptor to fulfill a condition precedent to acceptance; or

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(4) by the death or insanity of the proposer, if the fact of the death or insanity comes to the
knowledge of the acceptor before acceptance.

Agency

In law, the relationship that exists when one person or party (the principal) engages another (the
agent) to act for him, e.g. to do his work, to sell his goods, to manage his business. The law of
agency thus governs the legal relationship in which the agent deals with a third party on behalf of
the principal. The competent agent is legally capable of acting for this principal vis-à-vis the
third party. Hence, the process of concluding a contract through an agent involves a twofold
relationship. On the one hand, the law of agency is concerned with the external business relations
of an economic unit and with the powers of the various representatives to affect the legal position
of the principal. On the other hand, it rules the internal relationship between principal and agent
as well, thereby imposing certain duties on the representative (diligence, accounting, good faith,
etc.).

Under section 201 to 210 an agency may come to an end in a variety of ways:

(i) By the principal revoking the agency – However, principal cannot revoke an agency coupled
with interest to the prejudice of such interest. Such Agency is coupled with interest. An agency is
coupled with interest when the agent himself has an interest in the subject-matter of the
agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent
for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the
principal against the security of the goods; in such a case, the principal cannot revoke the
agent’s authority till the goods are actually sold, nor is the agency terminated by death or
insanity. (Illustrations to section 201)

(ii) By the agent renouncing the business of agency;

(iii) By the business of agency being completed;

(iv) By the principal being adjudicated insolvent (Section 201 of The Indian Contract Act. 1872)

The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to
bind the principal (Section 204), though he can always do so, before such authority has been so
exercised (Sec 203).

Further, as per section 205, if the agency is for a fixed period, the principal cannot terminate the
agency before the time expired, except for sufficient cause. If he does, he is liable to compensate
the agent for the loss caused to him thereby. The same rules apply where the agent, renounces an
agency for a fixed period. Notice in this connection that want of skill continuous disobedience of
lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of
an agent. Further, reasonable notice has to be given by one party to the other; otherwise, damage
resulting from want of such notice, will have to be paid (Section 206). As per section 207, the
revocation or renunciation of an agency may be made expressly or impliedly by conduct. The
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termination does not take effect as regards the agent, till it becomes known to him and as regards
third party, till the termination is known to them (Section 208).

When an agent’s authority is terminated, it operates as a termination of subagent also. (Section

210)

Essentials of a valid contract:

All agreements are not contracts. Only that agreements which is enforceable at law is a contract. An
agreement which is enforceable at law cannot be contract. Thus, the term agreement is more wider in
scope than contract. All Contracts are agreements but all agreements are not contracts.

An agreement, to be enforceable by law, must posses the essential elements of a valid contract as
contained in section 10 of the Indian Contract Act. According to Section 10, "All agreements are contract
if they are made by the free consent of the parties, competent to contract, for a lawful consideration
and with a lawful object and are not expressly declared to be void." As the details of these essentials
form the subject-matter of our subsequent chapters, it is proposed to dismiss them in brief here.

The following are the essential elements of a valid contract :

1. Offer and Acceptance. In order to create a valid contract, there must be a 'lawful offer' by one party
and 'lawful acceptance' of the same by the other party.

2. Intention to Create Legal Relationship. In case, there is no such intention on the part of parties,
there is no contract. Agreements of social or domestic nature do not contemplate legal relations.
Case :- Balfour vs. Balfour(1919)

3.Lawful Consideration. Consideration has been defined in various ways. According to

Blackstone,"Consideration is recompense given by the party contracting to another." In other words of
Pollock, "Consideration is the price for which the promise of the another is brought."
consideration is known as quid pro-quo or something in return.

4. Capacity of parties. The parties to an agreement must be competent t contract. If either of the parties
does not have the capacity to contract, the contract is not valid.
According the following persons are incompetent to contract.
(a) Miners, (b) Persons of unsound mind, and
(c) persons disqualified by law to which they are subject.

5. Free Consent. 'Consent' means the parties must have agreed upon the same thing in the same sense.
According to Section 14, Consent is said to be free when it is not caused by-

(1) Coercion, or (2) Undue influence, or (3) Fraud, or

(4) Mis-representation, or (5) Mistake.
An agreement should be made by the free consent of the parties.

6. Lawful Object. The object of an agreement must be valid. Object has nothing to do with
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consideration. It means the purpose or design of the contract. Thus, when one hires a house for use as a
gambling house, the object of the contract is to run a gambling house.

The Object is said to be unlawful if-

(a) it is forbidden by law;

(b) it is of such nature that if permitted it would defeat the provision of any law;
(c) it is fraudulent;
(d) it involves an injury to the person or property of any other;
(e) the court regards it as immoral or opposed to public policy.

7. Certainity of Meaning. According to Section 29,"Agreement the meaning of which is not Certain or
capable of being made certain are void."

8. Possibility of Performance. If the act is impossible in itself, physically or legally, if cannot be enforced
at law. For example, Mr. A agrees with B to discover treasure by magic. Such Agreements is not
enforceable.

9. Not Declared to be void or Illegal. The agreement though satisfying all the conditions for a valid
contract must not have been expressly declared void by any law in force in the country. Agreements
mentioned in Section 24 to 30 of the Act have been expressly declared to be void for example
agreements in restraint of trade, marriage, legal proceedings etc.

10. Legal Formalities. An oral Contract is a perfectly valid contract, expect in those cases where writing,
registration etc. is required by some statute. In India writing is required in cases of sale, mortgage, lease
and gift of immovable property, negotiable instruments; memorandum and articles of association of a
company, etc. Registration is required in cases of documents coming within the scope of section 17 of
the Registration Act.

All the elements mentioned above must be in order to make a valid contract. If any one of them is
absent the agreement does not become a contract.

Void agreements:

Regulatory Requirements: Contract Law:

Classification of Contracts

Express Contract:-A contract wherein both the offer and acceptance are made in words, spoken
or written.
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Implied Contract:- A contract which is inferred from the conduct of parties or course of
dealings between them.

Quasi Contract:- It is a contract which does not arise by virtue of an agreement, express or
implied, but the law recognises the contract under certain special circumstances. These contracts
are based on the principle of equity, justice and good conscience. The Act describes the
obligations arising under these contracts as 'certain relations resembling those created by
contracts'. Some of the transactions that will be considered as 'quasi-contract' under the law are:-

 When a person who is interested in the payment of money which another person is bound
by law to pay, and who therefore pays it, is entitled to be reimbursed by the other person

 When a person finds goods belonging to another person, it is his duty to restore them to
the rightful owner;

 A person to whom money is paid or anything delivered, by mistake or under coercion, is

liable to repay or return it

 Where necessaries are supplied to a person, who is incompetent to contract such as

minors or to someone whom he is legally bound to support, the supplier is entitled to
recover the price of the property of the incompetent person,etc.

Valid Contract:- A valid contract is a 'contract which satisfies all the requirements of the Act'.
Such a contract creates rights in personam and is legally enforceable.

Void Agreement:- It is an agreement not enforceable by law. It is void ab initio because it lacks
one or more of the essentials of a valid contract. Such an agreement does not create any legal
relations. However, it is different from unlawful agreements which are forbidden by the law. An
illegal agreement must necessarily be void but a void agreement need not be illegal.The
following agreements that have been declared void by the Contract Act:-

 Agreements by incompetent persons

 Agreements wherein consideration and objects are unlawful

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 Agreements in restraint of marriage

 Agreements in restraint of trade

 Agreements in restraint of legal proceedings

 Agreements the meaning of which are uncertain,etc.

Performance of contracts:
Execution of a contract by which the contracting parties are automatically discharged (see
discharge of contract) of their obligations under it. Although contracts usually call for full and
precise performance, a substantial performance may be acceptable under certain circumstances,
on a pro rata basis, or on payment of damages for the unfinished or defective performance.

A contract creates legal obligations ,”Performance of a contract” means the carrying out of these
obligations. Each party must perform or offer to perform the promise which he has made.
Section 37, Para 1, of the Contract Act lays down that, “The parties to a contract must either
perform, or offer to perform, ‘their respective promises, unless such performance is dispensed
with or excused under the provisions of this act, or of any other law.”

The Offer to Perform or Tender

The offer to perform the contract is called Tender. Offer to perform or Tender may be called
attempted performance. A tender, to be legally valid, must fulfill the following conditions.Sec.
38 .

1. It must be unconditional. A tender coupled with a condition is no tender.

Example

A passenger on a bus offers a rupee note for the fare which is 10p. only. It is not a valid. tender
because it imposes condition on the acceptance of the tender viz the return of the balance out of
the rupee. A tender of money must be of the exact sum due. Bireswar v. The Emperor.
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2. A tender to pay conditionally upon the other party doing something such as giving a release or
accepting the other amount in full satisfaction of all demands, is not a valid tender. But ‘of
course, a receipt may be demanded after a tender has been accepted.

3. A tender money, must be in legal tender money, not by any foreign money, or by promissory
note or cheque. Jagat v. Nabagopal.

4: The tender must be made at a proper time and place. What is proper time and place, depends
upon the intention of the parties and the provisions of Sections 46-50 of the Act. (See pages.109-
110).

A tender before the due date or at a time and place other than that agreed upon, is not a valid
tender. Eshaque v. Abdul Bari.

5. The person to whom a tender is made must be given a reasonable opportunity of ascertaining
that the person by whom it is made is able and willing there and then, to do the whole of what he
is bound by his promise to do.

6. The reason behind the above rule is that an offer-to perform a -part of the promise is not a
valid tender.

7. If the offer is an offer to deliver anything to the promisee, the promisee must have a
reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound
by his promise to deliver.

Example :

P contracts to deliver to B at his warehouse on the 1 st March 1973, 100 bales of cotton of a
particular quality. P must bring the cotton to B’s warehouse, on the appointed day, under such
circumstances that B may have a reasonable opportunity of satisfying himself that the thing
offered is cotton of the quality contracted for, and that there are 100 bales.

8. When there are several promisees, an offer, to any one of ,them is a valid tender.

Effect of refusal to accept a properly made offer of performance or Tender

‘Where the promisor has made an offer of performance to the promisee, and the offer has not
been accepted, the contract is deemed to be broken by the promisee and he can be sued for
breach of contract.

Effect of refusal of. party to perform promise wholly

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When a party to a contract has refused to perform, or disabled himself from performing, his
promise in its entirely, the promisee may put an end to the contract, unless he has signified by
words or conduct, his acquiescence in its continuance.-Sec. 39.

Examples :

P, a singer, enters into a contract with B, manager of a theatre to sing at his theatre two nights in
every week during the next two months, and B engages to pay her at the rate of 100 rupees for
each night. On the sixth night P willfully absents herself. With the assent of B, P sings on the
seventh night. B has signified his acquiescence in the continuance of the contract and cannot now
put an end to it but is entitled to compensation for the damage sustained by him thro6gh P’s
failure to sing on the sixth night.

WHOM IS A CONTRACT TO BE PERFORMED?

1.Personal Performance

In cases involving personal skill, taste, or credit, the promisor must himself perform the contract.
The courts will enforce the intention of the parties, as expressed in the contract, or as may be
inferred from the circumstances of the case.

2.Performance by representatives

In all other cases the Promisor or his representatives may employ a competent person to perform
it.-Sec. 40.

Examples :

(i) Q promises to paint a picture for B ; Q must perform this promise personally.

(ii) Q promises to pay B a sum of money. Q may perform this promise, either by personally
paying the money to B or causing it to be paid to B by another.

Effect of Performance from a third person

When a promise accepts performance of the promise from a third person, he cannot afterwards
enforce it against the promisor: -Sec. 41.

4.deatth of the Promisor

 Contracts involving personal skill or volition, come to an end when the Promisor dies.
His heirs or ‘legal representatives _ are not bound to perform such contract~ This rule is
expressed in a Latin phrase, action personalis moritur cum persona–a personal cause of
action dies with the person concerned.
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 In cases not involving personal skill or volition, the legal representatives of a deceased
promisor are bound to perform the contract. Upon failure to do so, they will be liable for
breach of contract.
 But the liability of the legal representatives is limited to the assets obtained from the
deceased. They are not personally liable.

The legal representatives can enforce performance of the contract upon the other party or parties
and their legal representatives.

Examples:

(i) P promises to deliver goods to B on a certain day on payment of Rs. 1,000. P dies before that
day. P’s representatives are bound to deliver the goods to B; and B is bound to pay Rs. 1,000 to
P’s representatives.

(ii) Q promises to paint picture for B by a certain day, at a certain price. Q dies before the day.
The contract cannot be enforced either by . Q’s representatives or by B.

5. Performance of Joint Promises – See below.

Who can demand performance ?

I. The promisee can demand performance of the promise. A stranger to a contract, i.e., one who
is not a party to it, cannot file a suit to enforce it. A contract between P and Q cannot be enforced
by R.

2. Under certain cases a stranger to the contract can enforce the contract. Examples, Trust,
Assignee …etc.

3. The legal representatives can enforce performance of the contract upon the other party or
parties and their legal representatives.

Breach of contract and its remedies:

Breach of Contract :-
Breach means violation of law. The breach of contract means to break the contract or not to act upon
the contract. When any party fails to perform its duties in a lawful contract it is called breach of
contract. The injured party has a right to take action against the party who has failed to perform his part
of contract.

REMEDIES or RIGHTS OF AGGRIEVED PARTY :-

On the breach of contract following remedies are available to an injured party.

1. Claim for Damages :-

 16

If contract is broken, the injured party has a remedy to claim for damages and losses suffered by him.
Injured party is entitled to receive compensation of loss from the party who has broken the contract.The
aim of this remedy is to provide the injured party the same benefits which it would receive in case of the
performance of contract.

Following are important types of damages :

i. :- Special Damage :- Under a special circumstances special damages takes place from breach of
contract.

Example :- If the machinery of any factory arrives late and due to this reason one party suffers a loss or
profits it is called special damage.

ii. General Damage :- If injured party suffers a loss due to non performance of the contract it is called
general damage. The injured party can recover from the guilty party the ordinary damages suffered by
him.

Example :- Mr. Robin contracts to pay 3 lac to Mr. Peter on 1st April. Mr. Robin does not pay the money
on that day. Mr. Peter is unable to pay her debts and suffer a loss. Mr. Robin is liable to pay Mr. Peter
principal amount and also interest on it.

iii. Exemplary Damages :- These damages are awarded in order to punish the guilty party for the breach
of contract and not to compensate the loss of the injured party.

These damages are awarded in dishonor of cheque and case of breach of contract to marry.

iv :- Nominal Damages :- When the injured party suffers no loss the contract may award him nominal
damages to recognize his right.

2. Suit For Injunction :-

Injunction means the order of the court. It may be used to prevent any wrongful act. In case of contract
it is used to prevent that act which is involved in breach of contract.

Example :- Suppose Mr. Yuvraj a film producer contracts with Miss. Neha to sign in his movies for ten
years and not to sign in any other film. After one year she contacts with other film producer Mr. Sethy
during the period of contract. The court may issue injunction on a suit by Mr. Yuvraj to restrain Miss.
Neha from signing in film of Mr. Sethy.

3. Specific Performance :-
A degree of specific performance is an order of the court. It is usually granted in those contracts related
to house, land and plot. In some cases compensation to pay. So court may issue the degree of specific
performance and can compel to defaulter party the performance of contract.
 17

Example :- Mr. Tipu agrees to sell his house to Mr. Amir, who agrees to purchase. But due to some
reasons Mr. Tipu commits breach . At the suit of Mr. Amir court may ask Mr. Tipu to carry out the
contract.

4. Recession Of The Contract :-

For the breach of contract it is an equitable remedy. When one party of the contract commits breach
and other party may rescued the contract that he may get free from all its obligations for the
performance of contract. Due to such recession and non performance injured party is entitled to get
compensation for the damages and loss.

Example :- Mr. Sanjay pledges the defence savings certificates to Mr. Panday and get loan. But Mr.
Sunjay does not return the loan. Mr. Panday may file a suit for recession of the contract responsibility to
return the defence savings certificates on payment.

5. Quantum Merit :-
It means"So much as deserves" we can explain it by the following example :

Example :- Suppose Mr. Ali entered into contract with Mr. Shawn that they will construct one room
jointly. Mr. Ali will construct the wall while Mr . Shawn will build the roof. Now Mr. Ali completes his job
but Mr. Shawn fails to build the roof of the room. Now in this case Mr. Ali is entitled to receive the
award according to his work done by him.This claim of Mr. Ali will be called a claim of "Quantum Merit."
The court will award to Mr. Ali keeping in view the work or services performed by him.

Quasi-Contracts:

A quasi-contract (or implied-in-law contract) is a fictional contract created by courts for

equitable, not contractual purposes.[1] A quasi-contract is not an actual contract, but is a legal
substitute for a contract formed to impose equity between two parties. The concept of a t is that
of a contract that should have been formed, even though in actuality it was not. It is used when a
court finds it appropriate to create an obligation upon a non-contracting party to avoid injustice
and to ensure fairness.[2][3][4] It is invoked in circumstances of unjust enrichment,[4] and is
connected with the concept of restitution.

Generally the existence of an actual or implied-in-fact contract is required for the defendant to be
liable for services rendered, and a person who provides a service uninvited is an officious
intermeddler who is not entitled to compensation. "Would-be plaintiffs cannot deliver unordered
goods or services and demand payment for the benefit....A corollary is that one who does have an
enforceable contract is bound by the contract's terms: subject to a few controversial exceptions,
she cannot sue for restitution of the value of benefits conferred..." [5] However, in many
jurisdictions under certain circumstances plaintiffs may be entitled to restitution under quasi-
contract (as in the example of Oklahoma below).
 18

Quasi-contracts are defined to be "the lawful and purely voluntary acts of a man, from which
there results any obligation whatever to a third person, and sometime a reciprocal obligation
between the parties

Contract compared

In contracts, it is the consent of the contracting parties which produces the obligation; in quasi-
contracts no consent is required, and the obligation arises from the law or natural equity, on the
facts of the case. These acts are called quasi-contracts, because, without being contracts, they
bind the parties as contracts do.[citation needed]

"A quasi-contract is not really a contract at all in the normal meaning of a contract," according to
one scholar, but rather is "an obligation imposed on a party to make things fair."[3]

The Oklahoma Supreme Court has:

described the distinction between a contract and a quasi-contract in T & S Inv. Co. v. Coury, 593 P.2d
503 (Okla. 1979), as follows: A "quasi" or constructive contract is an implication of law. An "implied"
contract is an implication of fact. In the former the contract is a mere fiction, imposed in order to adapt
the case to a given remedy. In the latter, the contract is a fact legitimately inferred. In one the intention
is disregarded; in the other, it is ascertained and enforced. In one, the duty defines the contract; in the
other, the contract defines the duty. (quoting from Berry v. Barbour, 279 P.2d 335, 338 (Okla. 1954)).

—Oklahoma Uniform Jury Instructions, § 23.10 citing cases therein at., [7]

Liability

The defendant's liability under quasi-contract is equal to the value of the benefit conferred by the
plaintiff. The value is the fair market value of the benefit and not necessarily the subjective value
that the defendant enjoys.[citation needed] A traditional measure of the fair market value is called
quantum meruit, for "as much as is deserved."[citation needed] For example, accountant prepares tax-
payer's taxes, finding a way to get him an unusually large refund. Tax-payer doesn't pay
accountant. Assuming a court finds no contract, tax-payer is only liable for the fair market value
of tax preparation services, which is not inflated up to account for the unusually large refund he
enjoyed.[citation needed]

Under Oklahoma law:

The measure of damages in a quasi-contract action is the amount which will compensate the party
aggrieved for the detriment proximately caused thereby, and, if the obligation is to pay money, the
detriment caused by the breach in the amount due by the terms of the obligation.

—Welling v. American Roofing & Sheet Metal Co., Inc., 617 P.2d 206, 209-210 (Okla. 1980), cited at., [7]
 19

The party to be charged is any defendant, or in the case of a guarantee or surety, a co-defendant,
in a breach of contract lawsuit.

Examples

For an example of a quasi-contract, suppose that a vacationing physician is driving down the
highway and finds Potter lying unconscious on the side of the road. The physician renders
medical aid that saves Potter's life. Although the injured, unconscious Potter did not solicit the
medical aid and was not aware that the aid had been rendered, Potter received a valuable benefit,
and the requirements for a quasi contract were fulfilled. In such a situation, the law will impose a
quasi contract.
 20

Unit-II

The Sale of Goods Act:

The Sale Of Goods Act, 1930
THE SALE OF GOODS ACT, 1930

ACT No. 3 OF 1930 [ 15th March, 1930.]

An Act to define and amend the law relating to the sale of goods.

1. Short title, extent and commencement.- (1) This Act may be called the Sale of
Goods Act,
1930.
2) It extends to the whole of India (except the State of Jammu and Kashmir).
(3) It shall come into force on the 1st day of July, 1930
2. Definitions .- In this Act, unless there is anything repugnant in the subject of content-
(1) ‘buyer" means a person who buys or agrees to buy goods,
(2) "delivery" means voluntary transfer of possession from one person to another.

Contract of sale of goods:

s per Section 4(1) of the Indian Sale of Goods Act, 1930, the contract of sale of goods is defined
as, “A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer
the property in goods to the buyer for a price.”

Few definitions under the Indian Sale of Goods Act, 1930, are:

 Goods: Every kind of moveable property other than actionable claims and money, includes stock
and shares, growing crops, grass, and things attached to or forming part of the land, which are
agreed to be severed before sale or under the contract of sale.
 Buyer: This means a person who buys or agrees to buy goods.
 Price: This means the money consideration for the sale of goods.
 Property: This refers to the general property in goods, and not merely a special property.
 Sale: Under a contract of sale, the property in goods is transferred from a seller to the buyer, it
is called a sale.

Sale of Goods: Difference between Contract of Sale and Agreement to Sell

The ‘contract of sale of goods’ is a broader term that includes sale and an agreement to sell. The
agreement to sell is defined as a legal agreement between parties regarding the transfer of the
property in the goods, that is to take place at future time period or subjected to execution of
specific conditions.

Simply put, suppose you want to sell a house and a plot that comes with it. You can enter into an
agreement to sell your property with a prospective buyer stating that in six months if the
transaction is not complete, the agreement is null and void and that you get to retain the advance
 21

amount paid for this agreement and that you don’t need to return it if the buyer is unable to pay
the rest of the amount agreed on to complete the transaction.

Here are few major differences between contract of sale and agreement to sell:

Contract of Sale Agreement to Sell

Sale is a contract that has been already An agreement to sell is a contract that has to be
executed. executed.

In case of loss or damage of goods, in sale, the The damage to the goods shall be borne by the
damages will be covered by the buyer even seller even if the goods are in custody of the
though the goods are in seller’s custody. buyer.

In a sale, the seller can sue the buyer for the In an ‘agreement to sell’, the seller has a right to
price of the goods because the property has file a law suit for damages for breach of contract.
passed to the buyer.

Conditions and warranties:

Condition and warranty.- (1) A stipulation in a contract of sale with reference to goods
which are the subject thereof may be a condition or a warranty.
(2) A condition is a stipulation essential to the main purpose of the contract, the breach
of which
gives rise to right to treat the contract as repudiated.
(3) A warranty is a stipulation collateral to the main purpose of the contract, the breach
of which
gives rise to a claim for damages but not to a right to reject the goods and treat the
contract as
repudiated.
(4) Whether a stipulation in a contract of sale is condition or a warranty depends in each
case on
the construction of the contract. A stipulation may be a condition, though called a
warranty in the contract.

When condition to be treated as warranty.- (1) Where a contract of sale is subject to

any condition to the fulfilled by the seller, the buyer may waive the condition or elect to
treat the breach of the condition as a breach of warranty and not as a ground for relating
the contract as
repudiated.

(2) Where a contract of sale is not severable and the buyer has accepted the goods or
part thereof,
the breach of any condition to be fulfilled by the seller can only be treated as a breach of
 22

warranty and not as a ground for rejecting the goods and treating the contract as
repudiated,
unless there is a term of the contract, express or implied, to that effect.
(3) Nothing in this section shall affect the case of any condition or warranty fulfilment of
which
is excused by law by reason of impossibility of otherwise.

Transfer of property:
Duration of certain leases in absence of written contract or local usage.- In the absence of a contract or
local law or usage to the contrary, a lease of immoveable property for agricultural or manufacturing
purposes shall be deemed to be a lease from year to year, terminable, on the part of either lessor or
lessee, by six months' notice expiring with the end of a year of the tenancy; and a lease of immoveable
property for any other purpose shall be deemed to be a lease from month to month, terminable, on the
part of either lessor or lessee, by fifteen days' notice expiring with the end of a month of the tenancy.
Every notice under this section must be in writing, signed by or on behalf of the person giving it, and 1[
either be sent by post to the party who is intended to be bound by it or be tendered or delivered
personally to such party], or to one of his family or servants at his residence, or (if such tender or
delivery is not practicable) affixed to a conspicuous part of the property.

Sale and agreement to sell.-

(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price. There may be a contract of sale between one part-
owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is transferred from the seller to the
buyer, the contract is called a sale,
but where the transfer of the property in the goods is to take place at a future time or subject to
some condition thereafter to be fulfilled, the contract is called an agreement to sell.
(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled
subject to which the property in the goods is to be transferred.

Rights of an unpaid seller:

"Unpaid seller" defined.- (1) The seller of goods is deemed to be an "unpaid seller"
within
the meaning of this Act-
(a) When the whole of the price has not been paid or tendered.
(b) When a bill of exchange or other negotiable instrument has been received as
conditional
payment, and the conditions on which it was received has not been fulfilled by reason of
the
dishonour of the instrument or otherwise.
(2) In this Chapter, the term "seller" includes any person who is in the position of a
seller, as, for
instance, an agent of the seller to whom the bill of lading has been endorsed, or a
consignor or
 23

agent who has himself paid, or is directly responsible for, the price.
Unpaid seller’s rights.- (1) Subject to the provisions of this Act and of any law for the
for
the time being in force, notwithstanding that the property in the goods may have passed
to the
buyer, the unpaid seller of goods, as such, has by implication of law.
(a) a lien on the goods for the period while he is in possession of them,
(b) in case of the insolvency of the buyer a right of stopping the goods in transit after he
has
parted with the possession of them.
(c) a right of re-sale as limited by this Act.
(2) Where the property in goods has not passed to the buyer, the unpaid seller has, in
addition to
his other remedies, a right of withholding delivery similar to and co-extensive with his
rights of
lien and stoppage in transit where the property has passed to the buyer.
Seller’s lien.-
(1) Subject to the provisions of this Act, the unpaid seller of goods who is in possession
of them
is entitled to retain possession of them until payment or tender of the price in the
following cases,
namely :-
(a) where the goods have been sold without any stipulations as to credit.
(b) where the goods have been sold on credit, but the term of credit has expired.
(c) where the buyer becomes insolvent.
(2) The seller may exercise his right of lien notwithstanding that he in possession of the
goods as
agent or bailee for the buyer.
Part delivery.- Where an unpaid seller has made part delivery of the goods, he may
exercise
his right of lien on the remainder, unless such part delivery has been made under such
circumstances as to show an agreement to waive the lien.
Termination of lien.-
(1) The unpaid seller of goods losses his lien thereon -
(a) when he delivers the goods to a carrier or other bailee for the purpose of
transmission
to the buyer without reserving the right of disposal of the goods.
(b) when the buyer or his agent lawfully obtains possession of the goods,
(c) by waiver thereof.
(2) The unpaid seller of goods, having a lien thereon, not lose his lien by reason only
that he has
obtained a decree for the price of the goods.
Right of stoppage in transit.- Subject to the provisions of this Act, when the buyer of
goods
becomes insolvent, the unpaid seller who has parted with the possession of the goods
has the
 24

right of stopping them in transit, that is to say, he may resume possession of the goods
as long as
they are in the course of transit, and may retain them until payment or tender of the
price.
Duration of transit.- (1) Goods are deemed to be in course of transit from the time
when
they are delivered to a carrier or other bailee for the purpose of transmission to the
buyer, until
the buyer or his agent in that behalf takes delivery of them from such carrier or other
bailee.
(2) If the buyer or his agent in that behalf obtains delivery of the goods before their
arrival at the
appointed destination, the transit is at an end.
(3) If, after the arrival of the goods at the appointed destination, the carrier or other
bailee
acknowledges to the buyer or his agent that he holds the goods on his behalf and
continues in
possession of them as bailee for the buyer or his agent, the transit is at an end and it is
immaterial
that a further destination for the goods may have been indicated by the buyer.
(4) If the goods are rejected by the buyer and the carrier or other bailee continues in
possession
of them, the transit is not deemed to be at an end, even if the seller has refused to
receive them
back.
(5) When goods are delivered to a ship chartered by the buyer, it is a question
depending on the
circumstances of the particular case, whether they are in the possession of the master
as a carrier
or as agent of the buyer.
(6) Where the carrier or other bailee wrongfully refuses to deliver the goods to the buyer
or his
agent in that behalf, the transit is deemed to be at an end.
(7) Where part delivery of the goods has been made to the buyer or his agent in that
behalf, the
remainder of the goods may be stopped in transit, unless such part delivery has been
given in
such circumstances as to show an agreement to give up possession of the whole of the
goods.
How stoppage in transit is effected.- (1) The unpaid seller may exercise his right to
stoppage in transit either by taking actual possession of the goods, or by giving notice of
his
claim to the carrier or other bailee in whose possession the goods are. Such notice may
be given
either to the person in actual possession of the goods or to his principal. In the later
case the
 25

notice, to be effectual, shall be given at such time and in such circumstances, that the
principal,
by the exercise of reasonable diligence, may communicate is to his servant or agent in
time to
prevent a delivery to the buyer.
(2) Whether notice of stoppage in transit is given by the seller to the carrier or other
bailee in
possession of the goods, he shall re-deliver the goods to, or according to the directions
of, the
seller. The expenses of such re-delivery shall be borne by the seller.
Effect to sub-sale or pledge by buyer.- (1) Subject to the provisions of this Act, the
unpaid
seller’s right of lien or stoppage in transit is not affected by any sale or other disposition
of the
gods which the buyer may have made, unless the seller has assented thereto.
Provided that where a document of title to goods has been issued or lawfully transferred
to any
person as buyer or owner of the goods, and that person transfers the document to a
person who
takes the document in good faith and for consideration, then, if such last mentioned
transfer was
by way of sale, the unpaid seller’s right of lien of stoppage in transit is defeated, and, if
such last
mentioned transfer was by way of pledge or other disposition for value, the unpaid
seller’s right
of lien or stoppage in transit can only be exercised subject to the rights of the
transferee.
(2) Where the transfer is by way of pledge, the unpaid seller may require the pledge to
have the
amount secured by the pledge satisfied in the first instance, as far as possible, out of
any other
goods or securities of the buyer in the hands of the pledge and available against the
buyer.
Sale not generally rescinded by lien or stoppage in transit.- (1) Subject to the
provisions
of this section, a contract of sale is not rescinded by the mere exercise by an unpaid
seller of his
right of lien or stoppage in transit.
(2) Where the goods are of a perishable nature, or where the unpaid seller who has
exercised his
right of lien or stoppage in transit gives notices to the buyer of his intentions to re-sell,
the
unpaid seller may, if the buyer does not within a reasonable time pay or tender the
price, re-sell
the goods within a reasonable time and recover from the original buyer damages for any
loss
 26

occasioned by his breach of contract, but the buyer shall not be entitled to any profit
which may
occur on the re-sale. If such notices is not given, the unpaid seller shall not be entitled
to recover
such damages and the buyer shall be entitled to the profit, if any, on the re-sale.
(3) Where an unpaid seller who has exercised his right of lien or stoppage in transit re-
sells the
goods, the buyer acquires a good title thereto as against the original buyer,
notwithstanding that
no notice of the re-sale has been given to the original buyer.
(4) Where the seller expressly reserves a right of re-sale in case the buyer should make
default,
and on, the buyer making default, re-sells the goods, the original contract of sale is
thereby
rescinded, but without prejudice to any claim which the seller may have for damages.

The negotiable instruments act:

Nature and types:

In India, there is reason to believe that instrument to exchange were in use from early times and
we find that papers representing money were introducing into the country by one of the
Mohammedan sovereigns of Delhi in the early part of the fourtheenth century. The word 'hundi',
a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit
root 'hund' meaning 'to collect' and well expresses the purpose to which instruments were utilised
in their origin. With the advent of British rule in India commercial activities increased to a great
extent. The growing demands for money could not be met be mere supply of coins; and the
instrument of credit took the function of money which they represented.

Before the enactment of the Negotiable Instrument Act, 1881, the law of negotiable instruments
as prevalent in England was applied by the Courts in India when any question relating to such
instruments arose between Europeans. When then parties were Hindu or Mohammedans, their
personal law was held to apply. Though neither the law books of Hindu nor those of
Mohammedans contain any reference to negotiable instruments as such, the customs prevailing
among the merchants of the respective community were recognised by the courts and applied to
the transactions among them. During the course of time there had developed in the country a
strong body of usage relating to hundis, which even the Legislature could not without hardship to
Indian bankers and merchants ignore. In fact, the Legislature felt the strength of such local
usages and though fit to exempt them from the operation of the Act with a proviso that such
usage may be excluded altogether by appropriate words. In the absence of any such customary
law, the principles derived from English law were applied to the Indians as rules of equity justice
and good conscience.
 27

The history of the present Act is a long one. The Act was originally drafted in 1866 by the India
Law Commission and introduced in December, 1867 in the Council and it was referred to a
Select Committee. Objections were raised by the mercantile community to the numerous
deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After
the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the
chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could
not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be
referred to a new Law Commission. On the recommendation of the new Law Commission the
Bill was re-drafted and again it was sent to a Select Committee which adopted most of the
additions recommended by the new Law Commission. The draft thus prepared for the fourth
time was introduced in the Council and was passed into law in 1881 being the Negotiable
Instruments Act, 1881 (26 of 1881)

(26 of 1881)

(9th December, 1881)

An Act to define and Law relating to Promissory Notes, Bills of Exchange and cheques.

WHEREAS it is expedient to define and amend the law relating to promissory notes, bills of
exchange and cheques.It is hereby enacted as follows:

This Act may be called the Negotiable Instruments Act, 1881.

Local extent, Saving of usage relating to hundis, etc., Commencement.-It extends to [the whole
of India ] but nothing herein contained affects the Indian Paper Currency Act, 1871 (3 of 1871),
section 2, or affects any local usage relating to any instrument in an oriental language : Provided
that such usages may be excluded by any words in the body of the instrument, which indicate
and intention that the legal relations of the parties thereto shall be governed by this Act; and it
shall come into force on the first day of March, 1882.
 28

1. The Act has been extended to Goa, Daman, and Diu by Regulation 12 of 1962, sec. 3 and Sch.
(w.e.f. 1-12-1965) and to Dadra and Nagar Haveli by Regulation 6 of 1963, sec. and Sch. I
(w.e.f. 1-11-1956).

2. Substituted by the A.O. 1950, for "all the Provinces of India".

3. The Words "except the State of Jammu and Kashmir" omitted by Act 62 of 1956, sec. 2 and
Sch. (w.e.f. 1-11-1956).

Promissory notes and bills of exchange are two primary types of negotiable instruments.

Promissory note

A promissory note is an unconditional promise in writing made by one person to another, signed
by the maker, engaging to pay on demand to the payee, or at fixed or determinable future time,
certain in money, to order or to bearer. (see Sec.194) Bank note is frequently referred to as a
promissory note, a promissory note made by a bank and payable to bearer on demand.

Bill of exchange

A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the
payee. A common type of bill of exchange is the cheque (check in American English), defined as
a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used
primarily in international trade, and are written orders by one person to his bank to pay the bearer
a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a
common means of exchange. They are not used as often today.

Bill of exchange, 1933

A bill of exchange is essentially an order made by one person to another to pay money to a third
person. A bill of exchange requires in its inception three parties—the drawer, the drawee, and the
payee. The person who draws the bill is called the drawer. He gives the order to pay money to
the third party. The party upon whom the bill is drawn is called the drawee. He is the person to
whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates
his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called
 29

the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself
payable to his own order.

A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn
endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount
of the bill against the drawee and all previous endorsers, regardless of any counterclaims that
may have disabled the previous payee or endorser from doing so. This is what is meant by saying
that a bill is negotiable.

In some cases a bill is marked "not negotiable" – see crossing of cheques. In that case it can still
be transferred to a third party, but the third party can have no better right than the transferor.

Negotiation and assignment:

When a promise note, bill of exchange or cheque is transferred to any person, so as to continue
the person the holder thereof, the instrument is said to be negotiated.

Assignment takes place where the holder of an instrument transfers it to another so as to confer a
right on the transferee to receive the payment of the instrument.

All negotiable instruments are chose in action and as such are transferable by assignment without
endorsement under sections 130-132 of the Transfer of property act. Assignment of a negotiable
instrument is effected by writing without endorsement. The main feature of assignment is that
the assignee obtains the right of the assignor. Therefore if the assignor’s title is defective
assignee’s title will also be defective.

Negotiation and assignment distinguished

1) Consideration is presumed until contrary is proved.

2) It transferee is a holder in due course he takes the instrument free from any defects.
3) Notice of transfer is not necessary.
4) Negotiation is effected by delivery in case of instruments payable to bearer and by delivery
and endorsement in case of instrument payable to order.
5) Transferee can sue the third party in his own name.
6) There are a number of presumptions in favor of holder in due courses.

Assignment

1) Consideration must be proved

2) Assignee’s title is always subject to defenses and equities between the original debtor and
 30

assignor.
3) Notice of assignment must be given.
4) Assignment is effected only by writing
5) Assignee cannot do so.
6) There are no such presumptions.

Endorsement

When the maker or holder of a negotiable instrument signs the same otherwise than as such
maker, or the purpose of negotiation on the back or face thereof or on a slip of a paper annexed
thereto, or so signs for the same purpose a stamped paper intended to be completed as a
negotiable instruments he is said to indorse the same, and is called an endorser.

When the maker or holder signs the instrument —

1) on the back or face of the instrument; or

2) on a slip of paper along if no space is left on the instrument; or
3) Signs a stamped paper for the same purpose but not on a copy of the instrument, he is said to
have made a valid endorsement.

The person who signs the instrument is called the endorser. The person to whom the instrument
is endorsed is called endorsee. Endorsement thus means writing nay thing on the face or on the
back of the instrument, for the purpose of negotiation. Such writing must be signed by the
endorser. Simple signature without any words will also constitute endorsement. No particular
form of words is necessary for an endorsement. Any amount of endorsements may be made on
the instrument. If there is no space, slip of paper may be used for further endorsement. This slip
of paper is called allonage.

Essentials of valid endorsement

The endorsement of a promissory note, bill of exchange or cheque is completed by delivery,

actual or constructive. Delivery to be effectual must be made by the party indorsing the
instrument, or by a person authorized by him in that behalf.

Endorsement constitutes a contract between the endorser and the endorsee. Endorser can be
liable to the endorsee if endorsement is complete. Endorsement is complete only when —

1) the holder writes and /or signs the face or back of he instrument or on a separate slip of paper;
or on a stamped paper;
2) the instrument is delivered to the endorsee.
3) The instruments is indorsed and delivered with an intention to transfer the property in the
instruments.

In Brind v Hampshire it has been held that until delivery of the instrument the contract of the
endorser is incomplete and may be revoked at any time. Forged endorsement gives no title.
 31

Who may indorse and negotiate?

The maker or holder of a negotiable instrument may indorse, otherwise than as such maker.
Every sole maker, drawer payee or endorsee or all several joint makers payees or endorsees of a
negotiable instruments may, if the negotiability of such instruments has not been restricted or
excluded indorse a negotiate the same.

The maker or drawer shall indorse any instruments only when he is in lawful possession or is
holder thereof. Similarly a payee or endorsee shall indorse or negotiate an instrument only when
he is the holder thereof. Therefore, a thief cannot indorse the instrument.

Holder-indue course:

"Holder".-

The "holder" of a promissory note, bill of exchange or cheque means any person entitled in his
own name to the possession thereof and to receive or recover the amount due thereon from the
parties thereto.

Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time
of such loss or destruction.

"Holder in due course" means any person who for consideration became the possessor of a
promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorse thereof,
if [payable to order] before the amount mentioned in it became payable, and without having
sufficient cause to believe that any defect existed in the title of the person from whom he derived
his title.

1. Subs. by Act 8 of 1919, sec. 2, for "payable to, or to the order of, a payee.
 32

Dishonour and discharge of a negotiable instrument:

Dishonor by non- acceptance.-

A bill of exchange is said to be dishonored by non-acceptance when the drawee, or one of

several drawee not being partners, makes default in acceptance upon being duly required to
accept the bill, or where presentment is excused and the bill is not accepted. Where the drawee is
incompetent to contract, or the acceptance is qualified the bill may be treated as dishonored

Dishonors by non-payment.-

A promissory note, bill of exchange or cheque is said to be dishonored by non-payment when the
maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon
being duly required to pay the same.

By and to whom notice should be given.-

When a promissory note, bill of exchange or cheque is dishonored by non-payment, the holder
thereof, or some party thereto who remains liable thereon, must given notice that the instrument
has been so dishonored to all other parties whom the holder seeks to make severally liable
thereon, and to some one of several partied whom he seeks to make jointly liable thereon.

Nothing in this section renders it necessary to give notice to the maker of the dishonored
promissory note, or acceptor of the dishonored bill of exchange or cheque.

By and to whom notice should be given.-

When a promissory note, bill of exchange or cheque is dishonored by non-payment, the holder
thereof, or some party thereto who remains liable thereon, must given notice that the instrument
 33

has been so dishonored to all other parties whom the holder seeks to make severally liable
thereon, and to some one of several partied whom he seeks to make jointly liable thereon.

Nothing in this section renders it necessary to give notice to the maker of the dishonored
promissory note, or acceptor of the dishonored bill of exchange or cheque.

Party receiving must transmit notice of dishonor.-

Any party receiving notice of dishonor must in order to render any prior party liable to himself,
give notice of dishonor to such party within a reasonable time , unless such party otherwise
receives due notice as provided by section 93.

Agent for presentment.-

When the instrument is deposited with an agent for presentment, the agent is entitled to the same
time to give notice to his principal as if he were the holder giving notice of dishonor, and the
principal is entitled to a further like period to give notice of dishonor.

When party to whom notice given is dead.-

When the party to whom notice of dishonor is dispatched is dead, but the party dispatching the
notice is ignorant of his death, the notice is sufficient.

When notice of dishonor is unnecessary.-

Notice of dishonor is necessary -

 34

(a) when it is dispensed with by the party entitled thereto

(b) in order to charge the drawer, when he has countermanded payment

(c) when the party charged could not suffer damage for want of notice

(d) when the party entitled to notice cannot after due search be found, or the party bound to give
notice is, for any other reason, unable without any fault of his own to give it.

(e) to charge the drawers, when the acceptors is also a drawer.

(f) in the case of a promissory note which is not negotiable.

(g) when the party entitled to notice, knowing the facts, promise unconditionally to pay the
amount due on the instrument.

Noting.-

When a promissory note or bill of exchange has been dishonored non-acceptance or non-
payment, the holder may cause such dishonor to be noted by a notary public upon the instrument,
or upon a paper attached thereto, or partly upon each.

Such note must be made within a reasonable time after dishonor, and must specify the date of
dishonor, the reason, if any, assigned for such dishonor, or, if the instrument has not been
expressly dishonored, the reason why the holder treats it as dishonored, and the notary’s charges.
 35

Noting.-

When a promissory note or bill of exchange has been dishonored non-acceptance or non-
payment, the holder may cause such dishonor to be noted by a notary public upon the instrument,
or upon a paper attached thereto, or partly upon each.

Such note must be made within a reasonable time after dishonor, and must specify the date of
dishonor, the reason, if any, assigned for such dishonor, or, if the instrument has not been
expressly dishonored, the reason why the holder treats it as dishonored, and the notary’s charges.

DISCHARGE OF NEGOTIABLE
INSTRUMENTS
Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor;

(b) By payment in due course by the party accommodated, where the instrument
is made or accepted for his accommodation;

(c) By the intentional cancellation thereof by the holder;

(d) By any other act which will discharge a simple contract for the payment of money;

(e) When the principal debtor becomes the holder of the instrument at or after
maturity in his own right.

PAYMENT BY PRINCIPAL DEBTOR

• In order to discharge the instrument, the payment must be a payment in due course, and
second, a payment made by the principal debtor
• If payment is made before the date of maturity, the instrument is not discharged as the
payment is not in due course
• Where payment is made by a party who is not a primary obligor or an accommodation party,
his payment only conceals his own liability and those who are obligated after him. All
 36

prior parties primarily or secondarily liable on the bill, are liable to such a payer, and the payer
may cancel indorsements subsequent to his own and reissue the paper, and it will be valid
as against the prior parties

PAYMENT BY THIRD PERSONS

• If payment is made by a third person, the instrument is not discharged because payment is
not made by the person principally liable
• Not any one who desires may pay the instrument and then recover of the maker. He must be
a person who has in some way made himself liable for the payment of the instrument.
• Exception: where an instrument has been protested and someone voluntarily makes
payment supra protest or for honor. And if the instrument was to give money in
payment, the instrument is discharged.

SUMMARY OF DISCHARGE BY PAYMENT

1. Payment by a person ultimately liable, whatever his position in the paper, is a

discharge of the instrument
2. Payment by an accommodation party isn’t a discharge of the instrument,
whatever his position thereon and whether the indorsement be regular or anomalous
3. Payment by the drawer or indorser is not a discharge of the instrument

PRINCIPAL DEBTOR
• Person ultimately bound to pay the debt

PAYMENT BY CHECK OR OTHER NEGOTIABLE PAPER

1. When they actually have been cashed or

2. When, through the fault of the creditor, they have been impaired
• A creditor isn’t bound to accept a check in satisfaction of his demand because a check,
even if good when offered, doesn’t meet the requirements of legal tender

WAIVER OF OBJECTION TO TENDER OF PAYMENT BY CHECK

• It is the general rule that an object to a tender must, to be available to the creditor, be made
in good time and that the grounds for objection must be specified; and that an objection to tender
on one ground is a waiver of all other objections which could have been made at that time
• It is ordinarily required of one to whom payment is offered in the form of a check, that he
makes his objection at the time of the offer of by check instead of an offer of payment in money
• Reason for the rule—to afford the debtor the opportunity to secure the specific money which
 37

the law prescribes shall be accepted in payment of debts

PAYMENT BY ACCOMMODATED PARTY

• The one ultimately liable on the accommodation instrument is the latter

• Hence, his payment in due course discharges the instrument as if payment was made
by the principal debtor under paragraph (a)

INTENTIONAL CANCELLATION

• The cancellation must be intentional and made by the holder

• There must be an intention to cancel a negotiable instrument by the holder thereof
as such intention is an essential element of discharge on a negotiable instrument and a
negotiable note in a torn condition is presumed cancelled by the holder thereof .

Arbitration:

Arbitration (n.)is the process of bringing a business dispute before a disinterested third party for
resolution. The third party, an arbitrator, hears the evidence brought by both sides and makes a
decision. Sometimes that decision is binding on the parties.

To arbitrate (v.)a matter is to bring it before an arbitrator.

Arbitration is a form of alternative dispute resolution (ADR), used in place of litigation in the
hope of settling a dispute without the cost and time of going to court.

Arbitration is often confused with mediation, which is an informal process of bringing in a third
party who goes between the disputing parties to help them settle a dispute. The mediation
process is not binding on the parties, and the mediator does not hear evidence.

Meaning:

This is one of the dispute resolution processes being practiced, and it similar to a lawsuit. In this
process,there is a neutral decision maker, popularly known as an arbitrator. He is either selected
by the concerned parties or by a neutral ADR service provider. Sometimes ,arbitration process is
carried on with a panel of three arbitrators in order to ensure different and more effective
 38

solutions. Parties in arbitration are usually represented by their attorneys, who provide the
necessary evidence and legal arguments to the arbitrator, representing their clients. The arbitrator
then arrives at a decision, which is termed as an "award." An arbitration award generally is a
final decision, subject only to limited review by a court as allowed by law. The use of arbitration
can be prevalently observed in consumer and employment matters, where it may be authorized
by the terms of employment or commercial contracts.

Advantages:

Parties often seek to resolve their disputes by means of arbitration,owing to a number of

perceived potential advantages over judicial proceedings:

 When the subject matter of the dispute involves a lot of technicality, arbitrators with a
great deal of expertise can be appointed
 It is a faster process when compared to litigation which consumes a lot of time
 It is a cost effective process
 It is a very flexible process and can be adjusted to the needs of the parties
 Arbitral proceedings and arbitral awards are usually maintained confidentially, thereby
providing a sense of security
 As a result of the provisions of the NEW York Convention, 1958 arbitration awards are
easier to enforce in most of the nations.
 In most of the legal systems that prevail, the avenues available for appeal of an arbitral
award are very limited which is very advantageous to the concerned parties.

Arbitrability:

The nature of the subject matter of some disputes, decides whether an issue is capable of
arbitration. Usually, two groups of legal procedures cannot be subjected to arbitration:

 Procedures which are more likely to result in a determination wherein the parties to the
dispute may not enter into an agreement
 A few legal orders are exempted or they curtail the possibility of arbitration for reasons
on grounds of protection of weaker members of the public, e.g. consumers.
 39

Unit-III

The Companies Act, 1956:

The Companies Act 1956 is an Act of the Parliament of India, enacted in 1956, which enabled
companies to be formed by registration, and set out the responsibilities of companies, their
directors and secretaries.[1]

The Companies Act 1956 is administered by the Government of India through the Ministry of
Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public
Trustee, Company Law Board, Director of Inspection, etc. The Registrar of Companies (ROC)
handles incorporation of new companies and the administration of running companies.

Since its commencement, it has been amended many times, in which amendment of 1988, 1990,
1996, 2000 and 2011 are notable.

Nature and Scope of the Act

Like most of Indian acts, it also extends to the whole India except State of Jammu and Kashmir
(S. 3). Notwithstanding anything contained in the Act every company, international or indigeous
will work under the provisions of the Act.This Act is general in nature and not subrogative. So if
a special Legislation applies on a Company, then the Company has to, in addition to Companies
Act, must comply the special Legislation. For example, all banking Companies in India has to
comply Banking Regulation Act 1949, in addition to the Companies Act 1956.

Provisions of the Act

The Act is 658 sections long. It contains provisions about Companies, directors of the
companies, memorandum and articles of associations, etc. This act states and discusses every
single provision requires or may need to govern a company.

Mode of forming incorporated company.

(1) Any seven or more persons, or where the company to be formed will be a private company,
any two or more persons, associated for any lawful purpose may, by subscribing their names to a
memorandum of association and otherwise complying with the requirements of this Act in
respect of registration, form an incorporated company, with or without limited liability.

(2) Such a company may be either—

 40

(a) 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 (in this Act termed “a company limited by
shares”);

(b) a company having the liability of its members limited by the memorandum to such amount as
the members may respectively undertake by the memorandum to contribute to the assets of the
company in the event of its being wound up (in this Act termed “a company limited by
guarantee”); or

(c) a company not having any limit on the liability of its members in this Act termed “an
unlimited company”).

Formation:
A company is an association of both individual and natural persond incorporated under the existing law
of a country. in ters of the companies act,1956 it is defined as:
"a company means a company formed and registered under this act or any existing Company"sec 3(1).
procedure for formation:
ahy seven or more persons or where the company to be formed is a private company,any two or more
persons associated for any lawful purpose may by subscribing their names to a memorandum of
association and otherwise complying with the requirements of the companies act,1956 in respect of
registration,form an incorporated companywith or without limited liability.(sec12)
The following ingredients are required for the formation of a company:
1.promoters of the company
2.lawful objective for which they associate themselves.
3.promoters must subscribe their names to the memorandum of the company
4.promoters must comply with the requirements of the companies act,1956in respect of registration
which is as follows:
a.declaration of compliance in Form1as prescribed in Companies(central Governments)general Rules
and Forms1956 executed by any one of the following persons:
advocte of a high court or a supreme court,attorney or a pleader entitled to sppear before a high court,a
company secretary or a chartered ccountant in whole time practice.
b.a stamped and signed copy of memorandum and articles of association.
c.notice of situation of registered office in form18
d.formno.32containing particulars of a person th act as managing/wholetime director of the company.
e.particulars in favour of one of the subscribers to the memorandum duly executed on a non judicial
stamp paper of the requisite value.
f. any agreement which the company proposes to enter into with any person
 41

g.original true copy of the Registrar of Companies letter intimating about the availability of name.
5.minimum paid up capital must be one lakh rupees for a private company and rupees five lakh for a
public limited company.
A private ltd company can immediately commence its business after a Certificate of registration is issued
by the Registrat after due verification of the documents and on payment of the prescribed fee as
specified in ScheduleX., apublic company having a share capital can commence its operations after
getting the Certificate of Commencement of business from the registrar.

Memorandum and articles of association:

Requirements with respect to memorandum.—

(1) The memorandum of every company shall state—

(a) the name of the company with “Limited” as the last word of the name in the case of a public
limited company, and with “Private Limited” as the last word of the name in the case of a private
limited company;

(b) the State in which the registered office of the company is to be situate; 1[***]

2
[(c) in the case of a company in existence immediately before the commencement of the
Companies (Amendment) Act, 1965, the objects of the company;

(d) in the case of a company formed after such commencement,—

(i) the main objects of the company to be pursued by the company on its incorporation and
objects incidental or ancillary to the attainment of the main objects;

(ii) other objects of the company not included in sub-clause (i); and
 42

(e) in the case of companies (other than trading corporations), with objects not confined to one
State, the States to whose territories the objects extend.]

(2) The memorandum of a company limited by shares or by guarantee shall also state that the
liability of its members is limited.

(3) The memorandum of a company limited by guarantee shall also state that each member
undertakes to contribute to the assets of the company in the event of its being wound up while he
is a member or within one year after he ceases to be a member, for payment of the debts and
liabilities of the company, or of such debts and liabilities of the company as may have been
contracted before he ceases to be a member, as the case may be, and of the costs, charges and
expenses of winding up, and for adjustment of the rights of the contributories among themselves,
such amount as may be required, not exceeding a specified amount.

(4) In the case of a company having a share capital—

(a) unless the company is an unlimited company, the memorandum shall also state the amount of
share capital with which the company is to be registered and the division thereof into shares of a
fixed amount;

(b) no subscriber of the memorandum shall take less than one share; and

(c) each subscriber of the memorandum shall write opposite to his name the number of shares he
takes.

. Form of memorandum.—

The memorandum of association of a company shall be in such one of the Forms in Tables B, C,
D and E in Schedule I as may applicable to the case of the company, or in a Form as near thereto
as circumstances admit.
 43

15A. Special provision as to alteration of memorandum consequent on

alteration of name of State of Madras.

1
[15A. Special provision as to alteration of memorandum consequent on alteration of name of
State of Madras.—

Where, in the memorandum of association of a company in existence immediately before the

commencement of the Madras State (Alteration of Name) Act, 1968 (53 of 1968) it is stated that
Madras is the State in which the registered office of that company is situate, then,
notwithstanding anything contained in this Act, the said memorandum shall, as from such
commencement, be deemed to have been altered by substitution of a reference to the State of
Tamil Nadu for the reference to the State of Madras, and the Registrar of the State of Tamil
Nadu shall make necessary alterations in the memorandum of association and the certificate of
incorporation of the said company.]

Articles of Association:

Articles are the rules, regulations and bye-laws for the internal management of the affairs of a
company. They are framed with the object of carrying out the aims and objects as set out in the
memorandum of Association. They are as such subordinate to, and controlled by, the
Memorandum of Association.

Contents of articles:

Articles usually contain provisions relating to the following matters:

Share capital, rights of shareholders, variation of these rights, payment of commissions, share
certificates

Calls on shares

Transfer of shares

Transmission of shares

Forfeiture of shares
 44

Conversion of shares into stock

Share warrants

Alteration of capital

General meetings and proceedings there at

Voting rights of members, Voting and poll, proxies

Directors, their appointment, remuneration, qualifications, powers and proceedings of board of

directors

Manager

Secretary

Dividends and reserves

Accounts, audit and borrowing powers

Capitalisation of profits

Winding up

Companies which must have their own Articles:

The following companies shall have their own articles, namely,

Unlimited companies,

Companies limited by guarantee,

Private companies limited by shares,

The Articles shall be signed by the subscribers of the Memorandum and registered along with the
Memorandum,

A public company may have its own Articles of Association. If it does not have its own Articles,
it may adopt Table A given in schedule I to the Act

Regulations required in case of an unlimited company, a company limited by guarantee and a

private company

Unlimited company: In the case of an unlimited company, the Articles shall state-
 45

The numbers with which the company is to be registered, and

If it has a share capital, the amount of share capital with which the company is to be registered

Company limited by guarantee: The case of a company limited by guarantee, the articles shall
state the number of members with which the company is to be registered.

Private company: In the case of a private company having a share capital, the Articles shall
contain provisions which-

Restrict the right to transfer shares,

Limit the number of its members to 50 (not including employee-members), and

Prohibit any invitation to the public to subscribe for any shares in, or debentures of, the
company.

Form of Articles in the case of other companies:

The Articles of any company, not being a company limited by shares, shall be in such one of the
Forms in Tables C,D, and E in schedule I to the Act

Such a company may include any additional matters in its Articles in so far as they are not
inconsistent with the provisions

Form and signature of Articles:

Printed,

Divided into paragraphs, and

Signed by each subscriber of the Memorandum (who shall add his address, description and
occupation, in the presence of at least l witness who will attest the signature and likewise add his
address) description and occupation.

Prospectus:

Dating of prospectus.—

A prospectus issued by or on behalf of a company or in relation to an intended company shall be

dated, and that date shall, unless the contrary is proved, be taken as the date of publication of the
prospectus.
 46

Matters to be stated and reports to be set out in prospectus. —

(1) Every prospectus issued—

(a) by or on behalf of a company, or

(b) by or on behalf of any person who is or has been engaged or interested in the formation of a
company,

shall state the matters specified in Part I of Schedule II and set out the reports specified in Part II
of that Schedule; and the said Parts I and II shall have effect subject to the provisions contained
in Part III of that Schedule.

(2) A condition requiring or binding an applicant for shares in or debentures of a company to

waive compliance with any of the requirements of this section, or purporting to affect him with
notice for any contract, document or matter not specifically referred to in the prospectus, shall be
void.

(3) No one shall issue any form of application for shares in or debentures of a company, unless
the form is accompanied 1[by a memorandum containing such salient features of a prospectus as
may be prescribed] which complies with the requirements of this section:

2
[Provided that a copy of the prospectus shall, on a request being made by any person before the
closing of the subscription list be furnished to him:
 47

Provided further that] this sub-section shall not apply if it is shown that the form of application
was issued either—

(a) in connection with a bona fide invitation to a person to enter into an underwriting agreement
with respect to the shares or debentures; or

(b) in relation to shares or debentures which were not offered to the public.

If any person acts in contravention of the provisions of this sub-section, he shall be punishable
with fine which may extend to 3 [fifty thousand rupees].

(4) A director or other person responsible for the prospectus shall not incur any liability by
reason of any non-compliance with, or contravention of, any of the requirements of this section,
if—

(a) as regards any matter not disclosed, he proves that he had no knowledge thereof; or

(b) he proves that the non-compliance or contravention arose from an honest mistake of fact on
his part; or

(c) the non-compliance or contravention was in respect of matters which, in the opinion of the
Court dealing with the case 4 [were immaterial] or was otherwise such as ought, in the opinion of
that Court, having regard to all the circumstances of the case, reasonably to be excused:

Provided that no director or other person shall incur any liability in respect of the failure to
include in a prospectus a statement with respect to the matters specified in clause 18 of Schedule
II, unless it is proved that he had knowledge of the matters not disclosed.

(5) This section shall not apply—

 48

(a) to the issue to existing members or debenture-holders of a company of a prospectus or form

of application relating to shares in or debentures of the company whether an applicant for shares
or debentures will or will not have the right to renounce in favour of other persons; or

(b) to the issue of a prospectus or form of application relating to shares or debentures which are,
or are to be, in all respects uniform with shares or debentures previously issued and for the time
being dealt in or quoted on a recognised stock exchange,

but, subject as aforesaid, this section shall apply to a prospectus or a form of application, whether
issued on or with reference to the formation of a company or subsequently.

(6) Nothing in this section shall limit or diminish any liability which any person may incur under
the general law or under this Act apart from this section.

Expert to be unconnected with formation or management of company.—

A prospectus inviting persons to subscribe for shares in or debentures of a company shall not
include a statement purporting to be made by an expert, unless the expert is a person who is not,
and has not been, engaged or interested in the formation or promotion, or in the management, of
the company.

Registration of prospectus.—

(1) No prospectus shall be issued by or on behalf of a company or in relation to an intended

company unless, on or before the date of its publication, there has been delivered to the Registrar
for registration a copy thereof signed by every person who is named therein as a director or
proposed director of the company or by his agent authorised in writing and having endorsed
thereon or attached thereto—
 49

(a) any consent to the issue of the prospectus required by section 58 from any person as an
expert; and

(b) in the case of a prospectus issued generally also—

(i) a copy of every contract required by clause 16 of Schedule II to be specified in the prospectus,
or, in the case of a contract not reduced into writing, a memorandum giving full particulars
thereof; and

(ii) where the persons making any report required by Part II of that Schedule have made therein,
or have, without giving the reasons, indicated therein, any such adjustments as are mentioned in
clause 32 of that Schedule, a written statement signed by those persons setting out the
adjustments and giving the reasons therefor.

(2) Every prospectus to which sub-section (1) applies shall, on the face of it,—

(a) state that a copy has been delivered for registration as required by this section; and

(b) specify any documents required by this section to be endorsed on or attached to the copy so
delivered, or refer to statements included in the prospectus which specify those documents.

1
[(3) The Registrar shall not register a prospectus unless the requirements of sections 55, 56, 57
and 58 and sub-sections (1) and (2) of this section have been complied with and the prospectus is
accompanied by the consent in writing of the person, if any, named therein as the auditor, legal
adviser, attorney, solicitor, banker or broker of the company or intended company, to act in that
capacity.]

(4) No prospectus shall be issued more than ninety days after the date on which a copy thereof is
delivered for registration; and if a prospectus is so issued, it shall be deemed to be a prospectus a
copy of which has not been delivered under this section to the Registrar.
 50

(5) If a prospectus is issued without a copy thereof being delivered under this section to the
Registrar or without the copy so delivered having endorsed thereon or attached thereto the
required consent or documents, the company, and every person who is knowingly a party to the
issue of the prospectus, shall be punishable with fine which may extend to 2[fifty thousand
rupees].

Terms of contract mentioned in prospectus or statement in lieu of prospectus,

not to be varied.—

A company shall not, at any time, vary the terms of a contract referred to in the prospectus or
statement in lieu of prospectus, except subject to the approval of, or except on authority given
by, the company in general meeting.

Document containing offer of shares or debentures for sale to be deemed

prospectus.—

(1) Where a company allots or agrees to allot any shares in or debentures of the company with a
view to all or any of those shares or debentures being offered for sale to the public, any
document by which the offer for sale to the public is made shall, for all purposes, be deemed to
be a prospectus issued by the company; and all enactments and rules of law as to the contents of
prospectus and as to liability in respect of statements in and omissions from prospectuses, or
otherwise relating to prospectuses, shall apply with the modifications specified in sub-sections
(3), (4) and (5), and have effect accordingly, as if the shares or debentures had been offered to
the public for subscription and as if persons accepting the offer in respect of any shares or
debentures were subscribers for those shares or debentures, but without prejudice to the liability,
if any, of the persons by whom the offer is made in respect of mis-statements contained in the
document or otherwise in respect thereof.

(2) For the purposes of this Act, it shall, unless the contrary is proved, be evidence that an
allotment of, or an agreement to allot, shares or debentures was made with a view to the shares or
debentures being offered for sale to the public if it is shown—
 51

(a) that an offer of the shares or debentures or of any of them for sale to the public was made
within six months after the allotment or agreement to allot; or

(b) that at the date when the offer was made, the whole consideration to be received by the
company in respect of the shares or debentures had not been received by it.

(3) Section 56 as applied by this section shall have effect as if it required a prospectus to state in
addition to the matters required by that section to be stated in a prospectus—

(a) the net amount of the consideration received or to be received by the company in respect of
the shares or debentures to which the offer relates; and

(b) the place and time at which the contract under which the said shares or debentures have been
or are to be allotted may be inspected.

(4) Section 60 as applied by this section shall have effect as if the persons making the offer were
persons named in a prospectus as directors of a company.

(5) Where a person making an offer to which this section relates is a company or a firm, it shall
be sufficient if the document referred to in sub-section (1) is signed on behalf of the company or
firm by two directors of the company or by not less than one-half of the partners in the firm, as
the case may be; and any such director or partner may sign by his agent authorised in writing.

Shares and share capital:

Nature of [shares or debentures].

 52

82. Nature of 1[shares or debentures].—The 1[shares or debentures] other interest of any member
in a company shall be movable property, transferable in the manner provided by the articles of
the company.

comments

The shareholders cannot among themselves enter into an agreement which is contrary to or
inconsistent with the articles of association of the company. A private agreement whereunder
there is a restriction on a living member to transfer his shareholding only to the branch of family
to which he belongs is not binding either on the shareholders or on the company; V.B. Rengaraj
v. V.B. Gopala Krishnan, JT 1991 (4) SC 430: (1992) 1 SCC 160: AIR 1992 SC 453.

Numbering of shares.—

1
[83. Numbering of shares.—Each share in a company having a share capital shall be
distinguished by its appropriate number.]

Certificate of shares.—

1
[(1)] A certificate, under the common seal of the company, specifying any shares held by any
member, shall be prima facie evidence of the title of the member to such shares.

2
[(2) A certificate may be renewed or a duplicate of a certificate may be issued if such
certificate—

(a) is proved to have been lost or destroyed, or

(b) having been defected or mutilated or torn is surrendered to the company.

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(3) If a company with intent to defraud renews a certificate or issues a duplicate thereof, the
company shall be punishable with fine which may extend to ten thousand rupees and every
officer of the company who is in default shall be punishable with imprisonment for a term which
may extend to six months, or with fine which may extend to 3[one lakh rupees], or with both.

(4) Notwithstanding anything contained in the articles of association of a company, the manner
of issue or renewal of a certificate or issue of a duplicate thereof, the form of a certificate
(original or renewed) or of a duplicate thereof, the particulars to be entered in the register of
members or in the register of renewed or duplicate certificates, the form of such registers, the fee
on payment of which, the terms and conditions if any (including terms and conditions as to
evidence and indemnity and the payment of out-of-pocket expenses incurred by a company in
investigating evidence) on which a certificate may be renewed or a duplicate thereof may be
issued, shall be such as may be prescribed.]

Two kinds of share capital.—

(1) “Preference share capital” means, with reference to any company limited by shares, whether
formed before or after the commencement of this Act, that part of the share capital of the
company which fulfils both the following requirements, namely:—

(a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount
or an amount calculated at a fixed rate, which may be either free of or subject to income-tax; and

(b) that as respects capital, it carries or will carry, on a winding up or repayment of capital, a
preferential right to be repaid the amount of the capital paid up or deemed to have been paid up,
whether or not there is a preferential right to the payment of either or both of the following
amounts, namely:—

(i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date
of the winding up or repayment of capital; and
 54

(ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles
of the company.

Explanation.—Capital shall be deemed to be preference capital, notwithstanding that it is entitled

to either of both of the following rights, namely:—

(i) that, as respects dividends, in addition to the preferential right to the amount specified in
clause (a), it has a right to participate, whether fully or to a limited extent, with capital not
entitled to the preferential right aforesaid;

(ii) that, as respects capital, in addition to the preferential right to the repayment, on a winding
up, of the amounts specified in clause (b); it has a right to participate, whether fully or to a
limited extent, with capital not entitled to that preferential right in any surplus which may remain
after the entire capital has been repaid.

(2) “Equity share capital” means, with reference to any such company, all share capital which is
not preference share capital.

(3) The expressions “preference share” and “equity share” shall be construed accordingly.

New issues of share capital to be only of two kinds.

1
[86. New issues of share capital to be only of two kinds.—The share capital of a company
limited by shares shall be of two kinds only, namely:—

(a) equity share capital—

(i) with voting rights; or

 55

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules and
subject to such conditions as may be prescribed;

(b) preference share capital.]

Power of company to accept unpaid share capital, although not called up.—

(1) A company may, if so authorised by its articles accept from any member the whole or a part
of the amount remaining unpaid on any shares held by him, although no part of that amount has
been called up.

(2) The member shall not however be entitled, where the company is one limited by shares, to
any voting rights in respect of the moneys so paid by him until the same would, but for such
payment, become presently payable.

Share capital to stand increased where an order is made under section

81(4).—

1
[94A. Share capital to stand increased where an order is made under section 81(4).—

(1) Notwithstanding anything contained in this Act, where the Central Government has, by an
order made under sub-section (4) of section 81, directed that any debenture or loan or any part
thereof shall be converted into shares in a company, the conditions contained in the
memorandum of such company shall, where such order has the effect of increasing the nominal
share capital of the company, stand altered and the nominal share capital of such company shall
stand increased by an amount equal to the amount of the value of the shares into which such
debentures or loans or part thereof has been converted.
 56

(2) Where, in pursuance of an option attached to debentures issued or loans raised by the
company, any public financial institution proposes to convert such debentures or loans into
shares in the company, the Central Government may, on the application of such public financial
institution direct that the conditions contained in the memorandum of such company shall stand
altered and the nominal share capital of such company shall stand increased by an amount equal
to the amount of the value of the shares into which such debentures or loans or part thereof has
been converted.

(3) Where the memorandum of a company becomes altered, whether by reason of an order made
by the Central Government under sub-section (1) of section 81 or sub-section (2) of this section,
the Central Government shall send a copy of such order to the Registrar and also to the company
and on receipt of such order, the company shall file in the prescribed form, within thirty days
from the date of such receipt, a return to the Registrar with regard to the increase of share capital
and the Registrar shall, on receipt of such order and return, carry out the necessary alterations in
the memorandum of the company.]

Allotment of shares:

Allotment of shares and debentures to be dealt in on stock exchange.—

1
[(1) Every company intending to offer shares or debentures to the public for subscription by the
issue of a prospectus shall, before such issue, make an application to one or more recognised
stock exchange for permission for the shares or debentures intending to be so offered to be dealt
with in the stock exchange or each such stock exchange.]

2 3
[ [(1A)] Where a prospectus, whether issued generally or not, states that an 4[application under
sub-section (1) has been] made for permission for the shares or debentures offered thereby to be
dealt in one or more recognized stock exchanges, such prospectus shall state the names of the
stock exchange or, as the case may be, each such stock exchange, and any allotment made on an
application in pursuance of such prospectus shall, whenever made, be void 5[***] if the
permission has not been granted by the stock exchange or each such stock exchange as the case
may be, before the expiry of ten weeks from the date of the closing of the subscription lists:

Provided that where an appeal against the decision of any recognized stock exchange refusing
permission for the shares or debentures to be dealt in on that stock exchange has been preferred
 57

under section 22 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), such allotment
shall not be void until the dismissal of the appeal.]

(2) Where the permission has not been 6[applied under sub-section (1)] 7[or such permission
having been applied for, has not been granted as aforesaid,] the company shall forthwith repay
without interest all moneys received from applicants in pursuance of the prospectus, and, if any
such money is not repaid within eight days after the company becomes liable to repay it, 8[the
company and every director of the company who is an officer in default shall, on and from the
expiry of the eighth day, be jointly and severally liable to repay that money with interest at such
rate, not less than four per cent and not more than fifteen per cent, as may be prescribed, having
regard to the length of the period of delay in making the repayment of such money].
9
[***]

10
[(2A) Where permission has been granted by the recognized stock exchange or stock
exchanges for dealing in any shares or debentures in such stock exchange or each such stock
exchange and the moneys received from applicants for shares or debentures are in excess of the
aggregate of the application moneys relating to the shares or debentures in respect of which
allotments have been made, the company shall repay the moneys to the extent of such excess
forthwith without interest, and if such money is not repaid within eight days, from the day the
company becomes liable to pay it,11[the company and every director of the company who is an
officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to
repay that money with interest at such rate, not less than four per cent and not more than fifteen
per cent as may be prescribed, having regard to the length of the period of delay in making the
repayment of such money].]
12
[***]

13
[(2B) If default is made in complying with the provisions of sub-section (2A), the company and
every officer of the company who is in default shall be punishable with fine which may extend to
14
[fifty thousand rupees], and where repayment is not made within six months from the expiry of
the eighth day, also with imprisonment for a term which may extend to one year.]

(3) All moneys received as aforesaid shall be kept in a separate bank account maintained with a
Scheduled Bank 15[until the permission has seen granted, or where an appeal has been preferred
against the refusal to grant such permission, until the disposal of the appeal, and the money
standing in such separate account shall where the permission has not been applied for as
aforesaid or has not been granted, be repaid within the time and in the manner specified in sub-
 58

section (2)]; and if default is made in complying with this sub-section, the company and every
officer of the company who is in default, shall be punishable with fine which may extend to
2
[fifty thousand rupees].

13
[(3A) Moneys standing to the credit of the separate bank account referred to in sub-section (3)
shall not be utilised for any purpose other than the following purposes namely:—

(a) adjustment against allotment of shares, where the shares have been permitted to be dealt in on
the stock exchange or each stock exchange specified in the prospectus; or

(b) repayment of moneys received from applicants in pursuance of the prospectus, where shares
have not been permitted to be dealt in on the stock exchange or each stock exchange specified in
the prospectus, as the case may be, or, where the company is for any other reason unable to make
the allotment of share.]

(4) Any condition purporting to require or bind any applicant for shares or debentures to waive
compliance with any of the requirements of this section shall be void.

16
[(5) For the purposes of this section, it shall be deemed that permission has not been granted if
the application for permission, where made, has not been disposed of within the time specified in
sub-section (1).]

(6) This section shall have effect—

(a) in relation to any shares or debentures agreed to be taken by a person underwriting an offer
thereof by a prospectus, as if he had applied therefor in pursuance of the prospectus; and

(b) in relation to a prospectus offering shares for sale, with the following modifications,
namely:—
 59

(i) references to sale shall be substituted for references to allotment;

(ii) the persons by whom the offer is made, and not the company, shall be liable under sub-
section (2) to repay money received from applicants, and references to the company’s liability
under that sub-section shall be construed accordingly; and

(iii) for the reference in sub-section (3) to the company and every officer of the company who is
in default, there shall be substituted a reference to any person by or through whom the offer is
made and who is knowingly guilty of, or wilfully authorises or permits, the default.

(7) No prospectus shall start that application has been made for permission for the shares or
debentures offered thereby to be dealt in on any stock exchange, unless it is a recognised stock
exchange.
 60

Unit-IV

Membership:

The Companies Act: Who Can Become a Member of a Company?

Any individual who can enter into a contract under the Indian Contract Act, 1872 may be eligible
to become a member of a company. However, this is subject to the provisions under the
Memorandum and the Articles of the company.

The Articles may restrict particular persons or organizations from becoming a member of a
company. A person can become a member of a company provided he fulfills certain conditions:

 Minor: A minor is not qualified to become a member of a company, because a contract

with a minor is not valid. However, a minor can become a member if a written agreement
is signed by his legal guardian.
 Insolvent: A bankrupt person may be considered a member of a company and is entitled
to vote, as long as his name is there on the register of members.
 Partnership Firm: A partnership firm may own shares in a business. The shares are
allotted on the names of partners. As per Section 25 of the Companies Act, 1956, a firm
is allowed to become a member of a company that is licensed under Sec. 25.
 Foreigner: A foreigner is eligible to become a member of a company. His rights as a
member would be suspended if at any point of time he becomes an alien foe.
 Company: A company may become a member of any other company if granted by its
Articles. However, under Sec. 77 (1), of the Companies Act, 1956, a company cannot
become its own member. It is considered illegal if it buys its own shares.

Borrowing powers:
Generally borrowing powers of a company are determined by the memorandum and the articles of
association. That is why, depending upon the provisions of these two documents, a company, can
borrow money. The memorandum and articles of a company may impose some restrictions on
borrowing power of the company. In such a case, the company is to strictly observe these restrictions.
Because, borrowing in excess of the limits laid down by the articles is ultra vires the company and not
binding on it.

As because, the commercial transactions necessarily involve the giving and taking of credit, so a trading
company has an implied power to borrow. Of course, such type of implied power is not entrusted to any
non-trading company. In case of non-trading company, if their memorandum and atricles do not permit
to borrow money, then their provisions of memorandum and articles should be altered before taking
any step to borrow money.

Unless any of the following ways of borrowing money is prohibited, the company can take any one of
them as a way of borrowing money, subject to power given by the memorandum and articles to borrow
money.
 61

i) Mortgage of immovable properties of the company.

ii) Hypothetication on mortgage of movable goods, including stock in trade and furniture, charge on
uncalled capital, floating charge on all the assets of the company, mortgage of book debts, promissory
notes, hundies and bill of exchanges, debentures and debenture stock, charge on patents, licences and
copyrights and goodwill etc.

A company cannot borrow money on the security of its books of account because of the fact that these
books of account are to be kept in the registered office and they are open for inspection. Besides on the
security of the reserve capital, no company can borrow money.

Management and meetings:

Kinds of Company Meetings :Broadly, meetings in a company are of the following types :-

I. Meetings of Members :
These are meetings where the members / shareholders of the company meet and discuss various
matters. Member’s meetings are of the following types :-

A. Statutory Meeting :
A public company limited by shares or a guarantee company having share capital is required to
hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the
company. Such a meeting must be held within a period of not less than one month or within a
period not more than six months from the date on which it is entitled to commence business i.e. it
obtains certificate of commencement of business. In a statutory meeting, the following matters
only can be discussed :-

a. Floatation of shares / debentures by the company

b. Modification to contracts mentioned in the prospectus

The purpose of the meeting is to enable members to know all important matters pertaining to the
formation of the company and its initial life history. The matters discussed include which shares
have been taken up, what money has been received, what contracts have been entered into, what
sums have been spent on preliminary expenses, etc. The members of the company present at the
meeting may discuss any other matter relating to the formation of the Company or arising out of
the statutory report also, even if no prior notice has been given for such other discussions but no
resolution can be passed of which notice have not been given in accordance with the provisions
of the Act.

A notice of at least 21 days before the meeting must be given to members unless consent is
accorded to a shorter notice by members, holding not less than 95% of voting rights in the
company.

A statutory meeting may be adjourned from time to time by the members present at the meeting.
 62

The Board of Directors must prepare and send to every member a report called the "Statutory
Report" at least 21 days before the day on which the meeting is to be held. But if all the members
entitled to attend and vote at the meeting agree, the report could be forwarded later also. The
report should be certified as correct by at least two directors, one of whom must be the managing
director, where there is one, and must also be certified as correct by the auditors of the company
with respect to the shares allotted by the company, the cash received in respect of such shares
and the receipts and payments of the company. A certified copy of the report must be sent to the
Registrar for registration immediately after copies have been sent to the members of the
company.

A list of members showing their names, addresses and occupations together with the number
shares held by each member must be kept in readiness and produced at the commencement of the
meeting and kept open for inspection during the meeting.

If default is made in complying with the above provisions, every director or other officer of the
company who is in default shall be punishable with fine upto Rs. 500. The Registrar or a
contributory may file a petition for the winding up of the company if default is made in
delivering the statutory report to the Registrar or in holding the statutory meeting on or after 14
days after the last date on which the statutory meeting ought to have been held.

Contents of Statutory Report must provide the following particulars:- (a)The total number of
shares allotted, distinguishing those fully or partly paid-up, otherwise than in cash, the extent to
which partly paid shares are paid-up, and in both cases the consideration for which they were
allotted.(b) The total amount of cash received by the company in respect of all shares allotted,
distinguishing as aforesaid.(c) An abstract of the receipts and payments upto a date within 7 days
of the date of the report and the balance of cash and bank accounts in hand, and an account of
preliminary expenses.(d) Any commission or discount paid or to be paid on the issue or sale of
shares or debentures must be separately shown in the aforesaid abstract.(e) The names, addresses
and occupations of directors, auditors, manager and secretary, if any, of the company and the
changes which have taken place in the names, addresses and occupations of the above since the
date of incorporation.(f) Particulars of any contracts to be submitted to the meeting for approval
and modifications done or proposed.(g) If the company has entered into any underwriting
contracts, the extent, if any, to which they have not been carried out and the reasons for the
failure.(h) The arrears, if any, due on calls from every director and from the manager.(i) The
particulars of any commission or brokerage paid or to be paid, in connection with the issue or
sale of shares or debentures to any director or to the manager.

The auditors have to certify that all information regarding calls and allotment of shares are
correct.

B. Annual General Meeting

Must be held by every type of company, public or private, limited by shares or by guarantee,
with or without share capital or unlimited company, once a year. Every company must in each
year hold an annual general meeting. Not more than 15 months must elapse between two annual
general meetings. However, a company may hold its first annual general meeting within 18
 63

months from the date of its incorporation. In such a case, it need not hold any annual general
meeting in the year of its incorporation as well as in the following year only.

In the case there is any difficulty in holding any annual general meeting (except the first annual
meeting), the Registrar may, for any special reasons shown, grant an extension of time for
holding the meeting by a period not exceeding 3 months provided the application for the purpose
is made before the due date of the annual general meeting. However, generally delay in the
completion of the audit of the annual accounts of the company is not treated as "special reason"
for granting extension of time for holding its annual general meeting. Generally, in such
circumstances, an AGM is convened and held at the proper time . all matters other than the
accounts are discussed. All other resolutions are passed and the meeting is adjourned to a later
date for discussing the final accounts of the company. However, the adjourned meeting must be
held before the last day of holding the AGM.

A notice of at least 21 days before the meeting must be given to members unless consent is
accorded to a shorter notice by members, holding not less than 95% of voting rights in the
company. The notice must state that the meeting is an annual general meeting. The time, date
and place of the meeting must be mentioned in the notice. The notice of the meeting must be
accompanied by a copy of the annual accounts of the company, director’s report on the position
of the company for the year and auditor’s report on the accounts. Companies having share capital
should also state in the notice that a member is entitled to attend and vote at the meeting and is
also entitled to appoint proxies in his absence. A proxy need not be a member of that company.
A proxy form should be enclosed with the notice. The proxy forms are required to be submitted
to the company at least 48 hours before the meeting.

The AGM must be held on a working day during business hours at the registered office of the
company or at some other place within the city, town or village in which the registered office of
the company is situated. The Central Government may, however, exempt any class of companies
from the above provisions. If any day is declared by the Central government to be a public
holiday after the issue of the notice convening such meeting, such a day will be traeted as a
working day.

A company may, by appropriate provisions in its its articles, fix the time for its annual general
meeting and may also by a resolution passed in one annual general meeting fix the time for its
subsequent annual general meetings.

Companies licensed under Section 25 are exempt from the above provisions provided that the
time, date and place of each annual general meeting are decided upon beforehand by the Board
of Directors having regard to the directions, if any, given in this regard by the company in
general meeting.

In case of default in holding an annual general meeting, the following are the consequences :-

1. Any member of the company may apply to the Company Law Board. The Company Law
Board may call, or direct the calling of the meeting, and give such ancillary or
consequential directions as it may consider expedient in relation to the calling, holding
 64

and conducting of the meeting. The Company Law Board may direct that one member
present in person or by proxy shall be deemed to constitute the meeting. A meeting held
in pursuance of this order will be deemed to be an annual general meeting of the
company. An application by a member of the company for this purpose must be made to
the concerned Regional Bench of the Company Law Board by way of petition in Form
No. 1 in Annexure II to the CLB Regulations with a fee of rupees fifty accompanied by
(i) affidavit verifying the petition, (ii) bank draft for payment of application fee.
2. Fine which may extend to Rs. 5,000 on the company and every officer of the company
who is in default may be levied and for continuing default, a further fine of Rs. 250 per
day during which the default continues may be levied.

Business to be Transacted at Annual General Meeting :

At every AGM, the following matters must be discussed and decided. Since such matters are
discussed at every AGM, they are known as ordinary business. All other matters and business to
be discussed at the AGM are specila business.

The following matters constitute ordinary business at an AGM :-

a. Consideration of annual accounts, director’s report and the auditor’s report

b. Declaration of dividend
c. Appointment of directors in the place of those retiring
d. Appointment of and the fixing of the remuneration of the statutory auditors.

In case any other business ( special business ) has to be discussed and decided upon, an
explanatory statement of the special business must also accompany the notice calling the
meeting. The notice must should also give the nature and extent of the interest of the directors or
manager in the special business, as also the extent of the shareholding interest in the company of
every such person. In case approval of any document has to be done by the members at the
meeting, the notice must also state that the document would be available for inspection at the
Registered Office of the company during the specified dates and timings.

C. Extraordinary General Meeting

Every general meeting (i.e. meeting of members of the company) other than the statutory
meeting and the annual general meeting or any adjournment thereof, is an extraordinary general
meeting. Such meeting is usually called by the Board of Directors for some urgent business
which cannot wait to be decided till the next AGM. Every business transacted at such a meeting
is special business. An explanatory statement of the special business must also accompany the
notice calling the meeting. The notice must should also give the nature and extent of the interest
of the directors or manager in the special business, as also the extent of the shareholding interest
in the company of every such person. In case approval of any document has to be done by the
members at the meeting, the notice mus also state that the document would be available for
inspection at the Registered Office of the company during the specified dates and timings.

The Articles of Association of a Company may contain provisions for convening an

extraordinary general meeting. Eg. It may provide that "the board may, whenever it thinks fit,
call an extraordinary general meeting" or it may provide that "if at any time there are not within
 65

India, directors capable of acting who are sufficient in number to form a quorum, any director or
any two members of the company may call an extraordinary general meeting".

Extraordinary General Meeting on Requisition :

The members of a company have the right to require the calling of an extraordinary general
meeting by the directors. The board of directors of a company must call an extraordinary general
meeting if required to do so by the following number of members :-

a. members of the company holding at the date of making the demand for an EGM not less
than one-tenth of such of the voting rights in regard to the matter to be discussed at the
meeting ; or
b. if the company has no share capital, the members representing not less than one-tenth of
the total voting rights at that date in regard to the said matter.

The requisition must state the objects of the meetings and must be signed by the requisitioning
members. The requisition must be deposited at the company's registered office. When the
requisition is deposited at the registered office of the company, the directors should within 21
days, move to call a meeting and the meeting should be actually be held within 45 days from the
date of the lodgement of the requisition. If the directors fail to call and hold the meeting as
aforesaid, the requisitionists or any of them meeting the requirements at (a) or (b) above, as the
case may be, may themselves proceed to call meeting within 3 months from the date of the
requisition, and claim the necessary expenses from the company. The company can make good
this sum from the directors in default. At such an EGM, any business which is not covered by the
agenda mentioned in the notice of the meeting cannot be voted upon.

Power of Company Law Board to Order Calling of Extraordinary General Meeting :

If for any reason, it is impracticable to call a meeting of a company, other than an annual general
meeting, or to hold or conduct the meeting of the company, the Company Law Board may, either
i) on its own motion, or ii) on the application of any director of the company, or of any member
of the company, who would be entitled to vote at the meeting, order a meeting to be called and
conducted as the Company Law Board thinks fit, and may also give such other ancillary and
consequential directions as it thinks fit expedient. A meeting so called and conducted shall be
deemed to be a meeting of the company duly called and conducted.

Procedure for Application under Section 186 :

An application by a director or a member of a company for this purpose is required to be made to
the Regional Bench of the Company Law Board before whom the petition is to be made in Form
No 1 specified in Annexure II to the CLB Regulations with a fee of Rs200. The petition must be
accompanied with the following documents -

a. Evidence in proof of status of the applicant.

b. Affidavit verifying the petition.
c. Bank draft evidencing payment of application fee.
d. Memorandum of appearance with copy of the Board's resolution or executed vakalat
nama, as the case may be.
 66

D. Class Meeting
Class meetings are meetings which are held by holders of a particular class of shares, e.g.,
preference shareholders. Such meetings are normally called when it is proposed to vary the rights
of that particular class of shares. At such meetings, these members dicuss the pros and cons of
the proposal and vote accordingly. (See provisions on variations of shareholder’s rights). Class
meetings are held to pass resolution which will bind only the members of the class concerned,
and only members of that class can attend and vote.

Unless the articles of the company or a contract binding on the persons concerned otherwise
provides, all provisions pertaining to calling of a general meeting and its conduct apply to class
meetings in like manner as they apply with respect to general meetings of the company.

II. Meetings of the Board of Directors

- Meeting of the Board of Directors

- Meeting of a Committee of the Board

III. Other Meetings

A. Meeting of debenture holders
A company issuing debentures may provide for the holding of meetings of the debentureholders.
At such meetings, generally nmmatters pertaining to the variation in terms of security or to
alteration of their rights are discussed. All matters connected with the holding, conduct and
proceedings of the meetings of the debentureholders are normally specified in the Debenture
Trust Deed. The decisions at the meeting made by the prescribed majority are valid and lawful
and binding upon the minority.

B. Meeting of creditors
Sometimes, a company, either as a running concern or in the event of winding up, has to make
certain arrangements with its creditors. Meetings of creditors may be called for this purpose. Eg
U/s 393, a company may enter into arrangements with creditors with the sanction of the Court
for reconstruction or any arrangement with its creditors. The court, on application, may order the
holding of a creditors' s meeting. If the scheme of arrangement is agreed to by majority in
number of holding debts to value of the three-fourth of the total value of the debts, the court may
sanction the scheme. A certified copy of the court's order is then filed with the Registrar and it is
binding on all the creditors and the company only after it is filed with Registrar.

Similarly, in case of winding up of a company, a meeting of creditors and of contributories is

held to ascertain the total amount due by the company and also to appoint a liquidator to wind up
the affairs of the company.

Requisites of a Valid Meetings The following conditions must be satisfied for a meeting to be
called a valid meeting :-

1. It must be properly convened. The persons calling the meeting must be authorised to do
so.
 67

2. Proper and adequate notice must have been given to all those entitled to attend.
3. The meeting must be legally constituted. There maust be a chairperson. The rules of
quorum must be maintained and the provisions of the Companies Act, 1956 and the
articles must be complied with.
4. The business at the meeting must be validly transacted.. The meeting must be conducted
in accordance with the regulations governing the meetings.

Notice of General Meeting

A meeting cannot be held unless a proper notice has been given to all persons entitled to attend
the meeting at the proper time, containing the necessary information. A notice convening a
general meeting must be given at least 21 clear days prior to the date of meeting. However, an
annual general meeting may be called and held with a shorter notice, if it is consented to by all
the members entitled to vote at the meeting. In respect of any other meeting, it may be called and
held with a shorter notice, if at least members holding 95 percent of the total voting power of the
Company consent to a shorter notice.

Notice of every meeting of company must be sent to all members entitled to attend and vote at
the meeting. Notice of the AGM must be given to the statutory auditor of the company.

Accidental omission to give notice to, or the non-receipt of notice by, any member or any other
person on whom it should be given will not invalidate the proceedings of the meeting. The notice
may be given to any member either personally or by sending it by post to him at his registered
address, or if there is none in India, to any address within India supplied by him for the purpose.
Where notice is sent by post, service is effected by properly addressing, pre-paying and posting
the notice. A notice may be given to joint holders by giving it to the jointholder first named in
the register of members. A notice of meeting may also be given by advertising the same in a
newspaper circulating in the neighbourhood of the registered office of the company and it shall
be deemed to be served on every member who has to registered address in India for the giving of
notices to him.

A notice calling a meeting must state the place, day and hour of the meeting and must contain the
agenda of the meeting. If the meeting is a statutory or annual general meeting, notice must
describe it as such. Where any items of special business are to be transacted at the meeting, an
explanatory statement setting out all materials facts concerning each item of the special business
including the concern or interest, if any, therein of every director and manager, is any, must be
annexed to the notice. If it is intended to propose any resolution as a special resolution, such
intention should be specified.

A notice convening an AGM must be accompanied by the annual accounts of the company, the
director’s report and the auditor’s report. The copies of these documents could, however, be sent
less than 21 days before of the date of the meeting if agreed to by all members entitled to vote at
the meeting.
 68

Chairman
The chairman is the head of the meeting. Generally, the chairman of the Board of Directors is the
Chairman of the meeting. Unless the articles otherwise provide, the members present in person at
the meeting elect one of themselves to be the chairman thereof on a show of the hands. If there is
no Chairman or he is not present within 15 minutes after the appointed time of the meeting or is
unwilling to act as chairman of the meeting, the directors present may elect one among
themselves to be the chairman of the meeting. If, however no director is willing to act as
chairman or if no director is present within 15 minutes after the appointed time of the meeting,
the members present should choose one among themselves to be chairman of the meeting. If,
after the election of a chairman on a show of hands, poll is demanded and taken and a different
person is elected as chairman, then that person will be the chairman for the rest of the meeting.

Duties of the chairman

Without a chairman, a meeting is incomplete. The chairman is the regulator of the meeting. His
duties include the following :-

1. He must ensure that the meeting is properly convened and constituted i.e. that proper
notice has been given, that the required quorum is present, etc.
2. He must ensure that the provisions of the act and the articles in regard to the meeting and
its procedures are observed.
3. He must ensure that business is taken in the order set out in agenda and no business
which is not mentioned in the agenda is taken up unless agreed to by the members.
4. He must impartially regulate the proceedings of the meeting and maintain discipline at
the meeting.
5. He may exercise his powers of adjournment of the meeting, should he in good faith feel
that such a step is necessary. The chairman has the power to adjourn the meeting in case
of indiscipline at the meeting. A chairman however does not have the power to stop or
adjourn the meeting at his own will and pleasure. If he adjourns the meeting prematurely,
the members present may decide to continue the meeting and elect another chairman and
proceed with the business for which it was convened.
6. He must exercise his power to order a poll correctly and must order it to be taken when
demanded properly.
7. He must exercise his casting vote bonafide in the interest of the company.

Voting and Demand for Poll

Generally, initially matters are decided at a general meeting by a show of hands. If the majority
of the hands raise their hands in favour of a particular resolution, then unless a poll is demanded,
it is taken as passed. Voting by a show of hands operates on the principle of "One Member-One
Vote". However, since the fundamental voting principle in a company is "One Share-One Vote",
if a poll is demanded, voting takes place by a poll. Before or on declaration of the result of the
voting on any resolution on a show of hands, the chairman may order suo motu (of his own
motion) that a poll be taken. However, when a demand for poll is made, he must order the poll be
taken. The chairman may order a poll when a resolution proposed by the Board is lost on the
show of hands or if he is of the opinion that the decision taken on the show of hands is likely to
be reversed by poll. When a poll is taken, The decision arrived by poll is final and the decision
on the show of hands has no effect.
 69

A poll is allowed only if the prescribed number of members demand a poll. A poll must be
ordered by the chairman if it is demanded:-

a. in the case of a public company having a share capital, by any member or members
present in person or by proxy and holding shares in the company-

i. which confer a power to vote on the resolution not being less than one-tenth of the total
voting power in respect of the resolution, or
ii. on which an aggregate sum of not less than fifty thousand rupees has been paid up.

b. in the case of a private company having a share capital, by one member having the right
to vote on the resolution and present in person or by proxy if not more than seven such
members are personally present, and by two such members present in person or by proxy,
if more than seven such members are personally present.
c. in the case of any other, by any member or members present in person or by proxy and
having not less than one-tenth of the total voting power in respect of the resolution.

Motion
Motion means a proposal to be discussed at a meeting by the members. A resolution may be
passed accepting the motion, with or without modifications or a motion may be entirely rejected.
A motion, on being passed as a resolution becomes a decision. A motion must be in writing and
signed by the mover and put to the vote of the meeting by the chairman. Only those motions
which are mentioned in the agenda to the meeting can be discussed at the meeting. However,
motions incidental or ancillary to the matter under discussion may be moved and passed.
Generally, a motion is proposed by one member and seconded by another member.

Amendment
Amendment means any modification to a motion before it is put to vote for adoption.
Amendment may be proposed by any member who has not already spoken on the main motion or
has not previously moved an amendment thereto. There can be an amendment to an amendment
motion also. A motion must be in writing and signed by the mover and put to the vote of the
meeting by the chairman. An amendment must not raise any question already decided upon at the
same meeting and must be relevant to the main motion which it seeks to amend. The chairman
has the discretion to accept or reject an amendment on various grounds such as inconsistency,
redundancy, irrelevance, etc. If the amendment is adopted on a vote by the members, it is
incorporated in the body of the main motion. The altered motion is then discussed and put to vote
and if passed, becomes a resolution.

Kinds of Resolutions
Resolutions mean decisions taken at a meeting. A motion, with or without amendments is put to
vote at a meeting. Once the motion is passed, it becomes a resolution. A valid resolution can be
passed at a properly convened meeting with the required quorum. There are broadly three types
of resolutions :-

1. Ordinary Resolution :
An ordinary resolution is one which can be passed by a simple majority. I.e. if the votes
 70

(including the casting vote, if any, of the chairman), at a general meeting cast by members
entitled to vote in its favour are more than votes cast against it. Voting may be by way of a show
of hands or by a poll provided 21 days notice has been given for the meeting.

2. Special Resolution :
A special resolution is one in regard to which is passed by a 75 % majority only i.e. the number
of votes cast in favour of the resolution is at least three times the number of votes cast against it,
either by a show of hands or on a poll in person or by proxy. The intention to propose a
resolution as a special resolution must be specifically mentioned in the notice of the general
meeting. Special resolutions are needed to decide on important matters of the company.
Examples where special resolutions are required are :-

a. To alter the domicile clause of the memorandum from one State to another or to alter the
objects clause of the memorandum.
b. To alter / change the name of the company with the approval of the central government
c. To alter the articles of association
d. To change the name of the company by omitting "Limited" or "Private Limited". The
Central Government may allow a company with charitable objects to do so by special
resolution under section 25 of the Companies Act, 1956.

3. Resolution requiring Special Notice :

There are certain matters specified in the Companies Act, 1956 which may be discussed at a
general meeting only if a special notice is given regarding the proposal to discuss these matters at
a meeting. A special notice enables the members to be prepared on the matter to be discussed and
gives them time to indicate their views on the resolution. In case special notice of resolution is
required by the Companies Act, 1956 or by the articles of a company, the intention to propose
such a resolution must be notified to the company at least 14 days before the meeting. The
company must within 7 days before the meeting give the notice of the proposed resolution to its
members. Notice of the resolution is required to be given in the same way in which notice of a
meeting is given, or if that is not practicable, the company may give notice by advertisement in a
newspaper having an appropriate circulation or in any other manner allowed by the articles, not
less 7 days before the meeting.

The following matters requiring Special Notice before they are discussed before tha meeting :-

a. To appoint at an annual general meeting appointing an auditor a person other than a

retiring auditor.
b. To resolve at an annual general meeting that a retiring auditor shall not be reappointed.
c. To remove a director before the expiry of his period of office.
d. To appoint another director in place of removed director.
e. Where the articles of a company provide for the giving of a special notice for a
resolution, in respect of any specified matter or matters.

Please note that a resolution requiring special notice may be passed either as an ordinary
resolution (Simple majority) or as a special resolution (75 % majority).
 71

Circulation of Member's Resolution

Generally, the Board of Directors prepare the agenda of the meeting to be sent to all members of
the meeting. A member, by himself has very little say in deciding the agenda. However, there are
provisions in the Companies Act which enable members to introduce motions at a meeting and
give prior notice of their intention to do so to all other members of the company. If members
having one twentieth of the total voting rights of all members having the right to vote on a
resolution or if 100 members having the right to vote and holding paid-up capital of Rs1,00,000
or more, require the company to do so, the company must :-

1. Give to the members entitled to receive notice of the next annual general meeting, notice
of any resolution which may be properly moved and is intended to be moved at that
meeting; and
2. Circulate to members entitled to have notice of any general meeting sent to them, any
statement of not more than 1,000 words with respect to the matter referred to in any
proposed resolution, or any business to be dealt with at that meeting.

The expenses for this purpose must be borne by the requisitionists and must be tendered to the
company. The requisition, signed by all the requisitionists, must be deposited at the registered
office of the company at least 6 weeks before the meeting in the case of resolution and not less
than 2 weeks before the meeting in case of any other requisition together with a reasonable sum
to meet the expenses. However, where a copy of the requisition requiring notice of resolution has
been deposited at the registered office of the company and an annual general meeting is called
for a date six weeks or less after the requisition is deposited, the copy though not deposited
within the prescribed time is deemed to have been properly deposited.

The company is required to serve the notice of resolution and/or the statement to the members as
far as possible in the manner and so far as practicable at the same time as the notice of the
meeting ; otherwise as soon as practicable thereafter.

However, a company need not circulate a statement if the Court, on the application either of the
company or any other aggrieved person, is satisfied that the rights so conferred are being abused
to secure needless publicity or for defamatory purposes. Secondly a banking company need not
circulate such statement, if in the opinion of its Board of directors, the circulation will injure the
interest of the company.

Registration of Resolutions and Agreements

A copy of each of the following resolutions along with the explantory statement in case of a
special business and agreements must, within 30 days after the passing or making thereof, be
printed or typewritten and duly certified under the signature of an officer of the company and
filed with the Registrar of Companies who shall record the same :-

1. All special resolutions

2. All resolutions which have been unanimously agreed to by all the members but which, if
not so agreed, would not have been effective unless passed as special resolutions
 72

3. All resolutions of the board of directors of a company or agreement executed by a

company, relating to the appointment, re-appointment or renewal of the appointment, or
variation of the terms of appointment, of a managing director
4. All resolutions or agreements which have been agreed to by all members of any class of
members but which, if not so agreed, would not have been effective unless passed by a
particular majority or in a particular manner and all resolutions or agreements which
effectively bind all members of any class of shareholders though not agreed to by all of
those members
5. All resolutions passed by a company conferring power upon its directors to sell or
dispose of the whole or any part of the company's undertaking; or to borrow money
beyond the limit of the paid-up share capital and free reserves of the company; or to
contribute to charities beyond Rs50000 or 5 per cent of the average net profits
6. All resolutions approving the appointment of sole selling agents of the company
7. All copies of the terms and conditions of appointment of a sole selling agent or sole
buying or purchasing agent
8. Resolutions for voluntary winding up of a company

Adjournment
Adjournment means suspending the proceedings of a meeting for the time being so that the
meeting may be continued at a later date and time fixed in that meeting itself at the time of such
adjournment or to decided later on. Only the business not finished at the original meeting can be
transacted at the adjourned meeting.

The majority of members at a meeting may move an adjournment motion at a meeting. If the
chairman adjourns the meeting, ignoring the views of the majority, the remaining members can
continue the meeting. The chairman cannot adjourn the meeting at his own discretion without
there being a good cause for such an adjournment. Where the chairman, acting bona fide within
his powers, adjourns the meeting as per the view of the majority, the minority members cannot to
continue with such meeting and, if they do the proceedings there will be null and void.

An adjourned meeting is merely the continuation of the original meeting and therefore, a fresh
notice is not necessary, if the time, date and place for holding the adjourned meeting are decided
and declared at the time of adjourning it. If a meeting is adjourned without stipulation as to when
it will be continued, fresh notice of the adjourned meeting must be given.

Postponement
Postponement of a meeting means defering the holding of the meeting itself at a later date.
Postponement is done by the Board of Directors or by the person convening the meeting. In case
of adjournment, it is the decision of the majority of the members present at the meeting itself.

Dissolution
Dissolution of a meeting means termination of a meeting. The meeting no longer exists once it
has been dissolved. If within half an hour after the time appointed for holding a general meeting;
the quorum is not present, the meeting shall stand dissolved if it was called on requisition by
members.
 73

Minutes of Proceedings of Meetings

Every company must keep minutes of the proceedings of general meetings and of the meetings
of board of directors and its committees. The minutes are a record of the discussions made at the
meeting and the final decisions taken thereat.

Every company must keep minutes containing details of all proceedings at the meetings. The
pages of the minute books must be consecutively numbered and the minutes must be recorded
therein within 30 days of the meeting. They have to be written directly on the numbered pages.
Pasting or attaching of papers is not allowed. Each page of every such minutes books must be
initialed or signed and last page of the record of proceedings of each meeting in such books must
be dated and signed by :-

a. in the case of the meeting of the Board of directors or committee thereof, by the chairman
of that meeting or that of the succeeding meeting, and
b. in the case of a general meeting, by the chairman of the same meeting within the
aforesaid 30 days or in the event of the death or inability of that chairman within the
period, by a director duly authorised by the Board of directors for the purpose.

The Company Law Board, however, may not object if minutes are maintained in loose leaf form
provided all other procedural requirements are complied with and all possible safeguards against
manipulation or interpolation of the minutes are ensured. The loose leaves must be bound at
reasonable intervals. Entering the minutes in a bound minute book by a chemical process, which
does not amount to attachment to any book by pasting or otherwise is permissible provided on
the mechanical impression of the minutes, the original signatures of the Chairman are given on
each page. All appointments of officers made at any of the meetings must be included in the
minutes of the meeting. In the case of a meeting of the Board of directors or its Committee, the
minutes must also state the names of directors present at the meeting and the names of directors,
if any, dissenting from, or not concurring with a resolution passed at the meeting.

The chairman may exclude from the minutes any matters which are defamatory, irrelevant or
immaterial or which are detrimental to the interests of the company. The discretion of the
Chairman with regard to the inclusion or exclusion of any matter is absolute and unfettered.

Where minutes of the proceedings of any meeting have been kept properly, they are, unless the
contrary is proved, presumed to be correct, and are valid evidence that the meeting was duly
called and held, and all proceedings thereat have actually taken place, and in particular, all
appointments of directors or liquidators made at the meeting shall be deemed to be valid.

The minute books of the proceedings of general meetings must be kept the registered office of
the company. Any member has a right to inspect, free of cost during business hours at the
registered office of the company, the minutes books containing the proceedings of the general
meetings of the company. Further, any member shall be entitled to be furnished, within 7 days
after he has made a request to the company, with a copy of any minutes on payment of Rupee
One for every hundred words or fraction thereof. If any inspection is refused or copy not
furnished within the time specified, every officer in default shall be punishable with fine up to
Rs. 500 for each offence. The Company Law Board may also by order compel an immediate
 74

inspection or furnishing of a copy forthwith. But the minutes books of the board meetings are not
open for inspection of members

Accounts and audit:

Requirement under Companies Act, 1956

Every company registered in India is required to get its accounts audited by a practicing
Chartered Accountant. Section 224 (1) of the Companies Act, 1956 states that every company,
whether it is public or private, shall have an auditor to audit its accounts.

This audit is called statutory audit and through it the Companies Act ensures that the persons
carrying on business with others money are accountable to them.

Appointment of Auditors

The appointment of auditor is mandatory in the Annual General Meeting for the following year.
The auditors appointed at the Annual General Meeting hold the office from the conclusion of the
Annual General Meeting at which he is appointed until the conclusion of the next Annual
General Meeting. Thus, the Act seeks to ensure that the appointment of auditors is not in the
hands of the directors and is vested in the general body of shareholders.

However, the first auditors of the Company are appointed by the Board of Directors within one
month from the date of incorporation of a company. The auditors, so appointed, hold the office
until the conclusion of the first annual general meeting of the Company. If the Board fails to
appoint the first auditor, the company may do so at a general meeting.

Who can be appointed as Auditors?

As per Sec 226 of Companies Act, 1956, a person who is Chartered Accountant within the
meaning of Chartered Accountants Act, 1949 and holds a certificate of practice, or a partnership
firm where of all the partners are Chartered Accountants holding certificates of practice, may be
appointed as auditor of a company. However, in the latter case, the appointment as an auditor
may be made in the firm name and any of its partners may act in the name of the firm.

The following persons cannot be appointed as auditor of a Company:

1. An officer or employee of the company;

2. A person who is partner with an employee of the company or employee of an employee of the
company;
3. Any person who is indebted to a company for a sum exceeding Rs. 1,000/- or who have
guaranteed to the company on behalf of another person for a sum exceeding Rs. 1,000/-.
4. A person who is holding any security of that company, after a period of one year from the date
of commencement of Companies (Amendment) Act, 2000.
 75

If an auditor, after his appointment, becomes subject to any disqualification mentioned above, he
shall be deemed to have vacated as such.

Do the accounts of branch office need to be audited?

Yes. As per section 228 of the Companies Act, 1956, where a company (whether public or
private limited) has a branch office, its accounts should also be audited. The audit of the accounts
of branch office can be done either by:

1. the company’s auditor; or

2. by any other person who is qualified to act as the company’s auditor

However, if the branch is situated in a country outside India, a person who is duly qualified to act
as auditor of the branch in accordance with the laws of that country can also be appointed as
auditor of branch.

If the branch is not being audited by the company’s auditor, even then he is entitled to visit the
branch office if he considers it necessary to do so for the performance of his duties as the auditor.
He has a right of access at all times to the books, accounts and vouchers of the company
maintained at such branch office.

Compromise arrangements and reconstruction:

Power to compromise or make arrangements with creditors and members.—

(1) Where a compromise or arrangement is proposed—

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them,the 1[Tribunal] may, on the
application of the company or of any creditor or member of the company or, in the case of a
company which is being wound up, of the liquidator, order a meeting of the creditors or class of
creditors, or of the members or class of members, as the case may be to be called, held and
conducted in such manner as the 1[Tribunal] directs.
 76

(2) If a majority in number representing three-fourths in value of the creditors, or class of

creditors, or members, or class of members as the case may be, present and voting either in
person or, where proxies are allowed 2[under the rules made under section 643], by proxy, at the
meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if
sanctioned by the 1[Tribunal], be binding on all the creditors, all the creditors of the class, all the
members, or all the members of the class, as the case may be, and also on the company, or, in the
case of a company which is being wound up, on the liquidator and contributories of the
company:

3
[Provided that no order sanctioning any compromise or arrangement shall be made by the
1
[Tribunal] unless the 1[Tribunal] is satisfied that the company or any other person by whom an
application has been made under sub-section (1) has disclosed to the 1[Tribunal], by affidavit or
otherwise, all material facts relating to the company, such as the latest financial position of the
company, the latest auditor’s report on the accounts of the company, the pendency of any
investigation proceedings in relation to the company under sections 235 to 351, and the like.]

(3) An order made by the 1[Tribunal] under sub-section (2) shall have no effect until a certified
copy of the order has been filed with the Registrar.

(4) A copy of every such order shall be annexed to every copy of the memorandum of the
company issued after the certified copy of the order has been filed as aforesaid, or in the case of
a company not having a memorandum, to every copy so issued of the instrument constituting or
defining the constitution of the company.

(5) If default is made in complying with sub-section (4), the company, and every officer of the
company who is in default, shall be punishable with fine which may extend to 4[one hundred
rupees] for each copy in respect of which default is made.

(6) The 5[Tribunal] may, at any time after an application has been made to it under this section
stay the commencement or continuation of any suit or proceeding against the company on such
terms as the 5[Tribunal] thinks fit, until the application is finally disposed of.

6
[***]
 77

comments

(i) A scheme sanctioned by the Court does not operate as a mere agreement between the parties,
it becomes binding on the company, the creditors and the shareholders and has statutory force. It
cannot be altered except with the sanction of the Court even if the shareholders and creditors
acquiesce in such alteration; J.K. (Bombay) Pvt. Ltd. v. New Kaiser-I-Hind Spinning and
Weaving Co. Ltd., 1970 (40) Comp. Cas. 689: (1970) 1 Com LJ 151: AIR 1970 SC 1041.

(ii) A binding obligation created under a composition under section 391 of the Companies Act,
between the company and its creditors does not affect the liability of the surety unless the
contract of suretyship otherwise provides; Punjab National Bank Ltd. v. Sri Vikram Cotton Mills
Ltd., 1970 (40) Comp. Cas. 927: 1970 (2) Com LJ 18: AIR 1970 SC 1973.

Power of Tribunal to enforce compromise and arrangement.—

1
[392. Power of Tribunal to enforce compromise and arrangement.—(1) Where the Tribunal
makes an order under section 391 sanctioning a compromise or an arrangement in respect of a
company, it—

(a) shall have power to supervise the carrying out of the compromise or an arrangement; and

(b) may, at the time of making such order or at any time thereafter, give such directions in regard
to any matter or make such modifications in the compromise or arrangement as it may consider
necessary for the proper working of the compromise or arrangement.

(2) If the Tribunal aforesaid is satisfied that a compromise or an arrangement sanctioned under
section 391 cannot be worked satisfactorily with or without modifications, it may, either on its
own motion or on the application of any person interested in the affairs of the company, make an
order winding up the company, and such an order shall be deemed to be an order made under
section 433 of this Act.
 78

(3) The provisions of this section shall, so far as may be, also apply to a company in respect of
which an order has been made before the commencement of the Companies (Amendment) Act,
2001 sanctioning a compromise or an arrangement.]

Information as to compromises or arrangements with creditors and

members.—

(1) Where a meeting of creditors or any class of creditors, or of members or any class of
members, is called under section 391,—

(a) with every notice calling the meeting which is sent to a creditor or member, there shall be
sent also a statement setting forth the terms of the compromise or arrangement and explaining its
effect; and in particular, stating any material interests of the directors, managing director 1[***]
or manager of the company, whether in their capacity as such or as members or creditors of the
company or otherwise, and the effect on those interests of the compromise or arrangement if, and
in so far as, it is different from the effect on the like interests of other persons; and

(b) in every notice calling the meeting which is given by advertisement, there shall be included
either such a statement as aforesaid or a notification of the place at which and the manner in
which creditors or members entitled to attend the meeting may obtain copies of such a statement
as aforesaid.

(2) Where the compromise or arrangement affects the rights of debenture-holders of the
company, the said statement shall give the like information and explanation as respects the
trustees of any deed for securing the issue of the debentures as it is required to give as respects
the company’s directors.

(3) Where a notice given by advertisement includes a notification that copies of a statement
setting forth the terms of the compromise or arrangement proposed and explaining its effect can
be obtained by creditors or members entitled to attend the meeting, every creditor or member so
entitled shall, on making an application in the manner indicated by the notice, be furnished by
the company, free of charge, with a copy of the statement.
 79

(4) Where default is made in complying with any of the requirements of this section, the
company, and every officer of the company who is in default, shall be punishable with fine
which may extend to 2[fifty thousand rupees]; and for the purpose of this sub-section any
liquidator of the company and any trustee of a deed for securing the issue of debentures of the
company shall be deemed to be an officer of the company:

Provided that a person shall not be punishable under this sub-section if he shows that the default
was due to the refusal of any other person, being a director, managing director, 1[***] manager
or trustee for debenture holders, to supply the necessary particulars as to his material interests.

(5) Every director, managing director, 1[***] or manager of the company, and every trustee for
debenture holders of the company, shall give notice to the company of such matters relating to
himself as may be necessary for the purposes of this section; and if he fails to do so, he shall be
punishable with fine which may extend to 3[five thousand rupees].

Provisions for facilitating reconstruction and amalgamation of companies.—

—

(1) Where an application is made to the 1[Tribunal] under section 391 for the sanctioning of a
compromise or arrangement proposed between a company and any such persons as are
mentioned in that section, and it is shown to the 1[Tribunal]—

(a) that the compromise or arrangement has been proposed for the purposes of, or in connection
with, a scheme for the reconstruction of any company or companies, or the amalgamation of any
two or more companies; and

(b) that under the scheme the whole or any part of the undertaking, property or liabilities of any
company concerned in the scheme (in this section referred to as a “transferor company”) is to be
transferred to another company (in this section referred to as “the transferee company”);
 80

the 1[Tribunal] may, either by the order sanctioning the compromise or arrangement or by a
subsequent order, make provision for all or any of the following matters:—

(i) the transfer to the transferee company of the whole or any part of the undertaking, property or
liabilities of any transferor company;

(ii) the allotment or appropriation by the transferee company of any shares, debentures policies,
or other like interests in that company which, under the compromise or arrangement, are to be
allotted or appropriated by that company to or for any person;

(iii) the continuation by or against the transferee company of any legal proceedings pending by
or against any transferor company;

(iv) the dissolution, without winding up, of any transferor company;

(v) the provision to be made for any persons who, within such time and in such manner as the
Court directs dissent from the compromise or arrangement; and

(vi) such incidental, consequential and supplemental matters as are necessary to secure that the
reconstruction or amalgamation shall be fully and effectively carried out:

2
[Provided that no compromise or arrangement proposed for the purposes of, or in connection
with, a scheme for the amalgamation of a company, which is being wound up, with any other
company or companies; shall be sanctioned by the 1[Tribunal] unless the Court has received a
report from 3[***] the Registrar that the affairs of the company have not been conducted in a
manner prejudicial to the interests of its members or to public interest:

Provided further that no order for the dissolution of any transferor company under clause (iv)
shall be made by the 4[Tribunal] unless the Official Liquidator has, on scrutiny of the books and
 81

papers of the company, made a report to the 4[Tribunal] that the affairs of the company have not
been conducted in a manner prejudicial to the interests of its members or to public interest.]

(2) Where an order under this section provides for the transfer of any property or liabilities, then,
by virtue of the order; that property shall be transferred to and vest in and those liabilities shall
be transferred to and become the liabilities of the transferee company and in the case of any
property, if the order so directs, freed from any charge which is, by virtue of the compromise or
arrangement, to cease to have effect.

(3) Within 5[thirty] days after the making of an order under this section, every company in
relation to which the order is made shall cause a certified copy thereof to be filed with the
Registrar for registration.

If default is made in complying with this sub-section, the company, and every officer of the
company who is in default, shall be punishable with fine which may extend to 6[five hundred
rupees].

(4) In this section—

(a) “property” includes property rights and powers of every description; and “liabilities” includes
duties of every description; and

(b) “transferee company” does not include any company other than a company within the
meaning of this Act; but “transferor company” includes any body corporate, whether a company
within the meaning of this Act or not.

comments

(i) When two companies amalgamate and merge into one the transferor company looses its entity
as it ceases to have its business. However their respective rights or liabilities are determined
 82

under the scheme of amalgamation but the corporate entity of the transferor company ceases to
exist with effect from the date the amalgamation is made effective; Saraswati Industrial
Syndicate Ltd. v. Commissioner of Income Tax, Haryana, Himachal Pradesh, Delhi-III, New
Delhi, AIR 1991 SC 70.

(ii) Merely because 51 per cent. of the shares of an Indian company are being given to a foreign
company the scheme of amalgamation cannot be said to be against public interest; Hindustan
Lever Employees Union v. Hindustan Lever Ltd., AIR 1955 SC 470.

Prevention of oppression and mismanagement:

Application to [Tribunal] for relief in cases of oppression.—

397. Application to 1[Tribunal] for relief in cases of oppression.—(1) Any member of a company
who complain that the affairs of the company 2[are being conducted in a manner prejudicial to
public interest or] in a manner oppressive to any member or members (including any one or more
of themselves) may apply to the 1[Tribunal] for an order under this section, provided such
members have a right so to apply in virtue of section 399.

(2) If, on any application under sub-section (1), the Court is of opinion—

(a) that the company’s affairs 2[are being conducted in a manner prejudicial to public interest or]
in a manner oppressive to any member or members; and

(b) that to wind up the company would unfairly prejudice such member or members, but that
otherwise the facts would justify the making of a winding-up order on the ground that it was just
and equitable that the company should be wound up,

the 1[Tribunal] may, with a view to bringing to an end the matters complained of, make such
order as it thinks fit.
 83

comments

(i) The legal representatives of a deceased member whose name is still on the register of
members are entitled to petition under sections 397 and 398 of the Companies Act; Worldwide
Agencies Pvt. Ltd. v. Mrs. Margarat T. Desor, AIR 1990 SC 737.

(ii) The law has not defined what is ‘oppression’ for purposes of section 397 and it is left to
Courts to decide on the facts of each case whether there is such oppression as calls for action
under this section; Shanti Prasad Jain v. Kalinga Tubes Ltd., 1965 (35) Comp. Cas. 351: 1965 (1)
Com LJ 193: AIR 1965 SC 1535.

(iii) The conduct of the majority shareholders should not only be oppressive to the minority but
must also be burdensome, harsh and wrongful and continuing up to the date of petition. The lack
of confidence between the majority and minority shareholders should also spring from
oppression of minority in the management of the company’s affairs; Shanti Prasad Jain v.
Kalinga Tubes Ltd., 1965 (35) Comp. Cas. 351: 1965 (1) Com LJ 193: AIR 1965 SC 1535.

Application to Tribunal for relief in cases of mismanage-ment.—

398. Application to 1[Tribunal] for relief in cases of mismanage-ment.—(1) Any members of a

company who complain—

(a) that the affairs of the company 2[are being conducted in a manner prejudicial to public
interest or] in a manner prejudicial to the interests of the company; or

(b) that a material change not being a change brought about by, or in the interests of, any
creditors including debenture holders, or any class of shareholders, of the company) has taken
place in the management or control of the company, whether by an alteration in its Board of
directors, 3[***] 4[or manager], 5[***] or in the ownership of the company’s shares, or if it has
no share capital, in its membership, or in any other manner whatsoever, and that by reason of
such change, it is likely that the affairs of the company 6[will be conducted in a manner
prejudicial to public interest or] in a manner prejudicial to the interests of the company,
 84

may apply to the 1[Tribunal] for an order under this section, provided such members have a right
so to apply in virtue of section 399.

(2) If, on any application under sub-section (1), the 1[Tribunal] is of opinion that the affairs of
the company are being conducted as aforesaid or that by reason of any material change as
aforesaid in the management or control of the company, it is likely that the affairs of the
company will be conducted as aforesaid, the 1[Tribunal] may, with a view to bringing to an end
or preventing the matters complained of or apprehended, make such order as it thinks fit.

comments

(i) The holder of a General Power of Attorney for and on behalf of a shareholder can validly give
consent to a petition under sections 397 and 398 of the Act; P. Punnaiah v. Jeypore Sugar Co.
Ltd., AIR 1994 SC 2258: 1994 (81) Comp. Cas. 1: 1994 (2) Com LJ 13.

(ii) Section 398 comes into play when there is actual mismanagement or apprehension of
mismanagement of the affairs of the company. It may be contrasted with section 397 which deals
with oppression to the minority shareholders, whether there is prejudice to the company or not;
Shanti Prasad v. Kalinga Tubes Ltd., 1965 (35) Comp. Cas. 351: 1965 (1) Com LJ 193: AIR
1965 SC 1535.

Right to apply under sections 397 and 398.——

(1) The following members of a company shall have the right to apply under section 397 or
398:—

(a) in the case of a company having a share capital, not less than one hundred members of the
company or not less than one-tenth of the total number of its members, whichever is less or any
members or members holding not less than one-tenth of the issued share capital of the company,
provided that the applicant or applicants have paid all calls and other sums due on their shares;

(b) in the case of a company not having a share capital, not less than one-fifth of the total number
of its members.
 85

(2) For the purposes of sub-section (1), where any share or shares are held by two or more
persons jointly, they shall be counted only as one member.

(3) Where any members of a company are entitled to make an application in virtue of sub-section
(1), any one or more of them having obtained the consent in writing of the rest, may make the
application on behalf and for the benefit of all of them.

(4) The Central Government may, if in its opinion circumstances exist which make it just and
equitable so to do, authorise any member or members of the company to apply to the 1[Tribunal]
under section 397 or 398, notwithstanding that the requirements of clause (a) or clause (b), as the
case may be, of sub-section (1) are not fulfilled.

(5) The Central Government may, before authorising any member or members as aforesaid,
require such member or members to give security for such amount as the Central Government
may deem reasonable, for the payment of any costs which the 1[Tribunal] dealing with the
application may order such member or members to pay to any other person or persons who are
parties to the application.

Right of Central Government to apply under sections 397 and 398.—

The Central Government may itself apply to the 1[Tribunal] for an order under section 397 or
398, or cause an application to be made to the 1[Tribunal] for such an order by any person
authorised by it in this behalf.

Powers of Government to prevent oppression or mismanage-ment.—

1
[(1) Notwithstanding anything contained in this Act, the Central Government may appoint such
number of persons as the 2[Tribunal] may, by order in writing, specify as being necessary to
effectively safeguard the interests of the company, or its shareholders or the public interests to
hold office as directors thereof for such period, not exceeding three years on any one occasion, as
it may think fit, if the 2[Tribunal], on a reference made to it by the Central Government or on an
application of not less than one hundred members of the company or of the members of the
company holding not less than one-tenth of the total voting power therein, is satisfied, after such
inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in
 86

order to prevent the affairs of the company being conducted either in a manner which is
oppressive to any members of the company or in a manner which is prejudicial to the interests of
the company or to public interest:

Provided that in lieu of passing an order as aforesaid, the 2[Tribunal] may, if the company has
not availed itself of the option given to it under section 265, direct the company to amend its
articles in the manner provided in that section and make afresh appointments of directors in
pursuance of the articles as so amended, within such time as may be specified in that behalf by
the 2[Tribunal].

(2) In case the 2[Tribunal] passes an order under the proviso to sub-section (1), it may, if it thinks
fit, direct that until new directors are appointed in pursuance of the order aforesaid, such number
of persons as the 2[Tribunal] may, by order, specify as being necessary to effectively safeguard
the interests of the company, or its shareholders or the public interest, shall hold office as
additional directors of the company and on such directions, the Central Government shall appoint
such additional directors.]

(3) For the purpose of reckoning two-thirds or any other proportion of the total number of
directors of the company, any director or directors appointed by the Central Government under
sub-section (1) or (2) shall not be taken into account.

3
[(4) A person appointed under sub-section (1) to hold office as a director or a person directed
under sub-section (2) to hold office as an additional director, shall not be required to hold any
qualification shares nor his period of office shall be liable to determination by retirement of
directors by rotation; but any such director or additional director may be removed by the Central
Government from his office at any time and another person may be appointed by that
Government in this place to held office as a director or, as the case may be, an additional
director.

(5) No change in the Board of directors made after a person is appointed or directed to hold
office as a director or additional director under this section shall, so long as such director or
additional director holds office, have effect unless confirmed by the 4[Tribunal].]
 87

5
[(6) Notwithstanding anything contained in this Act or in any other law for the time being in
force, where any person is appointed by the Central Government to hold office as director or
additional director of a company in pursuance of sub-section (1) or sub-section (2), the Central
Government may issue such directions to the company as it may consider necessary or
appropriate in regard to its affairs 6[and such directions may include directions to remove an
auditor already appointed and to appoint another auditor in his place or to alter the articles of the
company, and upon such directions being given, the appointment, removal or alteration, as the
case may be, shall be deemed to have come into effect as if the provisions of this Act in this
behalf have been complied with without requiring any further act or thing to be done].

(7) The Central Government may require the persons appointed as directors or additional
directors in pursuance of sub-section (1) or sub-section (2) to report to the Central Government
from time to time with regard to the affairs of the company.]

Power of [Tribunal] to prevent change in Board of directors likely to affect

company prejudicially.—

409. Power of 1[Tribunal] to prevent change in Board of directors likely to affect company
prejudicially.—(1) Where a complaint is made to the 1[Tribunal] by the managing director or any
other director 2[3[***] or the manager], or a company that as a result of a change which has taken
place or is likely to take place in the ownership of any shares held in the company, a change in
the Board of directors is likely to take place which (if allowed) would affect prejudicially the
affairs of the company, the 1[Tribunal] may, if satisfied, after such inquiry as it thinks fit to make
that it is just and proper so to do by order, direct that 4[no resolution passed or that may be
passed or no action taken or that may be taken] to effect a change in the Board of directors after
the date of the complaint shall have effect unless confirmed by the 5[Tribunal]; and any such
order shall have effect notwithstanding anything to the contrary contained in any other provision
of this Act or in the memorandum or articles of the company, or in any agreement with, or any
resolution passed in general meeting by, or by the Board of directors of the company.

(2) The 5[Tribunal] shall have power when any such complaint is received by it, to make an
interim order to the effect set out in sub-section (1), before making or completing the inquiry
aforesaid.

(3) Nothing contained in sub-sections (1) and (2) shall apply to a private company, unless it is a
subsidiary of a public company.
 88

Winding up:

Winding up of sick industrial company.—

1
[424G. Winding up of sick industrial company.—(1) Where the Tribunal, after making inquiry
under section 424B and after consideration of all the relevant facts and circumstances and after
giving an opportunity of being heard to all concerned parties, is of the opinion that the sick
industrial company is not likely to make its net worth exceed the accumulated losses within a
reasonable time while meeting all its financial obligations and that the company as a result
thereof is not likely to become viable in future and that it is just and equitable that the company
should be wound up, it may record its findings and order winding up of the company.

(2) For the purpose of winding up of the sick industrial company, the Tribunal may appoint any
officer of the operating agency, if the operating agency gives its consent, as the liquidator of such
industrial company and the officer so appointed shall for the purpose of the winding up of such
sick industrial company, be deemed to be, and have all the powers of, the official liquidator
under this Act.

(3) Notwithstanding anything contained in sub-section (2), the Tribunal may cause to be sold the
assets of the sick industrial company in such manner as it may deem fit and pass orders for
distribution in accordance with the provisions of section 529A, and other provisions of this Act.

(4) Without prejudice to the other provisions contained in this Act, the winding up of a company
shall, as far as may be, concluded within one year from the date of the order made under sub-
section (1).]

Consumer Protection Act and Cyber Law:

he Consumer Protection Act, 1986

 89

1. SHORT TITLE, EXTENT, COMMENCEMENT AND APPLICATION.

ACT NO. 68 OF 1986 [24th December, 1986.]

An Act to provide for the better protection of the interests of consumers and for that purpose to
make provision for the establishment of consumer councils and other authorities for the
settlement of consumers' disputes and for matters connected therewith. BE it enacted by
Parliament in the Thirty-seventh Year of the Republic of India as follows:--

CHAPTER I PRELIMINARY

(1) This Act may be called the Consumer Protection Act, 1986.

(2) It extends to the whole of India except the State of Jammu and Kashmir.

(3) It shall come into force on such date 1 as the Central Government may, by notification
appoint and different dates may be appointed for different States and for different provisions of
this Act.

(4) Save as otherwise expressly provided by the Central Government by notification, this Act
shall apply to all goods and services.

ACT NOT IN DEROGATION OF ANY OTHER LAW.

The provisions of this Act shall be in addition to and not in derogation of the provisions of any
other law for the time being in force.
 90

THE CENTRAL CONSUMER PROTECTION COUNCIL.

(1) The Central Government may, by notification, establish with effect from such date as it may
specify in such notification, a Council to be known as the Central Consumer Protection Council
(hereinafter referred to as the Central Council).

(2) The Central Council shall consist of the following members, namely :-

(a) the Minister in charge of Consumer Affairs in the Central Government, who shall be its
Chairman, and

(b) such number of other official or non-official members representing such interests as may be
prescribed.

13. PROCEDURE ON RECEIPT OF COMPLAINT.

(1) The District Forum shall, on receipt of a complaint, if it relates to any goods, -

(a) refer a copy of the complaint to the opposite party mentioned in the complaint directing him
to give his version of the case within a period of thirty days or such extended period not
exceeding fifteen days as may be granted by the District Forum;

(b) where the opposite party on receipt of a complaint referred to him under clause (a) denies or
disputes the allegations contained in the complaint, or omits or fails to take any action to
represent his case within the time given by the District Forum, the District Forum shall proceed
to settle the consumer dispute in the manner specified in clauses (c) to (g);
 91

(c) where the complaint alleges a defect in the goods which cannot be determined without proper
analysis or test of the goods, the District Forum shall obtain a sample of the goods from the
complainant, seal it and authenticate it in the manner prescribed and refer the sample so sealed to
the appropriate laboratory along with a direction that such laboratory make an analysis or test
whichever may be necessary, with a view to finding out whether such goods suffer from any
defect alleged in the complaint or from any other defect and to report its findings thereon to the
District Forum within a period of forty-five days of the receipt of the reference or within such
extended period as may be granted by the District Forum;

(d) before any sample of the goods is referred to any appropriate laboratory under clause (c), the
District Forum may require the complainant to deposit to the credit of the Forum such fees as
may be specified, for payment to the appropriate laboratory for carrying out the necessary
analysis or test in relation to the goods in question;

(e) the District Forum shall remit the amount deposited to its credit under clause (d) to the
appropriate laboratory to enable it to carry out the analysis or test mentioned in clause (c) and on
receipt of the report from the appropriate laboratory, the District Forum shall forward a copy of
the report along with such remarks as the District Forum may feel appropriate to the opposite
party;

(f) if any of the parties disputes the correctness of the findings of the appropriate laboratory, or
disputes the correctness of the methods of analysis or test adopted by the appropriate laboratory,
the District Forum shall require the opposite party or the complainant to submit in writing his
objections in regard to the report made by the appropriate laboratory;

(g) the District Forum shall thereafter give a reasonable opportunity to the complainant as well as
the opposite party of being heard as to the correctness or otherwise of the report made by the
appropriate laboratory and also as to the objection made in relation thereto under clause (f) and
issue an appropriate order under section 14.

(2) The District Forum shall, if the complaint received by it under section 12 relates to goods in
respect of which the procedure specified in sub-section (1) cannot be followed, or if the
complaint relates to any services, -
 92

(a) refer a copy of such complaint to the opposite party directing him to give his version of the
case within a period of thirty days or such extended period not exceeding fifteen days as may be
granted by the District Forum;

(b) where the opposite party, on receipt of a copy of the complaint, referred to him under clause
(a) denies or disputes the allegations contained in the complaint, or omits or fails to take any
action to represent his case within the time given by the District Forum, the District Forum shall
proceed to settle the consumer dispute, -

(i) on the basis of evidence brought to its notice by the complainant and the opposite party,
where the opposite party denies or disputes the allegations contained in the complaint, or

(ii) on the basis of evidence brought to its notice by the complainant where the opposite party
omits or falls to take any action to represent his case within the time given by the Forum.

(3) No proceedings complying with the procedure laid down in sub-sections (1) and (2) shall be
called in question in any court on the ground that the principles of natural justice have not been
complied with.

(4) For purposes of this section, the District Forum shall have the same powers as are vested in a
civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit in respect of
the following matters, namely :-

(i) the summoning and enforcing attendance of any defendant or witness and examining the
witness on oath;

(ii) the discovery and production of any document or other material object producible as
evidence;

(iii) the reception of evidence on affidavits;

 93

(iv) the requisitioning of the report of the concerned analysis or test from the appropriate
laboratory or from any other relevant source;

(v) issuing of any commission for the examination of any witness; and

(vi) any other matter which may be prescribed.

(5) Every proceeding before the District Forum shall be deemed to be a judicial proceeding
within the meaning of sections 193 and 228 of the Indian Penal Code (45 of 1860), and the
District Forum shall be deemed to be a civil court for the purposes of section 195 and Chapter
XXVI of the Code of Criminal Procedure, 1973 (2 of 1974).

(6) Where the complainant is a consumer referred to in sub-clause (iv) of clause (b) of sub-
section (1) of section 2, the provisions of rule 8 of Order I of the First Schedule to the Code of
Civil Procedure, 1908 (5 of 1908) shall apply subject to the modification that every reference
therein to a suit or decree shall be construed as a reference to a complaint or the order of the
District Forum thereon.

13. PROCEDURE ON RECEIPT OF COMPLAINT.

(1) The District Forum shall, on receipt of a complaint, if it relates to any goods, -

(a) refer a copy of the complaint to the opposite party mentioned in the complaint directing him
to give his version of the case within a period of thirty days or such extended period not
exceeding fifteen days as may be granted by the District Forum;

(b) where the opposite party on receipt of a complaint referred to him under clause (a) denies or
disputes the allegations contained in the complaint, or omits or fails to take any action to
represent his case within the time given by the District Forum, the District Forum shall proceed
to settle the consumer dispute in the manner specified in clauses (c) to (g);
 94

(c) where the complaint alleges a defect in the goods which cannot be determined without proper
analysis or test of the goods, the District Forum shall obtain a sample of the goods from the
complainant, seal it and authenticate it in the manner prescribed and refer the sample so sealed to
the appropriate laboratory along with a direction that such laboratory make an analysis or test
whichever may be necessary, with a view to finding out whether such goods suffer from any
defect alleged in the complaint or from any other defect and to report its findings thereon to the
District Forum within a period of forty-five days of the receipt of the reference or within such
extended period as may be granted by the District Forum;

(d) before any sample of the goods is referred to any appropriate laboratory under clause (c), the
District Forum may require the complainant to deposit to the credit of the Forum such fees as
may be specified, for payment to the appropriate laboratory for carrying out the necessary
analysis or test in relation to the goods in question;

(e) the District Forum shall remit the amount deposited to its credit under clause (d) to the
appropriate laboratory to enable it to carry out the analysis or test mentioned in clause (c) and on
receipt of the report from the appropriate laboratory, the District Forum shall forward a copy of
the report along with such remarks as the District Forum may feel appropriate to the opposite
party;

(f) if any of the parties disputes the correctness of the findings of the appropriate laboratory, or
disputes the correctness of the methods of analysis or test adopted by the appropriate laboratory,
the District Forum shall require the opposite party or the complainant to submit in writing his
objections in regard to the report made by the appropriate laboratory;

(g) the District Forum shall thereafter give a reasonable opportunity to the complainant as well as
the opposite party of being heard as to the correctness or otherwise of the report made by the
appropriate laboratory and also as to the objection made in relation thereto under clause (f) and
issue an appropriate order under section 14.

(2) The District Forum shall, if the complaint received by it under section 12 relates to goods in
respect of which the procedure specified in sub-section (1) cannot be followed, or if the
complaint relates to any services, -
 95

(a) refer a copy of such complaint to the opposite party directing him to give his version of the
case within a period of thirty days or such extended period not exceeding fifteen days as may be
granted by the District Forum;

(b) where the opposite party, on receipt of a copy of the complaint, referred to him under clause
(a) denies or disputes the allegations contained in the complaint, or omits or fails to take any
action to represent his case within the time given by the District Forum, the District Forum shall
proceed to settle the consumer dispute, -

(i) on the basis of evidence brought to its notice by the complainant and the opposite party,
where the opposite party denies or disputes the allegations contained in the complaint, or

(ii) on the basis of evidence brought to its notice by the complainant where the opposite party
omits or falls to take any action to represent his case within the time given by the Forum.

(3) No proceedings complying with the procedure laid down in sub-sections (1) and (2) shall be
called in question in any court on the ground that the principles of natural justice have not been
complied with.

(4) For purposes of this section, the District Forum shall have the same powers as are vested in a
civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit in respect of
the following matters, namely :-

(i) the summoning and enforcing attendance of any defendant or witness and examining the
witness on oath;

(ii) the discovery and production of any document or other material object producible as
evidence;
 96

(iii) the reception of evidence on affidavits;

(iv) the requisitioning of the report of the concerned analysis or test from the appropriate
laboratory or from any other relevant source;

(v) issuing of any commission for the examination of any witness; and

(vi) any other matter which may be prescribed.

(5) Every proceeding before the District Forum shall be deemed to be a judicial proceeding
within the meaning of sections 193 and 228 of the Indian Penal Code (45 of 1860), and the
District Forum shall be deemed to be a civil court for the purposes of section 195 and Chapter
XXVI of the Code of Criminal Procedure, 1973 (2 of 1974).

(6) Where the complainant is a consumer referred to in sub-clause (iv) of clause (b) of sub-
section (1) of section 2, the provisions of rule 8 of Order I of the First Schedule to the Code of
Civil Procedure, 1908 (5 of 1908) shall apply subject to the modification that every reference
therein to a suit or decree shall be construed as a reference to a complaint or the order of the
District Forum thereon.

27. Penalties

1
[(1)] Where a trader or a person against whom a complaint is made 2[or the complainant] fails
or omits to comply with any order made by the District Forum, the State Commission or the
National Commission, as the case may be, such trader or person 2[or complainant] shall be
punishable with imprisonment for a term which shall not be less than one month but which may
extend to three years, or with fine which shall not be less than two thousand rupees but which
may extend to ten thousand rupees, or with both:
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3
[***]

4
[(2) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),
the District Forum or the State Commission or the National Commission, as the case may be,
shall have the power of a Judicial Magistrate of the first class for the trial of offences under this
Act, and on such conferment of powers, the District Forum or the State Commission or the
National Commission, as the case may be, on whom the powers are so conferred, shall be
deemed to be a Judicial Magistrate of the first class for the purpose of the Code of Criminal
Procedure, 1973.

(3) All offences under this Act may be tried summarily by the District Forum or the State
Commission or the National Commission, as the case may be.]

Cyber law:

n May 2000, both the houses of the Indian Parliament passed the Information Technology Bill.
The Bill received the assent of the President in August 2000 and came to be known as the
Information Technology Act, 2000. Cyber laws are contained in the IT Act, 2000.

This Act aims to provide the legal infrastructure for e-commerce in India. And the cyber laws
have a major impact for e-businesses and the new economy in India. So, it is important to
understand what are the various perspectives of the IT Act, 2000 and what it offers.

The Information Technology Act, 2000 also aims to provide for the legal framework so that legal
sanctity is accorded to all electronic records and other activities carried out by electronic means.
The Act states that unless otherwise agreed, an acceptance of contract may be expressed by
electronic means of communication and the same shall have legal validity and enforceability.
Some highlights of the Act are listed below:

Chapter-II of the Act specifically stipulates that any subscriber may authenticate an electronic
record by affixing his digital signature. It further states that any person can verify an electronic
record by use of a public key of the subscriber.

Chapter-III of the Act details about Electronic Governance and provides inter alia amongst
others that where any law provides that information or any other matter shall be in writing or in
the typewritten or printed form, then, notwithstanding anything contained in such law, such
requirement shall be deemed to have been satisfied if such information or matter is -
rendered or made available in an electronic form; and accessible so as to be usable for a
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subsequent reference.

The said chapter also details the legal recognition of Digital Signatures.

Chapter-IV of the said Act gives a scheme for Regulation of Certifying Authorities. The Act
envisages a Controller of Certifying Authorities who shall perform the function of exercising
supervision over the activities of the Certifying Authorities as also laying down standards and
conditions governing the Certifying Authorities as also specifying the various forms and content
of Digital Signature Certificates. The Act recognizes the need for recognizing foreign Certifying
Authorities and it further details the various provisions for the issue of license to issue Digital
Signature Certificates.

Chapter-VII of the Act details about the scheme of things relating to Digital Signature
Certificates. The duties of subscribers are also enshrined in the said Act.

Chapter-IX of the said Act talks about penalties and adjudication for various offences. The
penalties for damage to computer, computer systems etc. has been fixed as damages by way of
compensation not exceeding Rs. 1,00,00,000 to affected persons. The Act talks of appointment
of any officers not below the rank of a Director to the Government of India or an equivalent
officer of state government as an Adjudicating Officer who shall adjudicate whether any person
has made a contravention of any of the provisions of the said Act or rules framed there under.
The said Adjudicating Officer has been given the powers of a Civil Court.

Chapter-X of the Act talks of the establishment of the Cyber Regulations Appellate Tribunal,
which shall be an appellate body where appeals against the orders passed by the Adjudicating
Officers, shall be preferred.

Chapter-XI of the Act talks about various offences and the said offences shall be investigated
only by a Police Officer not below the rank of the Deputy Superintendent of Police. These
offences include tampering with computer source documents, publishing of information, which
is obscene in electronic form, and hacking.

The Act also provides for the constitution of the Cyber Regulations Advisory Committee, which
shall advice the government as regards any rules, or for any other purpose connected with the
said act. The said Act also proposes to amend the Indian Penal Code, 1860, the Indian Evidence
Act, 1872, The Bankers' Books Evidence Act, 1891, The Reserve Bank of India Act, 1934 to
make them in tune with the provisions of the IT Act.

Advantages of Cyber Laws

The IT Act 2000 attempts to change outdated laws and provides ways to deal with cyber crimes.
We need such laws so that people can perform purchase transactions over the Net through credit
cards without fear of misuse. The Act offers the much-needed legal framework so that
information is not denied legal effect, validity or enforceability, solely on the ground that it is in
the form of electronic records.
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In view of the growth in transactions and communications carried out through electronic records,
the Act seeks to empower government departments to accept filing, creating and retention of
official documents in the digital format. The Act has also proposed a legal framework for the
authentication and origin of electronic records / communications through digital signature.

From the perspective of e-commerce in India, the IT Act 2000 and its provisions contain many
positive aspects. Firstly, the implications of these provisions for the e-businesses would be that
email would now be a valid and legal form of communication in our country that can be duly
produced and approved in a court of law.

Companies shall now be able to carry out electronic commerce using the legal infrastructure
provided by the Act.

Digital signatures have been given legal validity and sanction in the Act.

The Act throws open the doors for the entry of corporate companies in the business of being
Certifying Authorities for issuing Digital Signatures Certificates.

The Act now allows Government to issue notification on the web thus heralding e-governance.

The Act enables the companies to file any form, application or any other document with any
office, authority, body or agency owned or controlled by the appropriate Government in
electronic form by means of such electronic form as may be prescribed by the appropriate
Government.

The IT Act also addresses the important issues of security, which are so critical to the success of
electronic transactions. The Act has given a legal definition to the concept of secure digital
signatures that would be required to have been passed through a system of a security procedure,
as stipulated by the Government at a later date.

Under the IT Act, 2000, it shall now be possible for corporates to have a statutory remedy in case
if anyone breaks into their computer systems or network and causes damages or copies data. The
remedy provided by the Act is in the form of monetary damages, not exceeding Rs. 1 crore.

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