UNIT 1 The Indian Contract Act 1872:

General Principal of Law of Contract

Law of Contract: Definition,
essentials and Types of Contract
A contract is an agreement made between two or more parties which the law will
enforce.

Sec 2(h) defines contract “as an agreement enforceable by law”.

Contract=Agreement + Enforceability at law.

Agreement

Agreement is defined as “every promise and every set of promises, forming

consideration for each other”.

Promise= a proposal when accepted becomes a promise.

Agreement = Offer+ Acceptance

Consensus Ad Idem

The parties to the agreement must have agreed about the subject matter of the
agreement in the same sense and at the same time.

Unless there is consensus ad idem, there can be no contract.

Enforceable by law
 An agreement, to become a contract, must give rise to a legal obligation or duty.

An agreement may be social agreement or legal agreement.

But only those agreements which are enforceable in a court of law are contracts.

“All contracts are agreements, but all agreements are not necessarily contract”

Essential elements of a Valid Contrac

1. Offers and Acceptance

2. Legal Relationship
3. Lawful Consideration
4. Capacity of Parties
5. Free Consent
6. Lawful Objects
7. Writing and Registration
8. Certainty
9. Possibility of Performance
10. Not Expressly Declared Void

1. Offers and Acceptane

It is one of the essentials of valid contract. There must an offer and acceptance of the
same.

2. Legal Relationship
 The parties to an agreement must create legal relationship. Agreements of a social or
domestic nature do not create legal relations and as such cannot give rise to a contract

Example, X invited Y to a dinner Y accepted the invitation. It is a social agreement. If X

fails to serve dinner to Y, Y cannot go to the courts of law for enforcing the agreement.

3. Lawful Consideration
Consideration is “something in return.” Consideration has been defined as the price paid
by one party for the promise of the other. Example,: X agrees to sell his motor bike to Y
for Rs. 1,00,000. Here Y’s promise to pay Rs. 1, 00,000 is the consideration for X’s
promise to sell the motor bike and X’s promise to sell the motor bike is the consideration
for Y’s promise to pay 1, 00,000.

4. Capacity of Parties
It means that the parities to an agreement must be competent to contract. A contract by
a person of unsound mind is void ab-initio. Thus, a contract entered into by a minor or by
a lunatic is void.

Example: X a minor borrowed Rs 8,000 from Y and executed mortgage of his property
in favour of the lender. This was not a valid contract because X is not competent to
contract.

5. Free Consent
For a valid contract it is necessary that the consent of parties to the contact must be
free.

Example: X threatens to kill Y if he does not sell his car to X. Y agrees to sell his car to
X. In this case, Y’s consent has been obtained by coercion and therefore, it cannot be
regarded as free.

6. Lawful Objects
It is also necessary that agreement should be made for a lawful object. Every agreement
of which the object or consideration is unlawful is illegal and the therefore void.

7. Writing and Registration

According to Contract Act, a contract may be oral or in writing. Although in practice, it is
always in the interest of the parties that the contract should be made in writing so that it
may be convenient to prove in the court.

8. Certainty
For a valid contract, the terms and conditions of an agreement must be clear and
certain.
9. Possibility of Performance
If the act is legally or physically impossible to perform, the agreement cannot be
enforced at law.

Example: A agrees with B to discover treasure by magic and B agrees to pay Rs 1,000
to A. This agreement is void because it is an agreement to do an impossible act.

10. Not Expressly Declared Void

An agreement must not be one of those, which have been expressly declared to be void
by the Act.

Kinds of Contract

Contracts may be classified as follows:

1. On the basis of enforceability

(a) Valid Contracts.

(b) Void Contracts.

(c) Voidable Contracts. (d) Illegal Contracts.

 (e) Unenforceable Contracts.

2. On the basis of mode of creation

(a) Express Contracts

(b) Implied Contracts.

3. On the basis of the extent of execution

(a) Executed Contracts

(b) Executory Contracts.

Valid contract: The Contracts which are enforceable in a court of law are called Valid
Contracts.

Voidable Contract: If one party to the contract has the option of enforcing a contract by
law, but not at the option of the other or others, it is a voidable contract.

Void contract: An agreement may be enforceable at the time when it was entered into
but later on,due to certain reasons, for example impossibility or illegality of the contract,
it may become void and unenforceable.

Illegal contract: If the contract has unlawful object it is called Illegal Contract.

Example: There is a contract between X and Z according to which Z has to murder Y for
a consideration of Rs. 10000/- from X. It is illegal contract.

Unenforceable contract: A contract which has not properly fulfilled legal formalities is
called unenforceable contract. That means unenforceable contract suffers from some
technical defect like insufficient stamp etc. After rectification of that technical defect, it
becomes enforceable or valid contract.

Example: A and B have drafted their agreement on Rs. 10/- stamp where it is to be
written actually on Rs. 100/- stamp. It is unenforceable contract.

All illegal Contracts are void, but all void contracts are not illegal

Express contract – Where the offer or acceptance of any promise is made in words, the
promise is said to be express. For example: A has offered to sell his house and B has
given acceptance. It is Express Contract.

Implied contract – An implied contract is one which is inferred from the acts of the
parties or course of dealings between them. Sitting in a Bus can be taken as example to
implied contract between passenger and owner of the bus.
Quasi Contract: In case of Quasi Contract there will be no offer and acceptance so,
actually there will be no Contractual relations between the partners. Such a Contract
which is created by Virtue of law is called Quasi Contract.

Executed contract – In a contract where both the parties have performed their
obligation.

Unilateral contract – In a contract one party has performed his obligation and other
person is yet to perform his obligation.

Bilateral contract – It is a contract where both the parties are yet to perform their
obligation. Bilateral & Executory are same and inter – changeable.

Essentials of Valid Contract:

Offer: Definition and essentials
A contract is initiated by an offer or proposal. For this purpose, when a contract is
formed between two or more parties, the person making the offer is known as the
promisor and the person accepting the same is known as an acceptor. An offer so tabled
for the acceptance of the recipient must be valid. In this article, we look at the elements
of a valid offer in detail.

When a person signifies to another his willingness to do or to abstain from doing

anything, with a view to obtaining the ascent of that other to such act or abstinence he is
said to make a proposal. – Section 2 (a) of Indian Contract act.

Express or Implied

An offer can be tabled through words or conduct. An offer made through words (which
could be written or spoken), is known as an express contract, whereas the ones
addressed through the conduct and actions of the offeror is known as an implied
contract.

Legal Relations

An offer is made for the execution of a contract between two or more parties. In this
respect, it prompts for the creation of legal relations and legal consequences (in case of
non-performance). It is pertinent to note that a social contract without the establishment
of legal relations will not constitute a valid offer.

Clarity Matters

An offer must be definite and clear, without which a binding contract isn’t created. A
contract of such kind is considered to be void. To state as provided in the respective
legal provision, “Agreements, the meaning of which is not certain or capable of being
certain are void.”
 It is Not an Invitation to Offer

An invitation to offer merely invites the other party for an offer but doesn’t make it. To
reiterate, the sender of the invitation intimates the receiver that he/she/it intends to deal
with anybody who is willing to negotiate, after duly considering the information furnished
in the invite. Communications falling under this category doesn’t constitute an offer.

Specific or General

Offers may be specific or general, and both of these are construed as valid. It may be
noted though that if an offer is made to a specific person or for that matter a group of
persons, it is termed as specific and can only be accepted by the person to whom it is
made. On the other hand, an offer made to the public is termed as general, and such an
offer can be accepted by any person who fulfils the specified conditions.

Communication of Offer

An offer stated by the offeror must be clear in its communication so as to facilitate

acceptance. Lack of clarity will result in the voidance of the offer made.

Conditional Offer

An offer has scope to be conditional, though an acceptance hasn’t. The person making
the offer may include any compliance requirements if deemed necessary. However, an
offer shouldn’t have a condition which demands the recipient to accept a one-sided offer.
For instance, an offeror cannot state in an offer that a proposal is deemed to be
accepted if no response is filed within a given timeline.

No Scope for Cross Offers

Cross-offers take place when two parties make similar offers to each other by ignoring
the offer from the other end. The acceptance of cross offers doesn’t make for a complete
agreement. This is precisely because if the parties furnish an offer as acceptance of the
other, it will potentially lead to issues in the performance of the contract.

Acceptance: Definition and essentials

When the person to whom the proposal is made, signifies his ascent there to, the
proposal (offer) is said to be accepted. A proposal (offer) when accepted becomes a
Promise.

Essentials of Valid Acceptance

1. Acceptance must be given by that person only to whom the offer is made:

An acceptance to be valid must be given only by a person to whom offer has been given.
In other words, acceptance must move from the offeree and no one else.

2. Acceptance must be communicated:

 Offeree has to communicate his acceptance to offerer.

3. The acceptance must be given within the time prescribed or within a

reasonable time:

Sometimes, the time limit is fixed within which an acceptance is to be given. In such
cases, the acceptance must be given within the fixed time limit. In case, no time is
prescribed, the acceptance should be given within a reasonable time. The term
‘reasonable time’ depends upon the facts and circumstances of each case.

4. Acceptance must be Un-Conditional:

It is another important essential element of a valid acceptance. A valid contract arises

only if the acceptance is absolute and unconditional. It means that the acceptance
should be in total and without any condition.

6. Acceptance must be communicated in the method specified by offerer:

When an offer is made for the same, acceptance must be communicated in the method
specified by offerer.

7. The acceptance must be given before the lapse of offer:

A valid contract can arise only when the acceptance is given before the offer has
elapsed or withdrawn. An acceptance which is made after the withdrawal of the offer is
invalid, and does not create any legal relationship

8. The acceptance must be communicated:

It is an important and essential element of a valid acceptance.

Consideration-Definition and essentials

When a party to an agreement promises to do something, he must get
“something” in return .This “something” is defined as consideration.

The essentials or legal rules of a valid consideration are as under:-

1. It must move at the desire of the promisor:

In order to constitute legal consideration the act or abstinence forming the consideration
for the promise must be done at the desire or request of the promisor.

Example:

X saves Y’s house from the fire without being asked to do so. X cannot demand
payment for his services because X performed this act voluntarily and not at the desire
of Y.
2. It may move from the Promisee or any other person:

The second essential of a valid consideration is that consideration may move from the
promisee or from a third person on his behalf.

[Chinnaya v. Ramayya ]

3.It may be past, present or future:

Consideration may be past present or future.

A) Past Consideration:

When the consideration for a present promise was given before the date of the promise
it is called a past consideration. It is not a valid consideration.

B) Present Consideration:

When consideration is given simultaneously by one party to another at the time of

contract, it is called Present Consideration. The act constituting the consideration is
wholly or completely performed.

Example:

A sells a book to B and B pay its price immediately it is a case of present consideration.

C) Future Consideration:

When the consideration on both sides is to be given at a future date, it s called future
consideration or executory consideration. It consists of promises and each promise is a
consideration for the other.

4. It need not be Adequate:

It is not necessary that consideration should be adequate to the value of the promise.
The law only insists on the presence of consideration and not on its adequacy. It is for
the parties to the contract to consider the adequacy of consideration and the courts are
not concerned about it.

Example:

A agrees to sell his car worth Rs.20000 for Rs.5000 only and his consent is free. The
agreement is valid contract.

5. It must be real:
It is necessary that consideration must be real and competent. Example:

A promise to put life in X’s dead body on B’s promise to pay him Rs.1000. It is not real.

Capacity of Parties
For a valid contract, the parties to a contract must have capacity i.e. competence to
enter into a contract. Every person is presumed to have capacity to contract but there
are certain persons whose age, condition or status renders them incapable of binding
themselves by a contract. Incapacity must be proved by the party claiming the benefit of
it and until proved  by the party claiming the benefit of it and until proved the ordinary
presumptions remains.

Section 11 of the Contract Act deals with the competency of parties and provides that
“every person is competent to contract who is of the age of majority according to the law
to which he is subject, and who is of sound mind and is not disqualified from disqualified
from contracting by any law to which he is subject.”

It follow that the following person are incompetent to contract:

(a) minor
(b) person of unsound mind, and
(c) Person disqualified by any law to which they are subject.
Contract entered into by the persons mentioned above are void.
Every person is competent to contract:
(a) Who is of the age of majority.
(b) Who is of sound mind.
(c) Who is not disqualified from making a contract.
Therefore the following persons are not competent to contract
(a) A person who is a minor.

(b) A person of unsound mind.

(c) A person who is diqualified from making a contract. 

Minor: Who is Minor?

An infant or a minor is a person who is not a major. According to the Indian Majority Act,
1875, a minor is one who has not completed his or her 18th year of age. A person
attains majority on completing his 18th year in India.
 In the following two cases, a person continues to be a minor until he completes the age
21 years.

1. Where a guardian of a minor’ person or property has appointed under the

Guardians and Wards Act, 1890; or
2. Where the superintendence  of a minor’s property is assumed by a court of
wards.
An amendment to this ACt was made by Indian Majority (Amendment) Act 2000 which
fixed uniform age of majority as 18 years irrespective of the fact whether any guardian
has been appointed but president’s assent to kid has yet to be obtained.

To deal with the problem the law provides the following two approaches:
1. In case of contracts relating to ordinary merchantile transactions, the age of majority is
to be determined by the law of place where the contract is made.
2. In case of contracts relating to land, the age of majority is to be determined by the law
of the place where the land is situated.

Example:

A, 18 years old-domiciled in india, endorsed certain negotiable Instrument in Ceylon, by

the law of which he was a minor. Therefore, he was held not to be liable as endorser.

Free Consent
Consent
For a Contract to be valid, the consent of the parties must be genuine. The principle
of consensus-ad-idem is followed which means that the parties entering into the contract
must mean the same thing in the same sense.  The parties to the contract must have the
same understanding in regards to the subject matter of the contract.

Mere consent is not enough for a contract to be enforceable the consent given must be
free and voluntary.  The definition of Free consent is provided under the Indian Contracts
Act is Consent that is free from Coercion, Undue Influence, Fraud, Misrepresentation or
Mistake. Consent is said to be so caused when it would not have been given but for the
existence of such coercion, undue influence, fraud, misrepresentation or mistake.

Clearly, Free Consent means the absence of any kind of coercion, undue influence,
fraud, misrepresentation or mistake. When the consent which is given is affected by
these elements it calls into question whether the consent given was free and voluntary.
The objective of this principle is to ensure that judgment of the parties while entering into
the contract wasn’t clouded. Therefore consent given under coercion, undue influence,
fraud, misrepresentation or mistake has the potential to invalidate the contract.  

Factors which invalidate consent

As stated above, consent given by a party must be absent of:
 Coercion
According to the Indian Contracts Act, 1872, coercion is defined as:

“‘Coercion’ is the committing, or threatening to commit, any act forbidden by the Indian
Penal Code (45 of 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.”

A point to be remembered is that it is not necessary that the IPC is applicable at the
place the consent was obtained. A very crucial part of the law is the phrase “to the
prejudice of any person whatever” which means the coercion could be directed against
the prejudice of any person and not just the party to the contract. It is also not necessary
that only the party to the contract causes the coercion. Even a third party to the contract
can cause coercion to obtain the consent, as was seen in the case
of Ranganayakamma v. AlwarSethiwhere a widow was coerced into adopting a boy by
the boy’s parents by not allowing the corpse of the widow’s husband to be removed from
the home until the adoption is made.

The burden of proof in cases of coercion lies on the party whose consent was coerced.
When consent of a party was obtained through coercion, the contract becomes voidable
at the option of the party whose consent was so obtained.

Undue Influence
When the parties to the contract are in relationships in such a way that one party can
dominate the will of the other and uses the unfair advantage so gained to obtain the
consent of the other party, then the consent is said to have been obtained by undue
influence.  Now, the Contract Act 1872 also provides instances where a person can
dominate the will of another. These instances are:

 Where a person has a real or apparent authority over the other.

 Where a person has a fiduciary relationship with the other.
 Where a person enters into a contract with another whose mental capacity is
affected, either temporarily or permanently.

When a party who in a position to dominate the will of the other, enter into a contract and
the contract prima facie appears to unconscionable, then it is the burden of the party
who in a position to dominate, to prove that consent has not been obtained by undue
influence.

When the consent of the party to the contract has been obtained through undue
influence, then the contract becomes voidable at the option of the party whose consent
has been so obtained.

Fraud
Consent is not said to be free when it has been obtained by means of fraud. In such
cases, the contract becomes voidable at the option of the party whose consent was
obtained by means of fraud. Moreover, fraud is also a tort where action for damages can
 lie. The Indian Contract Act, 1872 gives the definition of the term ‘Fraud’.  The law
provides five acts which when committed either by the party or with his assistance or by
his agent, with the intention to deceive the other party, amounts to fraud. Those acts are
as follows:

 A suggestion, as to a fact which is false, by a party who believes it to be false.

 An active concealment of a fact by a party
 A promise made without any intention of fulfilling it.
 Any other act which can deceive.
 Any act or omission which the law specifically provides to be fraudulent.

Mere silence about facts which can affect the willingness of a person to enter into a
contract does not amount to fraud, but if there is a duty to speak upon the person who is
keeping silent, then it becomes a fraud. Example of such cases is Contracts Uberrima
fides, also known as Contracts of Utmost good faith where full disclosure is expected.

The burden of proof in cases of fraud lies on the party who alleges it. The party has to
prove the circumstances which can lead to the existence of fraud. Merely making a
mention of fraud in the pleadings is not enough. If the party, whose consent has been
obtained through fraud, had the opportunity or means to discover the truth with ordinary
diligence, then the contract will not be void.

Misrepresentation
Misrepresentation under the Indian Contract Act, 1872 has an exhaustive definition and
can be divided into 3 types.

 The first type is when a statement is made by a person, about a fact which is not
true, though he believes it to be true.
 Second is the type when there is a breach of duty by a person who is making the
false statement and he gains some kind of advantage even though it wasn’t his intention
to deceive the other party.
 The third is the type where if one party acting innocently, causes the other party
to make any mistake with regards to the subject matter of the agreement.

As can be seen from above, the three types of misrepresentation have one very
important thing in common, the intention of the party which misrepresents is innocent; it
is not to deceive the other party into entering the contract. The intention of the party who
makes the false statement is the difference between misrepresentation and fraud.

The burden lies on the party claiming misrepresentation to avoid the contract to prove
that misrepresentation was used to obtain the consent. When consent was obtained
through misrepresentation, it becomes voidable at the option of the party whose consent
was so obtained.

Mistake
When one of the parties has given its consent to the contract under some kind of
misunderstanding then the consent is said to be have been given by mistake. If it wasn’t
for the misunderstanding the party would not have entered into the agreement.  Under
contract law, a mistake can of two kinds: 1) Mistake of Law and 2) Mistake of Fact.

Mistake of Law

When the party has any misunderstanding with regards to the legal provisions, it is
called Mistake of Law. Now, the party can be confused regarding the law of the
Homeland or law of a foreign land. If it is a mistake regarding the law of the homeland,
the contract cannot be avoided. The party cannot take the plea of having no knowledge
of laws of his homeland. But if it is a mistake regarding the law of a foreign country, he
can be excused.

Mistake of Fact

When the parties have any misunderstanding regarding the subject matter or terms of
the contract, it is said to be a Mistake of fact. The misunderstanding can be on the part
of one party or both of them.

Bilateral Mistake – When both the parties are under any misunderstanding/mistake
relating to a matter of fact essential to the agreement, the agreement becomes void.

Unilateral Mistake – When the misunderstanding/mistake is on the part of one party to

the contract, the agreement remains valid.  Only when the party is mistaken about the
parties to agreement or nature of the transaction, the agreement becomes void.

Conclusion

Free Consent is absolutely essential to make an agreement a valid contract. The

importance of free consent cannot be stressed enough.  Consent of the parties to the
contract must be free and voluntarily. Consent to the contract has to be given without
any kind of pressure or delusions. It is important that the consent given by the parties is
free as this can affect the validity of the contract. If the consent to the agreement was
obtained or induced by coercion, undue influence, fraud, misrepresentation or mistake,
then it has the potential to make the agreement void.

Legality of Object
Section 23 of the Indian Contract Act has specified certain considerations and objects
as unlawful. The consideration or objects of an agreement is lawful, unless- it is
forbidden by law; is of such a nature that, if permitted, it would defeat the provision of
any law; or is fraudulent; or involves injury to the person or property of another; or the
court regards it as immoral or opposed to public policy.
In each of the above mentioned cases the consideration or object of an agreement is
deemed to be unlawful. Every agreement in which the object or consideration is unlawful
is void.
 Some Examples
X promises to obtain for Y an employment in the public service, and Y promises to pay X
Rs. 1000 for that. This agreement is void as the consideration in this case is unlawful.

X agrees to let her daughter to hire to Y as a concubine. This agreement is void as it is

immoral and as a result opposed to law.

The following agreements are considered to be against public policy:

 Trade with the enemy:

 An agreement between the citizens of two countries at war with each other is void
and hence inoperative.
 Agreement in interference with the course of justice:
 All agreements which interfere with the normal course of law and justice are
deemed to be opposed to public policy and hence are void.
 Agreements which injure the public services are considered to be void.
 Agreements infringing personal freedom
 Agreements hindering parental duties.
 Agreements hindering marital duties

Contract of indemnity
A contract of indemnity is one of the most important forms of commercial contracts.
Several industries, such as the insurance industry, rely on these contracts. This is
because of the nature of these contracts. They basically help businesses in indemnifying
their losses and, therefore, reduce their risks. This is extremely important for small as
well as large businesses.

Contract of Indemnity
A contract of indemnity basically involves one party promising the other party to make
good its losses. These losses may arise either due to the conduct of the other party or
that of somebody else.

To indemnify something basically means to make good a loss. In other words, it means
that one party will compensate the other in case it suffers some losses.

For example, A promises to deliver certain goods to B for Rs. 2,000 every month. C
comes in and promises to indemnify B’s losses if A fails to so deliver the goods. This is
how B and C will enter into contractual obligations of indemnity.

A contract of insurance is very similar to indemnity contracts. Here, the insurer promises
to compensate the insured for his losses. In return, he receives consideration in the form
of premium. However, the Contract Act does not strictly govern these kinds of
transactions. This is because the Insurance Act and other such laws contain specific
provisions for insurance contracts.
Parties under Indemnity Contracts
There are generally two parties in indemnity contracts. The person who promises to
indemnify for a loss is the Indemnifier. On the other hand, the person whose losses the
indemnifier promises to make good is the Indemnified. We can also refer to the
Indemnified party as the Indemnity Holder. For example, in the earlier example, C is the
Indemnifier and B is the Indemnity Holder.

Nature of Indemnity Contracts

An indemnity contract may be either express or implied. In other words, parties may
expressly create such a contract as per their own terms. The nature of circumstances
may also create indemnity obligations impliedly. For example, A does an act at the
request of B. If B suffers some losses and A offers to compensate him, they impliedly
create an indemnity contract.

Rights of an Indemnity Holder

When parties expressly make a contract of indemnity, they can determine their own
terms and conditions. However, sometimes they may not do so. In such a case, the
indemnity holder can enforce the following rights against the indemnifier:

1) The indemnifier will have to pay damages which the indemnity holder will claim in a
suit.

2) The indemnity holder can even compel the indemnifier to pay the costs he incurs in
litigating the suit.

3) If the parties agree to legally compromise the suit, the indemnifier has to pay the
compromise amount.

Contract of Guarantee
Apart from indemnity contracts, the Contract Act also governs contracts of guarantee.
These contracts might appear similar to indemnity contracts but there are some
differences between them.

In guarantee contracts, one party contracts to perform a promise or discharge a liability

of a third party. This will happen in case the third party fails to discharge its obligations
and defaults. However, the burden of discharging the burden will first lie on the
defaulting third party.

The person who gives the guarantee is the Surety. On the other hand, the person for
whom the Surety gives the guarantee is the Principal Debtor. Similarly, the person to
whom he gives such a guarantee is the Creditor.

Differences between Indemnity and Guarantee

There are some important differences between the contracts of indemnity and
guarantee.
Firstly, there are just two parties in indemnity, while there are three in contracts of
guarantee.

Secondly, in a guarantee, there is an existing debt/duty which the surety guarantees to

discharge. On the other hand, liability in indemnity is contingent and may not arise at all.

Thirdly, an indemnifier might act without the debtor’s behest, while a surety always waits
for the principal debtor’s request.

Finally, the liability of an indemnifier towards the indemnity holder is primary. Whereas,
in guarantee, the surety’s liability is secondary. This is because the primary liability lies
on the principal debtor himself.

Kinds of Guarantees
Contract of Guarantee means a contract to perform the promises made or discharge
the liabilities of the third person in case of his failure to discharge such liabilities.

Contract of Guarantee
As per section 126 of Indian Contract Act, 1872, a contract of guarantee has three
parties:

Surety: A surety is a person giving a guarantee in a contract of guarantee. A person

who takes responsibility to pay a sum of money, perform any duty for another person in
case that person fails to perform such work.

Principal Debtor: A principal debtor is a person for whom the guarantee is given in a
contract of guarantee.

Creditor: The person to whom the guarantee is given is known as the creditor.

For example, Mr. X advances a loan of 25000 to Mr. Y and Mr. Z promise that in case
Mr. Y fails to repay the loan, then he will repay the same. In this case of a contract of
guarantee, Mr. X is a Creditor, Mr. Y is a principal debtor and Mr. Z is a Surety.

Contract of Indemnity
It is a contract in which one party promises to save the other from the loss caused to him
by the acts of promisor or by any other person.

In a contract of indemnity, there are two parties namely indemnifier (promisor) and
indemnified (promisee).
 Differentiation between contract of indemnity and contract of guarantee

There is a difference between the two special types of contracts, contract of indemnity
and contract of guarantee which is as follows: –

1. In a contract of guarantee, there are three parties to a contract namely surety,

principal debtor and creditor whereas in case of indemnity there are only two parties to a
contract, promisor, and promisee.
2. In case of the contract of guarantee, the liability of the surety is secondary
whereas in a contract of indemnity the liability of promisor is primary.
3. Surety provides guarantee only when requested by the principal debtor in a
contract of guarantee. Indemnifier is not required to act at the request of the debtor, in a
contract of indemnity.
4. In a contract of guarantee, there is an existing liability for debt or duty, surety
guarantees the performance of such liability.  In a contract of indemnity, the possibility of
incurring a loss is contingent against which indemnifier undertakes to indemnify.
5. Surety is eligible to proceed against the principal debtor on payment of debt, in
case principal debtor fails to pay the debt. Indemnifier cannot sue third parties in his own
name.

Surety’s Liability
According to section 128 of Indian Contract Act, 1872, the liability of a surety is co-
extensive with that of principal debtor’s unless the contract provides.

Liability of surety is same as that of the principal debtor. A creditor can directly proceed
against the surety. A creditor can sue the surety directly without sueing principal debtor.
Surety becomes liable to make payment immediately when the principal debtor makes
default in such payment.

However, primary liability to make payment is of the principal debtor, surety’s liability is
secondary. Also, where the principal debtor cannot be held liable for any payment due to
any defect in documents, then surety is also not responsible for such payment.

Kinds of Guarantees
A contract of guarantee may be for an existing liability or for future liability. A contract of
guarantee can be a specific guarantee (for any specific transaction only) or continuing
guarantee.

Specific Guarantee: A specific guarantee is for a single debt or any specified

transaction. It comes to an end when such debt has been paid.

Continuing Guarantee: A continuing guarantee is a type of guarantee which applies to

a series of transactions.

A continuing guarantee applies to all the transactions entered into by the principal debtor
until it is revoked by the surety. A continuing guarantee can be revoked anytime by
surety for future transactions by giving notice to the creditors. However, the liability of a
surety is not reduced for transactions entered into before such revocation of guarantee.
 Revocation of Guarantee

1. By surety by giving a notice of revocation for future transactions.

2. On the death of surety. A continuing guarantee is revoked for all the future
transactions due to the absence of a contract. However, his legal representatives will
continue to be liable for transactions entered into before his death.

Discharge of a surety

 By giving notice of revocation for future transactions (section 130).

 In case of death of surety, the guarantee is revoked for all the future transactions
(section 131).
 When there is a change in terms and condition of the contract between the
creditor and principal debtor without obtaining the consent of surety. The surety will be
discharged of all the transactions taking place after such change in terms and condition
(section 133). For example – Q rents his house to R at a fixed rent, P becomes surety
for rent payable by R to Q. R and Q agree on a higher rent for which they do not obtain
P’s consent. In such a case P will be discharged as a surety after such change in
contract.
 In case the creditor releases the debtor or makes any omission due to which
results in the discharge of principal debtor’s liability (section 134).
 When the principal debtor makes payment of debt.
 When the creditor enters into an arrangement with the principal debtor for not to
sue him or to provide extra time for payment of debt, the surety will be discharged
(section 135).
 The surety will be discharged when the creditor does any act which is
inconsistent with the rights of surety.

Contract of Bailment & Pledge

Bailment and Pledge are two special contracts that are often confused. Every pledge is a
bailment but every bailment is not pledge. Bailment means a delivery of goods from one
person to another for a special purpose. Whereas Pledge means delivery of goods as
security for the payment of debt or performance of a promise. Therefore, Bailment &
Pledge are two different contracts. Pledge is a special kind of bailment.

Bailment
A bailment is a special contract defined under section 148 of the Indian Contract Act,
1872. It is derived from a French word i.e. “bailer” which means “to deliver”. The
etymological meaning of bailment is “handing over”or “change of possession of goods”.
By bailment, we mean delivery of goods from one person to another for a special
purpose on the contract that they shall reimburse the goods on the fulfilment of the
purpose or dispose of them as per the direction of the bailor. The person who delivers
the goods is known as bailor. And the person to whom the goods are given is known as
Bailee. And the property bailed is known as Bailed Property.

Essentials of Bailment
 There shall be a contract between the parties for the delivery of goods,
 The goods shall be delivered for a special purpose only,
 Bailment can only be done for movable goods and not for immovable goods or
money,
 There shall be a transfer of possession of goods,
 Ownership is not transferred to Bailee, therefore Bailor remains the owner,
 Bailee is duty bound to deliver the same goods back and not any other goods.
 Exception:The money deposited in the bank shall not account to bailment as the
money returned by the bank would not be the same identical notes. And it is one of the
essentials of the bailment that same goods are to be delivered back.

Duties of a Bailor

Section 150 of the Indian Contract Act, 1872 bound the bailor with certain duties to
disclose the latent facts specifically pertaining to defect in goods. Bailor’s duty of
disclosure are:

 Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the
goods that he is aware of to the Bailee that can interfere with the use of goods or can
expose him to extraordinary risks. And failure to do the same will make bailor liable for
damages.
 Non Gratuitous Bailment (Bailment for Reward): This duty particularly deals
with the goods given on hire. As per this provision, when the goods are bailed for hire,
then in such a situation even if the bailor is aware of the defect in the goods or not will be
held liable for the injury that has been caused due to the existence of such defect.

Duties of Bailee

Bailee has to fulfil several obligations as per Indian Contract Act, 1872. That is:

 Duty to take reasonable care: It is the duty of the Bailee to take care of goods
as his own goods. He shall ensure all safety measures that are necessary to protect the
goods. The standard of care should be such as taken care by a prudent man. The goods
shall be taken care of equally whether they are gratuitous or non-gratuitous. The Bailee
shall be held liable for payment of compensation if he fails to take due care. But if the
Bailee has taken due care and instead of that the goods are damaged then in such a
situation Bailee will not be liable to pay compensation. The Bailee is not liable for the
loss of goods due to destruction by fire. (Section 151-152)
 Duty not to make unauthorized use of the goods: Bailee is duty bound to use
the goods for a specific purpose only and not otherwise. If he uses the goods for any
other purpose than what is agreed for then the bailor has the right to terminate such
bailment or is entitled with compensation for damage caused due to unauthorized use.
(Section 153-154)
 Duty not to mix bailor’s goods with his own goods:It is the duty of the Bailee
not to mix bailor’s goods with his own. But if he wants to do the same then he shall seek
consent from the bailor for mixing of goods. If the bailor agrees for the mixing of the
goods then the interest in the mixed goods shall be shared in proportion. In case, Bailee
without the consent of bailor mixes the goods with his own then two situations arise:
goods can be separated and goods can’t be separated. In the former case the Bailee
 has to bear the cost of separation and in the latter case since there is the loss of the
goods, therefore, bailor shall be entitled with damages of such loss. (Section 155-157)
 Duty to return the goods on the fulfilment of purpose: Bailee is duty bound to
return the goods once the purpose is achieved or on the expiry of the time period for
which the goods were bailed. But if the Bailee makes default in returning the goods on
proper time then he will be responsible with the loss, destruction or deterioration of the
goods if any. (Section 160-161)
 Duty to deliver to the bailor increase or profit if any on the goods
bailed: The Bailee has a duty to return the goods along with increase or profit subject to
contract to the contrary. Accretion that has accrued from the bailed goods is the part of
the bailed goods and therefore bailor has the right over such accretions if any. And such
accretions shall be handed over to the bailor along with the goods bailed. For instance,
A leaves a cow in the custody of B and cow gives birth to the calf. Then B is duty bound
to hand over the bailed goods along with accretion to the bailor. (Section 163)

Rights of a Bailor
As such Indian Contract Act, 1872 does not provide for Rights of a Bailor. But Rights of a
Bailor is same as Duties of the Bailee i.e. Rights of Bailor = Duties of Bailee. So the
rights of bailor are:

 Enforcement of Bailee’s Duty:Since Right of the bailor is same as the right of

the Bailee, therefore on the fulfilment of all duties of Bailee the bailor’s right is
accomplished. For example, it is the duty of the Bailee to give the accretions and it is the
right of bailor to demand the same.
 Right to claim damages: If the Bailee fails to take care of the goods, the bailor
has the right to claim damages for such loss. (Section 151)
 Right to Termination the Contract: If the Bailee does not comply with the terms
of the contract and acts in a negligent manner in such case the bailor has the right to
rescind the contract. (Section 153)
 Right to claim compensation: If the Bailee uses the goods for an unauthorized
purpose or mixes the goods which cause loss of goods in such case bailor has the right
to claim compensation.
 Right to demand the return of goods: It is the duty of the Bailee to return the
goods and the bailor has the right to demand the same.

Rights of a Bailee

 Right to recover expenses:In the contract of Bailment, the Bailee incurs

expenses to ensure the safety of goods. The Bailee has the right to recover such
expenses from the bailor. (Section 158)
 Right to remuneration: When the goods are bailed to the Bailee he is entitled to
receive certain remuneration for services that he has rendered. But in case of gratuitous
bailment, the Bailee is not awarded any remuneration.
 Right to recover compensation:At times a situation arises wherein bailor did
not have the capacity to contract for bailment. Such a contract causing loss to the
 Bailee, therefore the Bailee has the right to recover such compensation from the bailor.
(Section 168)
 Right to Lien:Bailee has the right over Lien. By this, we mean that if the bailor
fails to make payment of remuneration or does not pay the amount due, the Bailee has
the right to keep the goods bailed in his possession till the time debtor dues are cleared.
Lien is of two types: particular lien and general lien. (Section 170-171)
 Right to suit against a wrongdoer:After the goods have been bailed and any
third party deprives the Bailee of use of such goods, then the Bailee or bailor can bring
an action against the third party. (Section 180)

Pledge
Pledge is a kind of bailment. Pledge is also known as Pawn.It is defined under section
172 of the Indian Contract Act, 1892. By pledge, we mean bailment of goods as a
security for the repayment of debt or loan advanced or performance of an obligation or
promise. The person who pledges the goods as security is known as Pledger or Pawnor
and the person in whose favour the goods are pledged is known as Pledgee or Pawnee.

Essentials of Pledge

Since Pledge is a special kind of bailment, therefore all the essentials of bailment are
also the essentials of the pledge. Apart from that, the other essentials of the pledge are:

 There shall be a bailment for security against payment or performance of the

promise,
 The subject matter of pledge is goods,
 Goods pledged for shall be in existence,
 There shall be the delivery of goods from pledger to pledgee,
 There is no transfer of ownership in case of the pledge.
 Exception:In exception circumstances pledgee has the right to sell the movable
goods or property that are been pledged.

Rights of Pawnor

As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to
Redeem. By this, we mean that on the repayment of the debt or the performance of the
promise, the Pawnor can redeem the goods or property pledged from the Pawnee
before the Pawnee makes the actual sale. The right of redemption is extinguished once
the actual sale is done by the Pawnee as per his right under section 176 of the Indian
Contract Act, 1872.

Rights of a Pawnee

The rights of the Pawnee as per Indian Contract Act, 1872 are:

 Right to retain the goods: If the Pawnor fails to make the payment of a debt or
does not perform as per the promise made, the Pawnee has the right to retain the goods
 pledged as security. Moreover, Pawnee can also retain goods for non-payment of
interest on debt or non-payment of expenses incurred. But Pawnee cannot retain goods
for any other debt or promise other than that agreed for in the contract. (Section 173-
174)
 Right to recover extraordinary expenses: The expenses incurred by Pawnee
on the preservation of goods pledged can be recovered from Pawnor. (Section 175)
 The right of suit to procure debt and sale of pledged goods: On the failure to
make repayment to Pawnee of the debt, the Pawnee has two right: either to initiate suit
proceedings against him or sell the goods. In the former case, the Pawnee retains the
goods with himself as collateral security and initiate the court proceedings. He need not
provide any notice of such proceedings to the Pawnor. And in the latter case, the
Pawnee can sell the goods after giving due notice of sale to the Pawnor. If the amount
received from the sale of goods is less than the amount due then the rest amount can be
recovered from Pawnor. And if the Pawnee gets more amount than the due amount then
such surplus is to be given back to Pawnor. (Section 176)

Difference between Bailment and Pledge

Basis Bailment Pledge

Transfer of goods from one

Transfer of goods from one person
person to another for a specific
Meaning to another as security for repayment
purpose is known as the
of debt is known as the pledge.
bailment.

It is defined under section 148

It is defined under section 172 of the
Defined In of the Indian Contract Act,
Indian Contract Act, 1872.
1872.

The person who delivers the
bailed goods is known as
Parties Bailor and the person receiving
such goods is known as
Bailee.
The person who delivers the
pledged goods is known as Pledger
or Pawnor and the person receiving
such goods is known as Pledgee or
Pawnee.

The consideration may or may

Consideration Consideration is always there.
not be present.

Bailee has no right to sell the Pledgee or Pawnee has the right to
Right to Sell
goods bailed. sell the goods.

Use of Goods Bailee can use the goods only Pledgee or Pawnee cannot use the
for a specific purpose only and
not otherwise.
 goods pledged.

The purpose of pledged goods is to

The purpose of bailed goods is
Purpose act as security for repayment of
for safekeeping or repairs etc.
debt or performance of the promise.

UNIT 2 The Sale of Goods Act. 1930

Sales and Good Act, 1930 Meaning and
Essential Elements of Contract of Sale
Till 1930, transactions relating to sale and purchase of goods were regulated by the
Indian Contract Act, 1872.In 1930,Sections 76 to 123 of the Indian Contract Act, 1872
were repealed and a separate Act called ‘The Indian Sale of Goods Act,1930 was
passed. It came into force on 1st July,1930.With effect from 22ndSeptember,1963,the word
‘Indian’was also removed.Now,the present Act is called’ The sales of goods act,1930’.
This Act extends to the whole of India except the State of Jammu and Kashmir.

Scope of the Act

The sale of Goods Act deals with ‘Sale of Goods Act,1930,’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.” ‘Contract of sale’ is a generic term which includes both a sale as well
as an agreement to sell.

Essential  elements of Contract of sale

1. Seller and buyer

There must be a seller as well as a buyer.’Buyer’ means a person who buys or agrees to
buy goods[Section 2910].’Seller’ means a person who sells or agrees to sell goods
[Section 29(13)].

2. Goods

There must be some goods.’Goods’ means every kind of movable property other than
actionable claims and money includes stock and shares,growingcrops,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[Section 2(7)].

3. Transfer of property
 Property means the general property in goods,and not merely a special property[Section
2(11)]. General property in goods means ownership of the goods. Special property in
goods means possession of goods.Thus,there must be either a transfer of ownership of
goods or an agreement to transfer the ownership of goods.The ownership may transfer
either immediately on completion of sale or sometime in future in agreement to sell.

4. Price

There must be a price.Price here means the money consideration for a sale of
goods[Section 2(10)].When the consideration is only goods,it amounts to a ‘barter’ and
not sale.When there is no consideration ,it amounts to gift and not sale.

5. Essential elements of a valid contract

In addition to the aforesaid specific essential elements,all the essential elements of a

valid contract as specified under Section 10 of Indian Contract Act,1872 must also be
present since a contract of sale is a special type of a contract.

Sales and Good Act 1930:

Conditions and Warranties
It is usual for both seller and buyer to make representations to each other at the time of
entering into a contract of sale. Some of these representations are mere opinions which
do not form a part of contract of sale.Whereas some of them may become a part of
contract of sale.Representations which become a part of contract of sale are termed as
stipulation which may rank as condition and warranty e.g. a mere commendation of his
goods by the seller doesn’t become a stipulation and gives no right of action to the buyer
against the seller as such representations are mere opinion on the part of the seller.But
where the seller assumes to assert a fact of which the buyer is ignorant,it will amount to
a stipulation forming an essential part of the contract of sale.

Meaning of Conditions [Section 12(2)]

A condition is a stipulation

1. Which is essential to the main purpose of the contract

2. The breach of which gives the aggrieved party a right to terminate the contract.

Meaning of Warranty[Section 12(3)]

A warranty is a stipulation

1. Which is collateral to the main purpose of the contract

2. The breach of which gives the aggrieved party a right to claim damages but not a
right to reject goods and to terminate the contract.
 Conditions to be treated as Warranty[Section 13]
In the following three cases a breach of a condition is treated as a breach of a warranty:

1. Where the buyer waives a conditions; once the buyer waives a conditions,he
cannot insist on its fulfillment e.g. accepting defective goods or beyond the stipulated
time amount to waiving a conditions.
2. Where the buyer elects to treat breach of the condition as a breach of
warranty;e.g. where he claims damages instead of repudiating the contract.
3. Where the contract is not severable and the buyer has accepted the goods or
part thereof,the breach of any condition by the seller can only be treated as breach of
warranty.Itcan not be treated as a gorund for rejecting the goods unless otherwise
specified in the contract.Thus,where the buyer after purchasing the goods finds that
some condition is not fulfilled,he cannot reject the goods.He has to retain the goods
entitling him to claim damages.

Express and Implied Conditions and Warranties

In a contract of sale of goods,conditions and warranties may be express or implied.

1. Express Conditions and Warranties.

 These are expressly provided in the contract.Forexample,a buyer desires to buy a Sony
TV Model No. 2020.Here,model no. is an express condition.In an advertisement for
Khaitanfans,guatantee for 5 years is an express warranty.

2. Implied Conditions and Warranties

These are implied by law in every contract of sale of goods unless a contrary intention
appears from the terms of the contract.The various implied conditions and warranties
have been shown below:

Implied Conditions

1. Conditions as to title [ Section 14 (a)]

There is an implied condition on the part of the seller that

 In the case of a sale,he has a right to sell the goods,and

 In the case of an agreement to sell,he will have a right to sell the goods at the
time when the property is to pass.

2. Condition in case of sale by description [Section 15]

Where there is a contract of sale of goods by description,there is an implied condition

that the goods shall correspond with description.The main idea is that the goods
supplied must be same as were described by the seller.Sale of goods by description
include many situations as under:

1. Where the buyer has never seen the goods and buys them only on the basis of
description given by the seller.
2. Where the buyer has seen the goods but he buys them only on the basis of
description given by the seller.

iii. Where the method of packing has been described.

3. Condition in case of sale by sample [Section 17]

A contract of sale is a contract for sale by sample when there is a term in the contract,
express or implied,to that effect.Such sale by sample is subject to the following three
conditions:

1. The goods must correspond with the sample in quality.

2. The buyer must have a reasonable opportunity of comparing the bulk with the
sample.

 The goods must be free from any defect which renders them unmerchantable
and which would not be apparent on reasonable examination of the sample.Such
defects are called latent defects and are discovered when the goods are put to use.

4. Condition in case of sale by description and sample [Section 15]

 If the sale is by sample as well as by description, the goods must correspond with the
sample as well as the description.

5. Condition as to quality or fitness [Section 16(1)]

There is no implied condition as to the quality or fitness for any particular purpose of
goods supplied under a contract of sale.In other words,the buyer must satisfy himself
about the quality as well as the suitability of the goods.

Exception to this rule:

There is an implied condition that the goods shall be reasonably fit  for a particular
purpose described if the following three conditions are satisfied:

1. The particular for which goods are required must have been disclosed(expressly
or impliedly) by the buyer to the seller.
2. The buyer must have relied upon the seller’s skill or judgement.

 The seller’s business must be to sell such goods.

6. Condition as to merchantable quality[Section 16(2)]

Where the goods are bought by description from a seller who deals in goods of that
description,there is an implied condition that the goods shall be of merchantable
quality.The expression ‘ merchantable quality’ means that the quality and condition of
the goods must be such that a man of ordinary prudence would accept them as the
goods of that description.Goods must be free from any latent or hidden defects.

7. Condition as to wholesomeness

In case of eatables or provisions or foodstuffs,there is an implied condition as to

wholesomeness.Condition as to wholesomeness means that the goods shall be fit for
human consumption.

8. Conditions implied by custom [Section 16(3)]

Condition as to quality or fitness for a particular purpose may be annexed by the usage
of trade.

 Implied warranties

a) Warranty as to quiet possession [Section14(b)]

There is an implied warranty that the buyer  shall have and enjoy quiet possession of the
goods.The reach of this warranty  gives buyer a right to claim damages from the seller.

b) Warranty of freedom from encumbrances [Section 14(c)]

 There is an implied warranty that the goods are free from any charge or encumbrance in
favour of any third person if the buyer is not aware of such charge or encumbrance.The
breach of this warranty gives buyer a right to claim damages from the seller.

1. Warranty as to quality or fitness for a particular purpose annexed by usage of

trade[Section 16(3)]
2. Warranty to disclose dangerous nature of goods

In case of goods of dangerous nature the seller fails to do so, the buyer may make
him liable for breach of implied warranty.

Transfer of ownership in goods

including sale by non-owners
A sale by non-owner in business law occurs when goods are sold by a person who is not
the owner without the owner’s permission.

A sale by non-owner in business law occurs when goods are sold by a person who is not
the owner without the owner’s permission. Only the person who owns the title to a piece
of property, whether that is personal property or real estate, can transfer the title to
someone else.

Nemodat quod non habet is a legal term that’s often abbreviated to nemo dat. It simply
means no one can transfer what they don’t have. As such, a seller can only transfer
ownership to a buyer if he possesses the right to do so. Nemodat may apply if a seller
sells stolen goods without the rights to them or a buyer purchases stolen goods.

NemoDat Exceptions
Nemodat protects the rightful owner of a piece of property, precluding the innocent
purchaser from maintaining ownership of the title. However, there are several exceptions
to the rule. Each exception is contained in one of the following acts:

 The Sale of Goods Act 1979 (SGA)

 The Factors Act 1889 (FA)
 The Hire Purchase Act 1964 (HPA)

When any of these exceptions are enacted, the rightful owner of the property loses
ownership of the title in favor of the purchaser. In essence, these exceptions protect the
innocent purchaser.

Here’s an example of a scenario where the transfer of ownership to a non-owner may

arise:

 Mr. Smith steals a piece of property and sells it to Mr. Jones.

 Then, Mr. Smith sells another piece of property to Mr. Murphy but retains
possession of it while wrongfully selling it again to Mr. Napoli.
 Mr. Smith then passes the property to Mr. Jones in search of an offer for sale.
Meanwhile, Mr. Jones goes on to sell the property without Mr. Smith’s authority and
maintains the proceeds from the sale.
 Mr. Smith buys the piece of property on credit and resells it to Mr. Jones, with no
intention of paying for the property.

This situation becomes tricky when you pause to consider why the two innocent parties
should suffer at the hands of one deviant.

Sales and Good Act 1930:

Performance of a Contract of Sale
Performance of the Contract
It is the duty of the seller and buyer that the contract is performed. The duty of the seller
is to deliver the goods and that of the buyer to accept the goods and pay for them in
accordance with the contract of sale.

Unless otherwise agreed, payment of the price and the delivery of the goods and
concurrent conditions, i.e., they both take place at the same time as in a cash sale over
a shop counter.

Delivery (Sections 33-39) Delivery is the voluntary transfer of possession from one
person to another. Delivery may be actual, constructive or symbolic. Actual or physical
delivery takes place where the goods are handed over by the seller to the buyer or his
agent authorized to take possession of the goods.

1. Constructive delivery takes place when the person in possession of the goods
acknowledges that he holds the goods on behalf of and at the disposal of the buyer. For
example, where the seller, after having sold the goods, may hold them as bailee for the
buyer, there is constructive delivery.
2. Symbolic delivery is made by indicating or giving a symbol. Here the goods
themselves are not delivered, but the “means of obtaining possession” of goods is
delivered, e.g, by delivering the key of the warehouse where the goods are stored, bill of
lading which will entitle the holder to receive the goods on the arrival of the ship.

Rules as to delivery
The following rules apply regarding delivery of goods:

(a) Delivery should have the effect of putting the buyer in possession.

(b) The seller must deliver the goods according to the contract.

(c) The seller is to deliver the goods when the buyer applies for delivery; it is the duty of
the buyer to claim delivery.
(d) Where the goods at the time of the sale are in the possession of a third person, there
will be delivery only when that person acknowledges to the buyer that he holds the
goods on his behalf.

(e) The seller should tender delivery so that the buyer can take the goods. It is no duty of
the seller to send or carry the goods to the buyer unless the contract so provides. But
the goods must be in a deliverable state at the time of delivery or tender of delivery. If by
the contract the seller is bound to send the goods to the buyer, but no time is fixed, the
seller is bound to send them within a reasonable time.

(f) The place of delivery is usually stated in the contract. Where it is so stated, the goods
must be delivered at the specified place during working hours on a working day. Where
no place is mentioned, the goods are to be delivered at a place at which they happen to
be at the time of the contract of sale and if not then in existence they are to be delivered
at the place at which they are manufactured or produced.

(g) The seller has to bear the cost of delivery unless the contract otherwise provides.
While the cost of obtaining delivery is said to be of the buyer, the cost of the putting the
goods into deliverable state must be borne by the seller. In other words, in the absence
of an agreement to the contrary, the expenses of and incidental to making delivery of the
goods must be borne by the seller, the expenses of and incidental to receiving delivery
must be borne by the buyer.

(h) If the goods are to be delivered at a place other than where they are, the risk of
deterioration in transit will, unless otherwise agreed, be borne by the buyer.

 (i) Unless otherwise agreed, the buyer is not bound to accept delivery in instalments.

Acceptance of Goods by the Buyer

 Acceptance of the goods by the buyer takes place when the buyer:

(a) intimates to the seller that he has accepted the goods; or

(b) retains the goods, after the lapse of a reasonable time without intimating to the seller
that he has rejected them; or

(c) does any act on the goods which is inconsistent with the ownership of the seller, e.g.,
pledges or resells. If the seller sends the buyer a larger or smaller quantity of goods than
ordered, the buyer may:

(a) reject the whole; or

(b) accept the whole; or

(c) accept the quantity be ordered and reject the rest. If the seller delivers with the goods
ordered, goods of a wrong description, the buyer may accept the goods ordered and
reject the rest, or reject the whole.
Where the buyer rightly rejects the goods, he is not bound to return the rejected goods to
the seller. It is sufficient if he intimates the seller that he refuses to accept them. In that
case, the seller has to remove them.

Installment Deliveries
 When there is a contract for the sale of goods to be delivered by stated installments
which are to be separately paid for, and either the buyer or the seller commits a breach
of contract, it depends on the terms of the contract whether the breach is a repudiation
of the whole contract or a severable breach merely giving right to claim for damages.

Suits for Breach of Contract

Where the property in the goods has passed to the buyer, the seller may sue him for the
price.

Where the price is payable on a certain day regardless of delivery, the seller may sue for
the price, if it is not paid on that day, although the property in the goods has not passed.

Where the buyer wrongfully neglects or refuses to accept the goods and pay for them,
the seller may sue the buyer for damages for non-acceptance.

 Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the
buyer may sue him for damages for non-delivery.

Where there is a breach of warranty or where the buyer elects or is compelled to treat
the breach of condition as a breach of warranty, the buyer cannot reject the goods. He
can set breach of warranty in extinction or dimunition of the price payable by him and if
loss suffered by him is more than the price he may sue for the damages.

If the buyer has paid the price and the goods are not delivered, the buyer can sue the
seller for the recovery of the amount paid. In appropriate cases the buyer can also get
an order from the court that the specific goods ought to be delivered.

Anticipatory Breach
 Where either party to a contract of sale repudiates the contract before the date of
delivery, the other party may either treat the contract as still subsisting or wait till the
date of delivery, or he may treat the contract as rescinded and sue for damages for the
breach.

In case the contract is treated as still subsisting it would be for the benefit of both the
parties and the party who had originally repudiated will not be deprived of:

(a) his right of performance on the due date in spite of his prior repudiation; or

(b) his rights to set up any defence for non-performance which might have actually
arisen after the date of the prior repudiation.
 Measure of Damages
 The Act does not specifically provide for rules as regards the measure of damages
except by stating that nothing in the Act shall affect the right of the seller or the buyer to
recover interest or special damages in any case were by law they are entitled to the
same. The inference is that the rules laid down in Section 73 of the Indian Contract Act
will apply.

Sales and Good Act 1930: Rights of

Unpaid Seller
Unpaid seller and his rights
Meaning of an Unpaid Seller [Sec 45(1)(2)]

The seller of goods is deemed to be an ‘unpaid seller’

1. When the whole of the price has not been paid or tendered
2. When a bill of exchange or other negotiable instrument (such as cheque) has
been received as conditional payment, and it has been dishonored [Section 45(1)].
3. The term ‘seller’ includes any person who is in the position of a seller(for
instance,an agent of the seller to whom the bill of lading has been endorsed, or a
consignor or agent who has himself paid,or is directly responsible for the price) [Section
4592)].

Rights of an Unpaid Seller [Section 46-52,54-56,60-61]

The  rights of an unpaid seller can broadly be classified under the following two
categories:

1. Rights against the goods

Rights against the buyer personally

The various rights of an unpaid seller have been shown in Fig.

 (I) Rights against the goods where the property in the goods has passed to the
buyer

a) Right of Lien [Section 47,48 and 49]

Meaning of Right of Lien:

The right of lien means the right to retain the possession of the goods until the full price
is received.

Three circumstance under which right of lien can be exercised [Section 47(1)]

1. Where the goods have been sold without any stipulation to credit;
2. Where the goods have been sold on credit, but the term of credit has expired;
3. Where the buyer becomes insolvent.

Other provisions regarding right of lien [Sections 47(2), 48, 49(2)]

1. The seller may exercise his right of lien, even if he possesses the goods as agent
or Bailee for buyer[Section 47(2)]
2. 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 agreement to waive the lien [Section 48].
3. The seller may exercise his right of lien even though he has obtained a decree for
the price of the goods [Section 49(2)].

Circumstances under which right of lien in the following cases:

1. 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 [Section
49(1)(a)].
2. When the buyer or his agent lawfully obtains possession of the goods [Section
49(1)(b)]
3. When the seller waives his right of lien [Section 49(1) (c)].
4. When the buyer disposes of the goods by sale or in any other manner with the
consent of the seller [Section 53(1)].
5. Where document of title to goods has been issued or lawfully transferees to any
person as buyer or owner of the goods and that person transfers the document by way
of sale, to a person who takes the document in good faith and for consideration.[Proviso
to Section 53(1)].

B) Right of Stoppage of Goods in Transit

The right of stoppage of goods means the right of stopping the goods while they are in
transit, to regain possession and to retain them till the full price is paid.

Conditions under which right of stoppage in transit can be exercised [Section 50]

The unpaid seller can exercise the right of stoppage in transit only if the following
conditions are fulfilled:
1. The seller must have parted with the possession of goods,i.e. the goods must not
be in the possession of seller.
2. The goods must be in the course of transit.

 The buyer must have become insolvent.

c) Right of Resale[Section 46(1) and 54]

An unpaid seller can resell the goods under the following three circumstance:

1. Where the goods are of a perishable nature.

2. Where the seller expressly reserves a right of resale if the buyer commits a
default in making payment.

 Where the unpaid seller who has exercised his right of lien or stoppage in transit
gives a notice to the buyer about his intention to resell andbuyer does not pay or tender
within a reasonable time.

(II) Rights against the goods where the property in the goods has not passed to
the buyer

Right of withholding delivery [Section 46(2)]

Where the property in the goods has not been passed to the buyer, the unpaid seller,
cannot exercise right of lien, but get a right of withholding the delivery of goods, similar
to and co-extensive with lien and stoppage in transit where the property has passed to
the buyer.

Rights of Unpaid Seller against the Buyer Personally

The unpaid seller, in addition to his rights against the goods as discussed above, has the
following three rights of action against the buyer personally:

1. Suit for price (Sec. 55). Where property in goods has passed to the buyer; or
where the sale price is payable ‘on a day certain’, although the property in goods has not
passed; and the buyer wrongfully neglects or refuses to pay the price according to the
terms of the contract, the seller is entitled to sue the buyer for price, irrespective of the
delivery of goods. Where the goods have not been delivered, the seller would file a suit
for price normally when the goods have been manufactured to some special order and
thus are unsaleable otherwise.
2. Suit for damages for non-acceptance (Sec. 56). Where the buyer wrongfully
neglects or refuses to accept and pay for the goods, the seller may sue him for damages
for non-acceptance. The seller’s remedy in this case is a suit for damages rather than an
action for the full price of the goods.
3. Suit for Interest [Section 61(2)]

In case of breach of the contract on the part of seller, the buyer may sue the seller for
interest from the date on which the payment was made.
 UNIT 3 The Companies Act. 2013
Companies Act 2013: Meaning and Essential Feature of
Company
COMPANY LAW
The word company is derived from a Latin word `companies`

it means a group of persons who took their need together.

 In India law relating to companies are contained in The companies Act 1956.

Meaning and definition

 A company is a voluntary association of persons formed for some common purpose
with capital divisible into parts known as shares.

Justice Lindlay defines company “as an association of many persons who contribute
money or money’s worth to a common stock and employ it in some trade or business
and who share the profits arising there from”
According to companies act a company means a company formed and registered under
companies act.

Features of a Registered company

1. Voluntary AssociationA company is voluntary association of persons who have

come together for a common object which generally is to earn profit.

The activities of this association are governed by the law and are limited by its
memorandum of association

2. Incorporated association

A company comes into existence on incorporation or registration under the companies

act. Minimum number of persons required for the purpose of incorporation is seven in
case of a public company and two in case of a private company.

3. Separate legal entity

 On incorporation company gets personality which is separate and distinct from those of
its members. Company is an artificial person created by law. 

4. Separate property
 The company can own , enjoy  and dispose off its property in its own name.

5. Legal restrictions

The formation, working and winding up of a company are strictly governed by laws, rules
and regulations

6. Perpetual succession

 unlike a person a company never dies. Its existence is not affected in any way by    the
death or insolvency of any shareholder. Members may come and members may go , but
the company continues its operations until it is wound up.

7. Common seal

As a company is an artificial person it cannot sign its name on a contract. So it function

with the help of seal. All contract entered into by the members will be under the common
seal of the company.

8. Share capital

A company mobilizes its capital by selling its shares. Those persons who buy these
shares become its share holders and thereby become members in it

9. Limited Liability

In case of limited companies liability of members will be limited to the amount unpaid on
the shares.

10.Transferability of shares

Members can freely transfer and sell their shares .The right to transfer share is a
statutory right of members.

 11. Ownership and management

The owners of a company are its share holders.

The affairs of the company are managed by their representatives known as Directors

Types of Company
Type of companies
Companies can be classified on the basis of ;
 A. Incorporation

B. Liability of members

C. Number of members

D. Ownership

A. Incorporation

1. Chartered company
2. Statutory company
3. Registered company

1. Chartered company
 The company which have formed and incorporated under a special charter granted by
the king or queen.

Eg East India company. Bank of England.

2. Statutory company
These are companies which are created by means of a special Act of Parliament or any
state legislature. Eg RBI, Railway

3. Registered company
Company formed and registered under companies Act 1956 is called Registered
companies.

B. Liability of members

1. Limited company
2. Company limited by guarantee
3. Unlimited company

1. Limited company or company limited by share

Majority of registered companies will be company limited by shares. In case of limited

companies liability of members will be limited to the amount unpaid on the shares.

2. Company limited by guarantee

Here liability of each member is limited by the memorandum to such amount as he may
guarantee by the memorandum to contribute to the assets of the company in the event
of its winding up.
 Such  companies are formed for the promotion of art science, culture, sports etc.

3. Unlimited company

A company not having any limit on the liability of its members is termed as unlimited
company.

The members are liable for the debts of the company at the time of winding up.

C. Number of members

1. Private company
2. Public company

1. Private company

A private company is a company

            -which restricts the right to transfer its shares.

            -limits the number of its members to 50.

           -prohibits any invitation to public to subscribe its shares.

2. Public company

A public company means a company which is not a private company

E. Ownership

1. Government Company
2. Foreign company
3. Holding and subsidiary company

1. Government company

A company is said to be Government Company when 51% of the paid up capital is held
by the central government or by any state government or partly by central govt or partly
by one or more state govt.

2. Foreign company

A foreign company is a company incorporated outside India and having a place of

business in India.

3. Holding and subsidiary company

            À Company which controls another company is known as the holding company
and the so controlled company is known as subsidiary company.

One Man Company

This is a company in which one man holds practically the whole of the share capital of
the company, and in order to meet the statutory requirement of minimum number of
members some dummy members like his wife and son holds one or two shares each.

Distinction between public company & private company.

  Private Company Public Company

Minimum no of members is
1. Minimum no of members is 2
7

2. Maximum no members is 50 No maximum limit

Minimum paid up capital is Rs 1 Minimum paid up capital is

3.
lakh 5 lakh

Name must end with the word Name must end with the
4.
‘Pvt Ltd’ word ‘Ltd’

It shall have to wait until it

Can commence business receive the certificate for
5.
immediately after incorporation commencement of
business.

It cannot invite public to It can invite public to

6. subscribe its shares and subscribe its shares and
debentures debentures

7. Minimum subscription is not Minimum subscription is

required for allotment of shares. required for allotment of
shares.
 

 
 It has to hold a statutory
Need not hold statutory meeting
8. meeting and file a stat:
of the members.
report.
Quorum required for a meeting Quorum required for a
9.
is 2. meeting is 5
There is restriction of transfer of  Shares can be freely
10.
shares transferred.
Not required to issue
11. Must issue prospectus.
prospectus.
13. Two directors Three directors

Memorandum and Articles of

Association, Prospectus
MEMORANDUM OF ASSOCIATION

Memorandum of association for a company is like the constitutional law for a country. It
is the document which contains  the rules regarding constitution and activities of the
company. It is a fundamental charter of the company.

It defines the extent of powers of the company, beyond that it cannot go. It is a
document filed at the time of incorporation.

It is a public document ie any interested public can get a copy on payment of prescribed
fees.

Contents of memorandum

1. Name clause
2. Registered office clause
3. Object clause
4. Liability clause
5. Capital clause
6. Association clause or subscription clause.

1.Name clause

The first clause of memorandum requires a company to state its name

Rules:-Should not adopt identical with or resembles that of an existing company.  Ltd for
public company and Pvt Ltd for private company. Should not use a name prohibited by
the Name and Emblems Act. 
2. Registered office clause

The memorandum must specify the state in which the registered office of the company is
to be situated.

3. Object clause

This is the most important clause of the memorandum of association. It defines the
object of the company and the extent of its powers. The object of the company must be
state very clearly and a company cannot do anything beyond object clause. The objects
of the company shall not be illegal or against public policy. 

4. Liability clause

This  clause state the nature of liability of members.

5. Capital clause

This clause contains the  total amount of capital with which the company is registered.
This capital is known as authorized capital or nominal capital or registered capital.

6. Association clause or subscription clause

The memorandum concludes with subscription clause. The memorandum must be

subscribed by at least  7 persons in case of public company and 2 in case of private
company. Each subscriber must sign the document and write the number of shares
taken by him.

ALTERATION OF MEMORANDUM

The alteration of the memorandum is possible only by strictly following the procedure
laid down in the Act

1. Alteration of a name clause

The name of a company can be changed by passing a special resolution and with
approval of central govt. If a company is registered with a name which is in the opinion of
central govt is identical with or too closely resemble to the name of an existing company,
it can be changed by passing an ordinary resolution but with the approval of central
govt .

2. Alteration of registered office clause

If the shift of office is within local limits, ie from one place to another place in the same
city , town or village that can be done by giving a notice of change to registrar.

If the shift is outside local limits, a special resolution has to be passed.

 If the shift is from the jurisdiction of one registrar to another’s the special resolution
should be confirmed by the regional director of the state. (new sec 17 A Amendment Act
2000)

3. Alteration of object clause

The alteration of object clause is subject to so many restrictions. A company may

change its objects for the following purposes;

1. To carry business more economically or more efficiently.

2. To attain its main purposes by new or improved means.
3. To enlarge or change local area of operation
4. To restrict or abandon any of its objects specified in the memorandum.
5. To amalgamate the company with any other company.
6. to sell or dispose of the whole or any part of the undertaking of the company.

–A special resolution and approval of company law board is necessary for alteration.

4. Alteration of liability clause

Liability clause cannot be altered so as to make the liability of members unlimited.

5. Alteration of capital clause

Alteration can be made to

1. To increase share capital

2.To convert fully paid share to stock

3.Cancellation of shares  etc

Doctrine of ultra vires

Memorandum contains  the rules regarding constitution and activities of the company. It

is a fundamental charter of the company. It defines the extent of powers of the company,
beyond that it cannot go.

A co can act and function within the limits of memorandum. Any act which is beyond the
memorandum is ultra vires the company. Such acts are void .

Ultra means beyond and vires means powers. So ultra vires means ‘beyond powers’.

The purpose of this doctrine is to helps the shareholders , creditors and every third
person dealing with the company to ensure that their investment are not diverted to
unauthorized objects.

ARTICLES OF ASSOCIATION
 Articles of association are the internal regulations of the company and are for the benefit
of shareholders. These are the rules and regulation relating to the internal management
of a company. The article define the mode and form on which the business of the
company is to be carried on.

Shares: Kinds
A share in the share capital of the company, including stock, is the definition of the term
‘Share’. This is in accordance with Section 2(84) of the Companies Act, 2013. In other
words, a share is a measure of the interest in the company’s assets held by a
shareholder. In this article, we will look at the different types of shares like preferential
and equity shares. Further, we will understand certain definitions and regulations
surrounding them.

The Memorandum and Articles of Association of the company prescribe the rights and
obligations of shareholders. Further, a shareholder must have certain contractual and
other rights as per the provisions of the Companies Act, 2013.

Section 44 of the Companies Act, 2013, states that shares or debentures or other
interests of any member in a company are movable properties. Also, they are
transferable in the manner prescribed in the Articles of the company. Further, Section 45
of the Act mandates the numbering of every share. This number is distinctive. However,
if a person is a holder of the beneficial interest in the share, then this rule does not apply
(example: share in the records of a depository).

According to Section 43 of the Companies Act, 2013, the share capital of a company is
of two types:

1. Preferential Share Capital

2. Equity Share Capital

Preferential Share Capital

The preferential share capital is that part of the Issued share capital of the company
carrying a preferential right for:

 Dividend Payment: A fixed amount or amount calculated at a fixed rate. This

might/might not be subject to income tax.
 Repayment: In case of a winding up or repayment of the amount of paid-up
share capital, there is a preferential right to the payment of any fixed premium or
premium on any fixed scale. The Memorandum or Articles of the company specifies the
same.

Equity Share Capital – Equity Shares

All share capital which is NOT preferential share capital is Equity Share Capital. Equity
shares are of two types:

1. With voting rights

2. With differential rights to voting, dividends, etc., in accordance with the rules.

In 2008, Tata Motors introduced equity shares with differential voting rights – the ‘A’
equity shares. According to the issue,

 Every 10 ‘A’ equity shares have one voting right

 ‘A’ equity shares get 5 percentage points more dividend than the ordinary shares.

Due to the difference in voting rights, the ‘A’ equity shares traded at a discount to
ordinary shares with complete voting rights.

Deeming of Capital as Preferential Capital

In certain cases, capital is deemed as preferential capital even though it is entitled to

either or both of the following rights:

1. For dividends, apart from the preferential rights to amounts specified above, it
can participate (fully or to a certain extent) with capital not entitled to the preferential
rights.
2. In case of a winding up, apart from the preferential right of the capital amounts
specified above, it can participate (fully or to a certain extent), with capital not entitled to
preferential rights in any surplus remaining after repaying the entire capital.

Remember, Section 43 is not applicable to private companies if the Memorandum or

Articles of Associates specifies it.

Allotment and Transfer of Share

1. PRIVATE PLACEMENT (SECTION: 42)

CONDITIONS:

(i) A private placement offer cannot be made to more than 200 people in aggregate in a
financial year excluding “qualified institutional buyers” and employees of the company
being offered securities under a scheme of employee’s stock option as per provisions of
clause (b) of sub-section (1) of section 62.

Where “Qualified institutional buyer” means the qualified institutional buyer as defined in
the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009 as amended from time to time.

(ii) If a company, whether listed or unlisted makes an offer to allot or invites subscription,
or allots, or enters into an agreement to allot, securities to more than 200 persons,
whether the payment for the securities has been received or not or whether the company
intends to list its securities or not on any recognized stock exchange in or outside India,
the same shall be deemed to be an offer to the public and shall accordingly be governed
by the provisions of Part I of chapter III.
(iii) No fresh offer or invitation under this section shall be made unless the allotments
with respect to any offer or invitation made earlier have been completed or that offer or
invitation has been withdrawn or abandoned by the company.

(iv) Anyallottee under a private placement offer/invitation shall not transfer his/its
securities to more than 20 persons during a quarter and the company shall not register
any transfer which is not in conformity with this requirement.

(v) The number of such offers or invitations shall not exceed 4 in a financial year and not
more than once in a calendar quarter with a minimum gap of 60 days between any 2
such offers or invitations.

(vi) The value of such offer or invitation shall be with an investment size of not less than
Rs. 50,000/- per person.

(vii) No company offering securities under this section shall release any public
advertisements or utilize any media, marketing or distribution channels or agents to
inform the public at large about such an offer.

(viii) Any offer or invitation not in compliance with the provisions of this section shall be
treated as a public offer and all provisions of this Act, and the Securities Contracts
(Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall
be required to be complied with.

PROCEDURE:

(i) Send Notice for convening Board Meeting atleast 7 days before convening the Board
Meeting.

(Ii) Notice shall be sent to shareholders for convening of Extra Ordinary General Meeting
for the approval of private placement offer Letter.

(iiI) Draft the private placement offer letter.

(iv) Special Resolution shall be passed in the EGM so convened, which shall remain
valid for a period of 12 months.

(v) File Form MGT -14 with the ROC within 30 days of passing Special Resolution.

(vi) Issue offer letter in PAS-4 within 30 days of record of name of persons

(vii) Prepare complete record of Private Placement in PAS-5

(viii) File Form PAS-4 and Form PAS-5 with ROC within 30 days of issue of offer letter in
Form GNL-2

(ix) Make Allotment of shares within 60 days of receipt of Money from the persons to
whom right was given.
 (x) Call Board Meeting for allotment of shares

(xi) File PAS-3 with ROC within 30 days of Allotment.

2. RIGHTS ISSUE OF SHARES (SECTION: 62)

RELEVANT PROVISIONS:

(I) As per Section 62 (1) Where at any time, a company having a share capital proposes
to increase its subscribed capital by the issue of further shares, such shares shall be
offered:

(a) to persons who, at the date of the offer, are holders of equity shares of the company
in proportion, as nearly as circumstances admit, to the paid-up share capital on those
shares by sending a letter of offer subject to the following conditions, namely: –

(i) the offer shall be made by notice specifying the number of shares offered and limiting
a time not being less than fifteen days and not exceeding thirty days from the date of the
offer within which the offer, if not accepted by 90% of its members, shall be deemed to
have been declined;

(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be
deemed to include a right exercisable by the person concerned to renounce the shares
offered to him or any of them in favour of any other person; and the notice referred to in
clause (i) shall contain a statement of this right;

(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier
intimation from the person to whom such notice is given that he declines to accept the
shares offered, the Board of Directors may dispose of them in such manner which is not
dis-advantageous to the shareholders and the company;

PROCEDURE:

(ii) Send Notice for convening Board Meeting atleast 7 days before convening the Board
Meeting.

(iii) Pass a Board resolution for approving “Letter of offer”. The offer letter shall include
right of renunciation also.

(iv) Send the Letter of offer to all existing shareholders through registered post or speed
post or through electronic mode at least three days before the opening of the issue.

(v) Receive acceptance, renunciations, rejection of rights from shareholders.

(vi) Issue notice in writing to every Director at least seven days’ before convening the
Board meeting. [Sec 173 (3)]

(vii) Convene a Board Meeting and pass Board resolution approving the allotment and
issue of shares.
(viii) File with Registrar a return of allotment in E-Form PAS-3 within 30 days of allotment
of shares.

Debentures
Debenture is a legal document containing an acknowledgement of indebtedness by a
company. It contains a promise to pay a stated rate of interest for a defined period and
then to repay the principal at a given date of maturity.

In short, a debenture is a formal legal evidence of debt and is termed as the senior
securities of a company. The position of a bond-holder contrasts sharply with that of an
equity-holder.

Whereas the former are creditors, the latter are the ultimate owners of a company.
Bond-holders assume risk but comparatively lower than the equity holders in the same
organisation.

Unlike equity holders, the bond investor does not share in the growth of a company to
any appreciable extent. The debenture holder, it is assumed, is a happy being who is
totally unconcerned with fluctuation in earning power. For preference and ordinary
shareholders the hard rule is: No profits, no dividends.

A company may acquire long term finance through public borrowings. These loans are
raised by the issue of debentures. As per Thomas Evelyn, “A debenture is a document
under the company’s seal which provides for the payment of a principal sum and
interest there on at regular intervals, which is usually secured by a fixed or
floating charge on the company’s property or undertaking and which
acknowledges a loan to the company.”

Thus a debenture is a loan to the company at fixed rate of debentures are printed or
written on the back of the document, the debenture holders do not take any risk unlike
shareholders They are the creditors of the company, profit or no profit, the debenture
holders must get their interest. The debentures are redeemable after a fixed time which
may be five years or more.

Debenture financing is a cheaper source of finance in comparison to equity and

preference shares the interest is paid to the debenture holders at a fixed rate and after
fixed time intervals and that too before any dividend payment is made to shareholders.
In the event of winding up of the company, the claims of debenture holders get first
preference to the payment of shareholders.

Characteristics of Debentures:
(1) The debenture holders get interest at a fixed rate. They have priority of claim over
that of shareholders.
(2) The company may have profit or no profit, the debenture holders receive interest.

(3) The debenture holders are the creditors of the company and in the event of winding
up of the company. They hold priority of claim to assets over that of shareholders

(4) Since the debenture holders have no voting power so they do not enjoy control over
the affairs of the company. However in case of non-payment of interest or principal
amount they can interfere in the company working by adopting legal action.

(5) The face value of debenture is always higher in comparison with equity shares.

(6) It is a cheaper source of finance in comparison with other sources.

(7) The interest paid on debenture is considered as the deductible business expenditure
for purpose of tax calculations.

Types of Debentures:
(i) Secured and Unsecured Debentures:

Secured debentures are those which create fixed or floating charge on the assets of the
company. Such debentures are also called as mortgage debentures. They are
empowered to dispose of such assets for the recovery of their claims in case issuing
company makes default.

On the other hand, debentures which do not create any charge or security on assets of
the company are called unsecured debentures. However, their claim is settled before
any payments are made to equity and preference shareholders.

(ii) Registered and Bearer Debentures:

A registered debenture holder is one whose name exists on the debenture certificate
and is registered with the company. Such debentures are transferred by more delivery
without intimating the company.

Generally, the interest coupons are attached to the debenture certificates and the bearer
of such certificate can fill in the coupon and can claim interest by sending it to the
company.

(iii) Redeemable and Irredeemable Debentures:

Redeemable debentures are those which are issued on redeemable basis i.e. issued on
conditional basis that they shall be redeemed after a certain fixed period.

Irredeemable debentures are those which are not redeemable during the existence of
the company. But the debt becomes due for redemption if the company goes into
liquidation or when the interest is not regularly paid as and when accrued.
(iv) Convertible and Non-convertible Debentures:

Convertible debenture holders have the option to convert their holdings into equity
shares after a specified period of time. Such holder thus gets the chance to participate in
the company affairs. Non- convertible debentures are those which cannot be covered
into equity shares.

Essentials conditions for a

Valid Meeting
1. Proper Authority:
The authority to call a general meeting is the board of directors of the company. The
notice of the meeting should be issued under their authority, granted at a duly
constituted meeting of the board or passing a resolution by circulation. A single director
has no power to convene a meeting. The secretary of the company has no authority to
call a general meeting unless the Board resolves and authorises him to do so.

In case the meeting of the Board of directors itself is unlawful e.g. where rightful
directors are prevented from attending the directors’ meeting, the decision taken by the
Board at such meeting to call the general meeting, shall also be unlawful.

Where, however, the meeting at which the directors decide to call a general meeting is
not properly constituted (e.g. there is some defect in the appointment or qualification of
the directors), and the Board acts bona fide, a general meeting called in pursuance of a
resolution passed at such directors’ meeting, is not necessarily invalid.

However, under certain circumstances, the requisitionists, the Central Government or

the Company Law Board (the Tribunal after its constitution) may call a general meeting
in case of default by the directors.

2. Notice:
Notice to whom? Notice of every general meeting should be given to the following
persons:

(i) Every member of the company.

(ii) Every person entitled to a share in consequence of the death or insolvency of a

member.

(iii) Auditor or auditors of the company [Sec. 172 (2)].

Deliberate omission to give notice to a single member may invalidate the meeting.
However, an accidental omission to give notice to or non-receipt of it, by a member will
not invalidate the meeting [Sec. 172 (3)].
Length of Notice:

A proper notice in writing to every member of the company is required by law for the
holding of every valid meeting. Notice must be given even though a member has waived
his right to have notice. It must disclose the purpose for which the meeting is called. It
must be given at least 21 clear days before the date of the meeting.

In calculating 21 days, the date of receipt of notice and the date of the meeting should
be excluded [Sec. 171 (1)]. Articles may provide for a notice longer than 21 days, but not
shorter than 21 days. The notice shall be deemed to have been received by a member
at the expiry of 48 hours from the time of posting [Sec. 53 (2) (b)].

A general meeting may be called at a shorter notice, if,

(i) In the case of an annual general meeting, all members entitled to vote thereat agree;

(ii) In the case of any other meeting (a) if the company has a share capital, members
holding 95% of the paid-up share capital carrying voting rights exercisable at the
meeting agree, (b) if the company does not have a share capital, members holding at
least 95% of the total voting power exercisable at the meeting agree.

The consent of the members for shorter notice may be obtained either at the meeting or
before the meeting. It may also be obtained after the meeting and the post consent will
validate the resolution originally passed without sufficient notice. It is usual to obtain it by
asking the shareholders to sign a form of consent.

Service of Notice:

Company may serve notice on the members either personally or by prepaid post or by
advertisement in the newspaper. It must be properly addressed. Service of notice’ by
advertisement shall be deemed to be complete the day when the advertisement appears
in the newspaper on both resident and non-resident members.

Explanatory statement need not be advertised, but the fact that the same has been sent
to the members through post shall be mentioned in the advertisement. In case of joint-
holding of shares, notice to first named shareholder would be sufficient.

When the meeting is adjourned for 30 days or more and the new business is to be
transacted at the adjourned meeting, a fresh notice has to be given.

Contents of the notice:

The notice must contain the following particulars:

(i) It should specify the name of the meeting, the place, day and hour of the meeting and
the meeting to be valid must be held at the place and time specified. Annual General
Meeting should be held on a working day during business hours. However, a meeting
may continue beyond business hours. Extraordinary general meeting can be held on any
day including a holiday and not necessarily during working hours.
(ii) It should also specify the nature of the business to be conducted at the meeting.
Section 173 puts business into two categories:

(a) General business:

In case of annual general meeting, all business relating to : (i) the consideration of
annual accounts, (ii) the declaration of a dividend, (iii) the appointment of directors in
place of those retiring, and (iv) the appointment of, and the fixing of remuneration of the
auditors, are considered as general business.

(b) Special business:

Any other business at an annual general meeting and all businesses in case of any other
meeting are regarded as special business. If special business is to be transacted at a
general meeting, an ‘explanatory statement’ giving all the material facts of the item of
special business including the particulars of interest, if any, of every director or other
managerial personnel, must be annexed to the notice.

Agenda:

Agenda gives guidance and information as to the business to be discussed and

transacted in the meeting. It sets out the chronological sequence in which the various
items of business shall be taken up in the meeting for discussion. The sequence should
not be changed unless agreed to by the members present. Routine items should be put
first and debatable items later. Similar items should be placed closer to each other.

Agenda is prepared by the Secretary in consultation with the Chairman or the Managing
Director. Agenda must be clear and complete. A company may be restrained from
transacting that business which is not mentioned in the agenda.

3. Place of the Meeting:

Annual General Meeting. The annual general meeting is to be held by a public company
at its registered office or at some other place in the same city, town or village where the
registered office of the company is situated. However, the Central Government has the
power to grant exemption to any company from this provision.

A private company can hold its annual general meeting at any other place if:

(i) It has fixed the place of the meeting by the articles; or

(ii) It has fixed the place of the meeting by a resolution agreed by all the members.

A company registered under section 25 of the Companies Act can hold the annual
general meeting at any place. In case of a Government company, meeting can be held
at any other place with the approval of the Ministry of Corporate Affairs.

Other General Meetings:

There is no such provision in the Companies Act which requires that the general
meetings of the company other than the annual general meeting must be held at some
particular place. It, therefore, follows that the other general meetings can be held,
subject to any specific provision in the articles at any other place. However, the directors
must act reasonably in fixing the time and place of the meeting so that members get full
opportunity in exercising their voting rights.

4. Quorum:
Minimum number of members required to constitute a valid meeting and to transact
business therein is called ‘quorum’. No meeting can be valid without quorum. Any
resolution passed at a meeting without quorum shall be invalid. Quorum is to be fixed by
the Articles of Association. But unless the articles provide for a large number, 5 persons
personally present in the case of a public company and 2 members personally present in
the case of private company shall be the quorum for a meeting of a company. [Section
174 (2)]. Thus, articles cannot provide a smaller quorum than what has been provided in
section 174 (1). Besides that, for the purpose of quorum, only members present in
person and not by proxy are counted.

If within half an hour from the time appointed for holding a meeting of the company, a
quorum is not present, the meeting, if called on the requisition of members, shall stand
dissolved [Sec. 174 (3)]. In any other case, the meeting shall stand adjourned to the
same day in the next week, at the same time and place, or to such other day and at such
other time and place as the Board may determine [Sec. 174 (4)].

If at the adjourned meeting also a quorum is not present within half an hour from the
time appointed for holding the meeting, the members present shall constitute quorum
[Sec. 174 (5)]. However, the above provisions shall not be applicable if the articles of the
company otherwise provide [Sec. 174 (2)]. But this does not mean that the number of
members personally attending can be less than two. A single person cannot constitute a
valid meeting except in certain cases only.

Can a single Member Constitute a Valid Meeting?

Ordinarily, a single member present cannot form a quorum, as a single member cannot
constitute a meeting. This is because meeting prima facie means coming together of two
or more than two persons. The Companies Act also uses the expression “members”
which shows that more than one member is expected to be present.

Meeting and Types

A meeting therefore, can be defined as a lawful association, or assembly of two or more
persons by previous notice for transacting some business. The meeting must be validly
summoned and convened. Such gatherings of the members of companies are known
as company meetings.

Essentials of Company Meetings

The essential requirements of a company meeting can be summed up as follows:
1. Two or More Persons: To constitute a valid meeting, there must be two or more
persons. However, the articles of association may provide for a larger number of
persons to constitute a valid quorum.
2. Lawful Assembly: The gathering must be for conducting a lawful business. An
unlawful assembly shall not be a meeting in the eye of law.
3. Previous Notice: Previous notice is a condition precedent for a valid meeting. A
meeting, which is purely accidental and not summoned after a due notice, is not at all a
valid meeting in the eye of law.
4. To Transact a Business: The purpose of the meeting is to transact a business. If
the meeting has no definite object or summoned without any predetermined object, it is
not a valid meeting. Some business should be transacted in the meeting but no decision
need be arrived in such meeting.

Kinds of Company Meetings

The meetings of a company can be broadly classified into four kinds.

 Meetings of the Shareholders.

 Meetings of the Board of Directors and their Committees.
 Meetings of the Debenture Holders.
 Meetings of the Creditors.

1. Meeting of the Share Holders

The meetings of the shareholders can be further classified into four kinds namely,

 Statutory Meeting,
 Annual General Meeting,
 Extraordinary General Meeting, and
 Class Meeting.

The chart given below gives a classification of company meetings.

1. Statutory Meeting

This is the first meeting of the shareholders conducted after the commencement of the
business of a public company. Companies Act provides that every public company
limited by shares or limited by guarantee and having a share capital should hold a
meeting of the shareholders within 6 months but not earlier than one month from the
date of commencement of business of the company.

Usually, the statutory meeting is the first general meeting of the company. It is

conducted only once in the lifetime of the company. A private company or a public
company having no share capital need not conduct a statutory meeting.
 Kinds of Company Meetings

2. Annual General Meeting

The Annual General Meeting is one of the important meetings of a company. It is usually
held once in a year. AGM should be conducted by both private and public ltd companies
whether limited by shares or by guarantee; having or not having a share capital. As the
name suggests, the meeting is to be held annually to transact the ordinary business of
the company.

3. Extra-ordinary General Meetings (EOGM)

Statutory Meeting and Annual General Meetings are called the ordinary meetings of a
company. All other general meetings other than these two are called Extraordinary
General Meetings. As the very name suggests, these meetings are convened to deal
with all the extraordinary matters, which fall outside the usual business of the Annual
General Meetings.

EOGMs are generally called for transacting some urgent or special business, which
cannot be postponed till the next Annual General Meeting. Every business transacted at
these meetings is called Special Business.

PERSONS AUTHORIZED TO CONVENE THE MEETING

The following persons are authorized to convene an extraordinary general meeting.

 The Board of Directors.
 The Requisitionists.
 The National Company Law Tribunal.
 Any Director or any two Members.

4. Class Meetings

Class meetings are those meetings, which are held by the shareholders of a particular
class of shares e.g. preference shareholders or debenture holders.

Class meetings are generally conducted when it is proposed to alter, vary or affect the
rights of a particular class of shareholders. Thus, for effecting such changes it is
necessary that a separate meeting of the holders of those shares is to be held and the
matter is to be approved at the meeting by a special resolution.
For example, for cancelling the arrears of dividends on cumulative preference shares, it
is necessary to call for a meeting of such shareholders and pass a resolution as required
by Companies Act. In case of such a class meeting, the holders of other class of shares
have no right to attend and vote.

2. Meetings of the Directors

Meetings of directors are called Board Meetings. These are the most important as well
as the most frequently held meetings of the company. It is only at these meetings that all
important matters relating to the company and its policies are discussed and decided
upon.

Since the administration of the company lies in the hands of the Board, it should meet
frequently for the proper conduct of the business of the company. The Companies Act
therefore gives wide discretion to the directors to frame rules and regulations regarding
the holding and conduct of Board meetings.

The directors of most companies frame rules concerning how, where and when they
shall meet and how their meetings would be regulated. These rules are commonly
known as Standing Orders.

3. Meetings of Debenture Holders

The debenture holders of a particular class conduct these meeting. They are generally
conducted when the company wants to vary the terms of security or to modify their rights
or to vary the rate of interest payable etc. Rules and Regulations regarding the holding
of the meetings of the debenture holders are either entered in the Trust Deed or
endorsed on the Debenture Bond so that they are binding upon the holders of
debentures and upon the company.

4. Meetings of the Creditors

Strictly speaking, these are not meetings of a company. They are held when the
company proposes to make a scheme of arrangements with its creditors. Companies
like individuals may sometimes find it necessary to compromise or make some
arrangements with their creditors, In these circumstances, a meeting of the creditors is
necessary.

Directors and Remuneration

Remuneration’ means any money or its equivalent given to any person for services
rendered by him and includes the perquisites mentioned in the Income-tax Act, 1961.

Managerial remuneration in simple words is the remuneration paid to managerial

personals. Here, managerial personals mean directors including managing director and
whole-time director, and manager.

Permissible managerial remuneration payable under the Companies Act 2013

 Total managerial remuneration payable by a public company, to its directors,
managing director and whole-time director and its manager in respect of any financial
year:

Max Remuneration in any

Condition
financial year

Company with one Managing

5% of the net profits of the
director/whole time
company
director/manager
Company with more than one
10% of the net profits of the
Managing director/whole time
company
director/manager
Overall Limit on Managerial 11% of the net profits of the
Remuneration company
Remuneration payable to directors who are neither managing
directors nor whole-time directors
For directors who are neither 1% of the net profits of the
managing director or whole-time company if there is a managing
directors director/whole time director
If there is a director who is 3% of the net profits of the
neither a Managing company if there is no managing
director/whole time director director/whole time director
The percentages displayed above shall be exclusive of any fees payable under section
197(5).

Until now, any managerial remuneration in excess of 11% required government

approval. However, now a public company can pay its managerial personnel
remuneration in excess of 11% without prior approval of the Central Government. A
special resolution approved by the shareholders will be sufficient.

In case a company has defaulted in paying its dues or failed to pay its dues, permission
from the lenders will be necessary.

 When the company has inadequate profits/no profits: In case a company has
inadequate profits/no profits in any financial year, no amount shall be payable by way of
remuneration except if these provisions are followed.

Where the effective

Limits of yearly remuneration
capital is:

Negative or less than

60 Lakhs
5 Crores
 5 crores and above
but less than 100 84 Lakhs
Crores

100 Crores and above

but less than 250 120 Lakhs
Crores

120 Lakhs plus 0.01% of the

250 Crores and above effective capital in excess of
250 Crores

Please Note:
These restrictions do not apply to the sitting fees of the directors (managing director,
whole time director/manager).

 Remuneration in excess of the aforementioned limits may be paid only if a

special resolution is passed by the shareholders.
 Remuneration as per the above limits may be paid if:
o A managerial personnel is functioning in a professional capacity
o The managerial person does not have an interest in the capital of the
company/holding company/subsidiary company either directly, or indirectly, or through
any statutory structures*
o The managerial person does not have a direct/indirect interest or related
to the directors /promoters of the company/holding company/subsidiary company any
time during the last 2 years either before/on/after the date of appointment
o He/she is in possession of a graduate level qualification along with
expertise and specialized knowledge in the field in which the company mainly operates.

*If any employee holds less than 0.5% of the company’s paid-up capital under any
scheme (including ESOP) or by way of qualification, for this purpose he/she is
considered to not have interest in the share capital of the company.

3. Important Pointers

1. Determination of Remuneration: The remuneration payable to the director shall

be determined by:

 The articles of the company

 A resolution
 Special resolution if articles require it to be passed in the general meeting

1. The remuneration payable as per these rules shall also include the remuneration
payable to the personals working in any other capacities. However, if the services are
rendered in professional a capacity and if the nomination and remuneration
 committee/Board of directors believes that the director possesses the necessary
qualification for the practice of the profession, exceptions are possible.
2. Fees to directors: The directors may receive fees for attending meetings and
such fees cannot exceed the limits prescribed. Different fees for different classes of
companies may be as prescribed.
3. The fees can be paid:

 Monthly
 As a Specified Percentage of the Net Profits yearly
 Partly by method (a) and partly by method(b)

4. Remuneration of independent directors: An Independent director shall be entitled

to a sitting fees, a reimbursement for participation in meetings and profit related
commission as approved by Board. However, he shall not be entitled to ESOP.

5. Excess Remuneration to be refunded: If any director receives any remuneration in

excess of the provisions of law, the same shall be refunded to the company or kept in
trust for the company. Such recovery shall not be waived unless permitted by the Central
Government.

6. Disclosure by a listed company: Every listed company shall disclose the ratio of the
remuneration paid and the median employee’s remuneration along with other prescribed
details.

7. Insurance: When the company insures its personnel by providing protection against

any act done by them due to negligence, default, misfeasance, breach of duty, breach of
trust, such the premium paid for this insurance shall not be treated as part of
remuneration except if the director is proved guilty.

8. Any managing director/whole time director receiving commission from the

company may also receive a remuneration or commission from the holding or subsidiary
of such a company provided the same is disclosed in the board’s report

Penalty
Any person who contravenes these provisions shall be punishable with a minimum fine
of Rs.1 Lakh and a maximum fine of Rs. 5 Lakhs.

Companies Directors: Appointment,

Power
Appointment
SECTION 152 OF THE COMPANIES ACT, 2013 – APPOINTMENT OF DIRECTOR
An individual who is appointed or elected as the member of the board of Directors of a
Company, who, along with the other directors, has the responsibility for determining and
implementing the policies of the company.

Director is an individual who directs, manages, oversees or controls the affairs of the
Company.

A director is a person who is appointed to perform the duties and functions of a company
in accordance with the provisions of The Company Act, 2013.

As per Section 149(1): Every Company shall have a Board of Directors consisting of
Individuals as director.

They play a very important role in managing the business and other affairs of Company.
Appointment of Directors is very crucial for the growth and management of Company.

APPOINTMENT OF DIRECTORS UNDER COMPANIES ACT 2013: 

TYPE OF COMPANY APPOINTMENT MADE

1. 2/3 of the total Directors

appointed by the shareholders.

 
Public Company or a Private
Company subsidiary of a public
company  

2.Remaining 1/3 appointment is

made as per Articles and failing
which, shareholders shall
appoint the remaining.

1. Articles prescribe manner of

appointment of any or all the
Directors.
 

Private Company which is not a  

subsidiary of a public company
2. In case, Articles are silent,
Directors must be appointed by
the shareholders

 *Nominee Directors can be appointed by a third party or by the Central Government in

the case of oppression or mismanagement.
 REQUIREMENT OF A COMPANY TO HAVE BOARD OF DIRECTORS: 

Private Limited
Minimum Two Directors
Company

Public Limited Company Minimum Three Directors

one person Company Minimum One Director

 * A company may appoint more than (15) fifteen Directors after passing a special
resolution.

*Further, every Company should have one Resident Director (i.e. a person who has lived
at least 182 days in India during the financial year)

Director’s appointment is covered under section 152 of Companies Act, 2013, along with
Rule 8 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

QUALIFICATIONS FOR DIRECTORS:

According to The Companies Act no qualifications for being the Director of any company
is prescribed. The Companies Act does, however, limit the specified share qualification
of Directors which can be prescribed by a public company or a private company that is a
subsidiary of a public company, to be five thousand rupees (Rs. 5,000/-).

New Categories of Director

 Resident Director:
 This is one of the most important changes made in the new regime, particularly in
respect of the appointment of Directors under section 149 of the Companies Act, 2013. It
states that every Company should have at least one resident Director i.e. a person who
has stayed in India for not less than 182 days in the previous calendar year.

Woman Director
Now the legislature has made mandatory for certain class of the company to appoint
women as director. As per section 149, prescribes for the certain class of the company
their women strength in the board should not be less than 1/3. Such companies either
listed company and any public company having-

1. Paid up capital of Rs. 100 cr. or more, or

2. Turnover of Rs. 300 cr. or more.

Foreign National as a Director under Companies Act, 2013

 Under Indian Companies Act, 2013, there is no restriction to appoint a foreign national
as a director in Indian Companies along with six types of Directors which are appointed
in a company, i.e., Women Director, Independent Director, Small Shareholders Director,
Additional Director, Alternative and Nominee Director. By complying with the Companies
Act, 2013 (hereinafter referred as “The Act”) read along with the Companies
(Appointment and Qualifications of Directors) Rules, 2014 (hereinafter referred as “The
Rules”)

Restrictions on number of Directorships

The Companies Act prevents a Director from being a Director, at the same time, in more
than fifteen (15) companies. For the purposes of establishing this maximum number of
companies in which a person can be a Director, the following companies are excluded:

A “pure” private company;

An association not carrying on its business for profit, or one that prohibits the payment of
any dividends; and

A company in which he or she is only appointed as an Alternate Director.

Failure of the Director to comply with these regulations will result in a fine of fifty
thousand rupees (Rs. 50,000/-) for every company that he or she is a Director of, after
the first fifteen (15) so determined.

Power
The directors are considered as the head and brain of a company. When the brain
functions, the company is said to function. For the proper functioning, the directors
should be properly entrusted with some powers. The directors generally acquire their
powers from the provisions of the Articles of Association and then from the Companies
Act.

1. General Powers of a Company Director

As per Sec. 291 of the Act, the Board is entitled to exercise all such powers and to do all
such acts and things as the company is authorized to do. The exceptions are the acts,
which can be done by the company only in the general meetings of the members as
required by law.

Specific Powers of a Company Director

A) As per Sec. 262, in the case of a public company or a private company, which is a
subsidiary of a public company, the power to fill a casual vacancy of directors is to be
exercised at a Board meeting.

B) As per Sec. 292, the following powers of the company shall be exercised by the
Board by means of resolution passed at the meeting of the Board:
 To make calls,
 To issue debentures,
 To borrow moneys by other means,
 To invest the funds of the company, and
 To make loans.

The last three powers cannot be delegated to the Manager or to a Committee of

Directors but must be exercised only at a Board meeting.

3. Powers of Director subject to the Consent of the Company

The directors of a public company or of a private company can exercise the following
powers, which is a subsidiary of a public company only with the consent of the company
in the general meeting:

 To sell, lease or otherwise dispose of the undertaking of the company.

 To remit or give time for repayment of any debt due to the company by a director.
 To invest the sale proceeds of any property of the company in securities other
than trust securities.
 To borrow moneys where the moneys already borrowed (other than temporary)
exceeds the total of the paid-up capital and free reserves of the company.
 To contribute to charities and other funds not directly relating to the business of
the company or to the welfare of the employees in any year in excess of Rs.50,000 or
5% of the average net profits of the three preceding financial years whichever is greater.

4. Powers of Director subject to the Consent of the Central Government

A) As per Sec. 268, any provision relating to the appointment or reappointment of a

Managing Director can be altered by the Board with the consent of the Central
Government.

B) As per Sec. 295, the Board, subject to the Central Government’s consent, has the
power to appoint a person for the first time as a Managing Director.

C) As per Sec. 295, the Board, only with the previous approval of the Central
Government, can make any loan or give any guarantee or provide any security in
connection with a loan made by any other person to:

 Any of its directors or any director of its holding company, or

 Any partner or relative of such director, or
 Any firm in which any such director or relative is a partner, or
 Any private company of which any such director is a member or director, or
 Anybody corporate, 25% or more of whose total voting power may be exercised
or controlled by any such director or two or more directors together, or
 Anybody corporate, whose Board or Managing director or Manager is
accustomed to act in accordance with the directions or instructions of any director or
directors of the leading company.

Subject to the approval of the Government, the Board has the power to invest in the
shares of another company in excess of the limits specified in Sec. 372.
Prevention of Oppression
and Mismanagement
Chapter XVI of the Companies Act, 2013 deals with the provisions relating to prevention
of oppression and mismanagement of a company. Oppression and mismanagement of a
company mean that the affairs of the company are being conducted in a manner that is
oppressive and biased towards the minority shareholders or any member or members of
the company. To prevent the same, there are provisions for the prevention and
mismanagement of a company.

Application to tribunal for relief in cases of oppression, etc

According to section 241, any member of the company who complains that the affairs of
the company are being conducted in a manner that is prejudicial to public interest or in a
manner prejudicial or oppressive to him or any material change that is being brought
about by, or in the interests of, any creditors, including debenture holders or any  class
shareholders of the company etc. that would materially affect the management of the
company and would make its affairs prejudicial to public interests or any of its member
or class of members, may make an application to the tribunal in accordance with the
provisions of section 244 of the Act.

The central government may also make an application to the tribunal for its orders where
it thinks that the affairs of the company are prejudicial to public interest.

Powers of Tribunal
Under section 242 of the Act, the Tribunal has the power to order for the regulation of
the conduct of affairs of the company in future, the purchase of shares, restriction on the
transfer of the share, termination, setting aside or modification of any agreement, setting
aside of any transfer, delivery of goods, payment, execution or other act relating to
property, removal of managing director, manager, or any of the directors of the
company, recovery of undue gains made by any managing director, manager or director
during the period of his appointment as such, imposition of costs as may be deemed fit.

A certified copy of the order shall be filed with the registrar within 30 days of the order by
the tribunal.

Any contravention of the provisions of this chapter shall lead company towards the
imposing of fine which shall not be less than 10 lakh rupees and which may extend to 25
lakh rupees and every officer of the company who is in default shall be punished with an
imprisonment of six months and with fine which shall not be less than twenty-five
thousand rupees and which may extend to one lakh rupees.

Consequences of termination or modification of certain agreement

If an order of the tribunal set asides, modifies or terminates any ongoing agreement then
as per the provisions of section 243 of the Act, such an action shall not give rise to any
 claims against any director or any person of the company for compensation for
damages, etc. Any director, managing director, etc who has been terminated from the
post as per the orders of the tribunal shall not hold the office of the same before the
expiry of a period of five years from the order of the tribunal.

Right to apply under section 241

According to section 244 of the Act, the following people can apply for the orders from
the tribunal-

1. In the case of a company having share capital of 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 member or members holding not less than one- tenth of the
issued share capital of the company, subject to the condition that the applicant or
applicants has or have paid all calls, and other sums due on his or their shares.
2. In the case of a company not having a share capital, not less than one- fifth of the
total number of its members.

Section 245 of the act talks about class action suits, wherein the class of members
having a similar cause of action can file an application before the tribunal to seek
necessary orders.

The prevention and oppression of mismanagement of a company is required so that

there is no prejudice towards the public interest and there is no biasness towards the
minority shareholders. Thereby the Act incorporates the wide provisions for the same so
that there is smooth functioning of the companies, as well as the interest of all the
shareholders, is put to forth.

Single Person Company

The Companies Act, 2013 completely revolutionized corporate laws in India by
introducing several new concepts that did not exist previously. On such game-changer
was the introduction of One Person Company concept. This led to the recognition of a
completely new way of starting businesses that accorded flexibility which a company
form of entity can offer, while also providing the protection of limited liability which sole
proprietorship or partnerships lacked.

Several other countries had already recognized the ability of individuals forming a
company before the enactment of the new Companies Act in 2013. These included the
likes of China, Singapore, UK, Australia, and the USA.

Section 2(62) of Companies Act defines a one person company as a company that has
only one person as its member. Furthermore, members of a company are nothing but
subscribers to its memorandum of association, or its shareholders. So, an OPC is
effectively a company that has only one shareholder as its member.

Such companies are generally created when there is only one founder/promoter for the
business. Entrepreneurs whose businesses lie in early stages prefer to create OPCs
 instead of sole proprietorship business because of the several advantages that OPCs
offer.

Difference between OPCs and Sole Proprietorships

A sole proprietorship form of business might seem very similar to one person companies
because they both involve a single person owning the business, but there actually exist
some differences between them.

The main difference between the two is the nature of liabilities they carry. Since an OPC
is a separate legal entity distinguished from its promoter, it has its own assets and
liabilities. The promoter is not personally liable to repay the debts of the company.

On the other hand, sole proprietorships and their proprietors are the same persons. So,
the law allows attachment and sale of promoter’s own assets in case of non-fulfilment of
the business’ liabilities.

Features of a One Person Company

Here are some general features of a one-person company:

1. Private company: Section 3(1)(c) of the Companies Act says that a single

person can form a company for any lawful purpose. It further describes OPCs as private
companies.
2. Single member: OPCs can have only one member or shareholder, unlike other
private companies.
3. Nominee: A unique feature of OPCs that separates it from other kinds of
companies is that the sole member of the company has to mention a nominee while
registering the company.
4. No perpetual succession: Since there is only one member in an OPC, his death
will result in the nominee choosing or rejecting to become its sole member. This does
not happen in other companies as they follow the concept of perpetual succession.
5. Minimum one director: OPCs need to have minimum one person (the member)
as director. They can have a maximum of 15 directors.
6. No minimum paid-up share capital: Companies Act, 2013 has not prescribed
any amount as minimum paid-up capital for OPCs.
7. Special privileges: OPCs enjoy several privileges and exemptions under the
Companies Act that other kinds of companies do not possess.

Formation of One Person Companies

A single person can form an OPC by subscribing his name to the memorandum of
association and fulfilling other requirements prescribed by the Companies Act, 2013.
Such memorandum must state details of a nominee who shall become the company’s
sole member in case the original member dies or becomes incapable of entering into
contractual relations.

This memorandum and the nominee’s consent to his nomination should be filed to the
Registrar of Companies along with an application of registration. Such nominee can
withdraw his name at any point of time by submission of requisite applications to the
Registrar. His nomination can also later be cancelled by the member.
 Membership in One Person Companies
Only natural persons who are Indian citizens and residents are eligible to form a one
person company in India. The same condition applies to nominees of OPCs. Further,
such a natural person cannot be a member or nominee of more than one OPC at any
point of time.

It is important to note that only natural persons can become members of OPCs. This
does not happen in the case of companies wherein companies themselves can own
shares and be members. Further, the law prohibits minors from being members or
nominees of OPCs.

Conversion of OPCs into other Companies

Rules regulating the formation of one person companies expressly restrict the
conversion of OPCs into Section 8 companies, i.e. companies that have charitable
objectives. OPCs also cannot voluntarily convert into other kinds of companies until the
expiry of two years from the date of their incorporation.

Privileges of One Person Companies

OPC enjoy the following privileges and exemptions under the Companies Act:

 They do not have to hold annual general meetings.

 Their financial statements need not include cash flow statements.
 A company secretary is not required to sign annual returns; directors can also do
so.
 Provisions relating to independent directors do not apply to them.
 Their articles can provide for additional grounds for vacation of a director’s office.
 Several provisions relating to meetings and quorum do not apply to them.
 They can pay more remuneration to directors than compared to other companies.

Important changes from the

Previous Companies Act 1956
S.N Companies Companies
o Scope Comments
Act, 2013 Act, 1956

1. Definition Section No provision Charge was

of “Charge” 2(16): “charge” not defined
means an earlier but
interest or lien includes
created on the interest and
 property or
assets of a
company or any
lien in the
of its
definition
undertakings or
provided now.
both as security
and includes a
mortgage.
Section
Section
(23A): “listed
2(52): “listed
public
company” Now covers all
companies”
means a types of
Definition means a public
company which companies
2. of “Listed company which
has any of its and not only
Company” has any of its
securities listed public
securities listed
on any companies.
in any
recognised
recognised
stock exchange
stock exchange
3. Definition Section Section The scope of
of “Officer 2(60): “officer 2(31) “officer officer in
who is in who is in who is in default has
Default” default”, for the default”, in been
purpose of any relation to any broadened.
provision in this provision The share
Act which referred to in transfer
enacts that an section 5, has agents,
officer of the the meaning registrars and
company who specified in that merchant
is in default section. bankers to the
shall be liable Section 5: For issue or
to any penalty the purpose of transfer
or punishment any provision in related issue
by way of this Act which of shares, are
imprisonment, enacts that an also brought
fine or officer of the under its
otherwise, company who ambit.
means any of is in default Directors who
the following shall be liable are aware of
officers of a to any the default by
company, punishment or the way of
namely:— penalty, participation in
(i) whole-time whether by way board meeting
director; of or receiving
imprisonment, the minutes
(ii) key fine or will also be
managerial otherwise, the included in this
personnel; expression category even
“officer who is if company
in default” has Managing
(iii) where there
is no key means all the Director/Whole
managerial following Time Director/
personnel, such officers of the other Key
director or company, Managerial
directors as namely : Personnel.
specified by the
Board in this (a) the CFO is also
behalf and who managing included in this
has or have director or category.
given his or managing Moreover any
their consent in directors ; Key
writing to the Managerial
Board to such Personnel/
(b) the whole-
specification, or person
time director or
all the directors, charged with
whole-time
if no director is duty of the
directors ;
so specified; compliance,
will only be
(c) the manager
(iv) any person included under
;
who, under the this category,
immediate if they
authority of the (d) the knowingly
Board or any secretary ; commit the
key managerial default.
personnel, is (e) any person
charged with in accordance
any with whose
responsibility directions or
including instructions the
maintenance, Board of
filing or directors of the
distribution of company is
accounts or accustomed to
records, act ;
authorises,
actively (f) any person
participates in, charged by the
knowingly Board with the
permits, or responsibility of
knowingly fails complying with
to take active that provision :
steps to
prevent, any
Provided that
default;
the person so
charged has
(v) any person given his
in accordance consent in this
with whose behalf to the
advice, Board ;
directions or
instructions the
(g) where any
Board of
Directors of the
company is
accustomed to
act, other than
a person who
gives advice to
the Board in a
professional
capacity; company does
not have any of
(vi) every the officers
director, in specified in
respect of a clauses (a) to
contravention of (c), any director
any of the or directors who
provisions of may be
this Act, who is specified by the
aware of such Board in this
contravention behalf or where
by virtue of the no director is so
receipt by him specified, all
of any the directors :
proceedings of
the Board or Provided that
participation in where the
such Board
proceedings exercises any
without power under
objecting to the clause (f) or
same, or where clause (g), it
such shall, within
contravention thirty days of
had taken place the exercise of
with his consent such powers,
or connivance; file with the
Registrar a
(vii) in respect return in the
of the issue or prescribed
transfer of any form.
shares of a
company, the
share transfer
agents,
registrars and
merchant
bankers to the
issue or
transfer
 Section
2(62): “One
New definition,
Person
Definition the concept
Company”
of “One was not there
4. means a No Provision
Person under the
company which
Company” Companies
has only one
Act, 1956.
person as a
Member.
a5. Articles of Section 5: (1) Section
Association The articles of a 26: There may
company shall in the case of a
contain the public company
regulations for limited by
management of shares, and
the company. there shall in
(2) The articles the case of an
shall also unlimited
contain such company or a
matters, as may company
be prescribed: limited by
guarantee or a
Provided that private
nothing company
prescribed in limited by
this sub-section shares, be
shall be registered with
deemed to the
prevent a memorandum,
company from articles of
including such association
additional signed by the
matters in its subscribers of
articles as may the
be considered memorandum,
necessary for prescribing
its regulations for
management. the company.
Section 27: (1)
In the case of
(3) The articles
an unlimited
may contain
company, the
provisions for
articles shall
entrenchment
state the
to the effect
number of
that specified
members with
provisions of
which the
the articles may
company is to
be altered only
be registered
if conditions or
and, if the
procedures as
company has a
that are more
restrictive than share capital,
those the amount of
applicable in share capital
the case of a with which the
special company is to
resolution, are be registered.
met or complied (2) In the case
with. of a company
limited by
(4) The guarantee, the
provisions for articles shall
entrenchment state the
referred to in number of
sub-section (3) members with
shall only be which the
made either on company is to
formation of a be registered.
company, or by (3) In the case
an amendment of a private
in the articles company
agreed to by all having a share
the members of capital, the
the company in articles shall
the case of a contain
private provisions
company and relating to the
by a special matters
resolution in the specified in
case of a public sub-clauses
company. (a), (b) and (c)
of clause (iii) of
sub-section (1)
(5) Where the
of section 3;
articles contain
and in the case
provisions for
of any other
entrenchment,
private
whether made
company, the
on formation or
articles shall
by amendment,
contain
the company
provisions
shall give notice
relating to the
to the Registrar
matters
of such
specified in the
provisions in
said sub-
such form and
clauses (b) and
manner as may
(c).
be prescribed.

Section 28: (1)
(6) The articles
The articles of
of a company
association of a
shall be in
company
respective
forms specified limited by
in Tables, F, G, shares may
H, I and J in adopt all or any
Schedule I as of the
may be regulations
applicable to contained in
such company. Table A in
Schedule I. (2)
(7) A company In the case of
may adopt all or any such
any of the company which
regulations is registered
contained in the after the
model articles commencement
applicable to of this Act, if
such company. articles are not
registered, or if
articles are
(8) In case of
registered,
any company,
insofar as the
which is
articles do not
registered after
exclude or
the
modify the
commencement
regulations
of this Act, in so
contained in
far as the
Table A
registered
aforesaid, those
articles of such
regulations
company do not
shall, so far as
exclude or
applicable, be
modify the
the regulations
regulations
of the company
contained in the
in the same
model articles
manner and to
applicable to
the same extent
such company,
as if they were
those
contained in
regulations
duly registered
shall, so far as
articles.
applicable, be
the regulations
of that company Section
in the same 29: The articles
manner and to of association
the extent as if of any
they were company, not
contained in the being a
duly registered company
articles of the limited by
company. shares, shall be
in such one of
the forms in
 Tables C, D
and E in
Schedule I as
may be
applicable, or in
a form as near
thereto as
circumstances
admit :
(9) Nothing in
this section Provided that
shall apply to nothing in this
the articles of a section shall be
company deemed to
registered prevent a
under any company from
previous including any
company law additional
unless matters in its
amended under articles insofar
this Act. as they are not
inconsistent
with the
provisions
contained in the
form in any of
the Tables C, D
and E, adopted
by the
company.
 UNIT 4 The Negotiable instruments
Act. 1881
Kinds of Negotiable instruments:
Promissory notes, Bills of exchange
and Cheques
Negotiable Instruments are written contracts whose benefit could be passed on from
its original holder to a new holder. In other words, negotiable instruments are documents
which promise payment to the assignee (the person whom it is assigned to/given to) or a
specified person. These instruments are transferable signed documents which promises
to pay the bearer/holder the sum of money when demanded or at any time in the future.

As mentioned above, these instruments are transferable. The final holder takes the
funds and can use them as per his requirements. That means, once an instrument is
transferred, holder of such instrument obtains a full legal title to such instrument.

Promissory notes
A promissory note refers to a written promise to its holder by an entity or an individual to
pay a certain sum of money by a pre-decided date. In other words, Promissory notes
show the amount which someone owes to you or you owe to someone together with the
interest rate and also the date of payment.

For example, A purchases from B INR 10,000 worth of goods. In case A is not able to
pay for the purchases in cash, or doesn’t want to do so, he could give B a promissory
note. It is A’s promise to pay B either on a specified date or on demand. In another
possibility, A might have a promissory note which is issued by C. He could endorse this
note and give it to B and clear of his dues this way.

However, the seller isn’t bound to accept the promissory note. The reputation of a buyer
is of great importance to a seller in deciding whether to accept the promissory note or
not

Bill of exchange
Bills of exchange refer to a legally binding, written document which instructs a party to
pay a predetermined sum of money to the second(another) party. Some of the bills might
state that money is due on a specified date in the future, or they might state that the
payment is due on demand.
A bill of exchange is used in transactions pertaining to goods as well as services. It is
signed by a party who owes money (called the payer) and given to a party entitled to
receive money (called the payee or seller), and thus, this could be used for fulfilling the
contract for payment. However, a seller could also endorse a bill of exchange and give it
to someone else, thus passing such payment to some other party.

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

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

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

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

The Negotiable Instruments (Amendment) Bill, 2017

The Negotiable Instruments (Amendment) Bill, 2017 has been introduced in the
LokSabha earlier this year on Jan 2nd, 2018.  The bill seeks for amending the existing
Act. The bill defines the promissory note, bill of exchange, and cheques. The bill also
specifies the penalties for dishonor of cheques and various other violations related to
negotiable instruments.

As per a recent circular, up to INR 10,000 along with interest at the rate of 6%-9% would
have to be paid by an individual for cheques being dishonored.

The Bill also inserts a provision for allowing the court to order for an interim
compensation to people whose cheques have bounced due to a dishonouring party
(individuals/entities at fault). Such interim compensation won’t exceed 20 percent of the
total cheque value.

Crossing of Cheque
 A cheque is a negotiable instrument. It can either be open or crossed. An open cheque
is the bearer cheque. It is payable over the counter on presentment by the payee to the
paying banker. While a crossed cheque is not payable over the counter but shall be
collected only through a banker. The amount payable for the crossed cheque is
transferred to the bank account of the payee. Types of cheque crossing are General
Crossing, Special Crossing and Restrictive Crossing. Let us learn about cheque crossing
in more detail.

Crossing Cheque
A crossing is an instruction to the paying banker to pay the amount of cheque to a
particular banker and not over the counter. The crossing of the cheque secures the
payment to a banker.

It also traces the person so receiving the amount of cheque. Addition of words ‘Not
negotiable’ or ‘Account Payee only’ is necessary to restrain the negotiability of the
cheque. The crossing of a cheque ensures security and protection to the holder.

However, we can negotiate a crossed bearer cheque by delivery and a crossed order
cheque by endorsement and delivery.

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

 General Crossing: Cheque bears across its face an addition of two parallel
transverse lines.
 Special Crossing: Cheque bears across its face an addition of the banker’s
name.
 Restrictive Crossing: It directs the collecting banker that he needs to credit the
amount of cheque only to the account of the payee.
 Non-Negotiable Crossing: It is when the words ‘Not Negotiable’ are written
between the two parallel transverse lines.

General Cheque Crossing

In general crossing, the cheque bears across its face an addition of two parallel
transverse lines and/or the addition of words ‘and Co.’ or ‘not negotiable’ between them.

In the case of general crossing on the cheque, the paying banker will pay money to any
banker. For the purpose of general crossing two transverse parallel lines at the corner of
the cheque are necessary.

Thus, in this case, the holder of the cheque or the payee will receive the payment only
through a bank account and not over the counter. The words ‘and Co.’ have no
significance as such.

But, the words ‘not negotiable’ are significant as they restrict the negotiability and thus,
in the case of transfer, the transferee will not give a title better than that of a transferor.

Special Cheque Crossing

In special crossing, the cheque bears across its face an addition of the banker’s name,
with or without the words ‘not negotiable’.

In this case, the paying banker will pay the amount of cheque only to the banker whose
name appears in the crossing or to his collecting agent.

Thus, the paying banker will honor the cheque only when it is ordered through the bank
mentioned in the crossing or its agent bank.

However, in special crossing two parallel transverse lines are not essential but the name
of the banker is most important.

Restrictive Cheque Crossing or Account Payee’s Crossing

This type of crossing restricts the negotiability of the cheque. It directs the collecting
banker that he needs to credit the amount of cheque only to the account of the payee, or
the party named or his agent.

Where the collecting banker credits the proceeds of a cheque bearing such crossing to
any other account, he shall be guilty of negligence.

Also, he will not be eligible for the protection to the collecting banker under section 131
of the Act.

However, such crossing will have no effect on the paying banker. This is so because it is
not his duty to determine that the cheque is collected for the account of the payee.

Not Negotiable Cheque Crossing

It is when the words ‘Not Negotiable’ are written between the two parallel transverse
lines across the face of the cheque in the case of general crossing or in the case of
special crossing along with the name of a banker.

The Not Negotiable Crossing does not mean that the cheque is non-transferrable. As per
section 130 of the Negotiable Instruments Act, 1881 a person taking a cheque bearing a
general or special crossing with the words ‘not negotiable’ will not have and is neither
capable of giving a better title than that which the person from whom he took it had.

One of the important features of a negotiable instrument is that a person who receives it
in good faith, without negligence, for value, before maturity and without knowing the
defect in the title of the transferor, gets a good title to the instrument.

Thus, he becomes the holder in due course and acquires an indisputable title to it. Also,
when the instrument passes through a holder in due course, all the subsequent holders
also receive a good title.

But, Not Negotiable Crossing takes away this important feature. In this case, the
transferee does not get the rights of the holder in due course.
Only if the title of the transferor is good, the title of the transferee is also good. Hence, in
case of any taint in the title of any one of the endorsers, the title of all the subsequent
transferees also becomes tainted.

Bouncing of Cheques
Where any cheque drawn by a person on an account maintained by him with a banker
for payment of any amount of money to another person from out of that account for the
discharge, in whole or in part, of any debt or other liability, is returned by the bank
unpaid, either because of the amount of money standing to the credit of that account is
insufficient to honour the cheque or that it exceeds the amount arranged to be paid from
that account by an agreement made with that bank, such person shall be deemed to
have committed an offence and shall, without prejudice to any other provisions of this
Act, be punished with imprisonment for [a term which may be extended to two years], or
with fine which may extend to twice the amount of the cheque, or with both: Provided
that nothing contained in this section shall apply unless:

(a) The cheque has been presented to the bank within a period of six months from the
date on which it is drawn or within the period of its validity, whichever is earlier;

(b) The payee or the holder in due course of the cheque, as the case may be, makes a
demand for the payment of the said amount of money by giving a notice in writing, to the
drawer of the cheque, [within thirty days] of the receipt of information by him from the
bank regarding the return of the cheque as unpaid; and

(c) The drawer of such cheque fails to make the payment of the said amount of money
to the payee or, as the case may be, to the holder in due course of the cheque, within
fifteen days of the receipt of the said notice.

Explanation: For the purposes of this section, “debt or other liability” means a legally

enforceable debt or other liability.

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Types of negotiable instrument;

Holder and Holder in due course
Types of Negotiable Instruments
Promissory Note: In this case, the debtor is the one who makes the instrument. And he
promises unconditionally to the creditor (or the bearer of the document) a certain sum of
money on a specific date.
 Bills of Exchange: This is an order from the creditor to the debtor. This instrument
instructs the drawee (debtor) to pay the payee a certain amount of money. The bill will
be made by the drawer (creditor)

Cheque: This is just another form of a bill of exchange. Here the drawer is a bank. And
such a cheque is only payable on demand. It is basically the depositor instructing the
bank to pay a certain amount of money to the payee or the bearer of the cheque.

Others: There are other instruments such as government promissory notes, railway

receipts, delivery orders, etc. These can be negotiable instruments by custom or practice
of the trade.

Holder and Holder in due course

Various differences between holder and holder-in-due-course can be explained on the
basis of the following

 Entitlement
 Maturity
 Right to recover amount
 Privileges
 Consideration
 Title
 Notice of defect in the Title

1. Entitlement: Holder is a person who is entitled for the possession of a negotiable

instrument in his own name. Hence he shall receive or recover the amount due thereon.
Whereas a Holder-in-due-course is a person who has obtained the instrument for
consideration and in good faith and before maturity.
2. Consideration: Consideration is not necessary to become a holder. The
instrument may also be given by way of a donation or gift and thus, the donee of an
instrument can also become a holder of it. However, consideration is a must to become
a holder-in-due-course and thereby the donee of a negotiable instrument can be a
holder but not holder-in-due-course.
3. Maturity: A holder may acquire the instrument even after its maturity. But a
holder-in-due-course must acquire the instrument before its maturity failing which he will
not enjoy the rights of a holder-in-due-course.
4. Title: A holder does not acquire a better title than that of transferor. In simple
words, if the title of any of the prior party is defective, his title will not be defect free.
Whereas, a holder-in-due-course derives a good title freed from all defects. His title is
better than that of the transferor.
5. Right to recover amount: A holder has a right to recover the amount due on the
instrument from the transferor (i.e., just preceding party) only from whom he has
obtained the instrument. Holder-in-due-course, on the other hand, can recover the
amount due on the instrument from any of the prior parties till the instrument is duly
discharged. Thus, all prior parties shall remain liable towards the holder-in-due-course,
jointly as well as severally, till the instrument is duly discharged.
6. Notice of defect in the Title: A holder-in-due-course is not only supposed to
have acquired the instrument without any notice of the defect of the title of the person
from whom he obtained it, but also there should be no cause on his part to believe that
any defect sustains in the transferor’s title. But a holder is exempt from this condition. He
 may have notice of defect in the title but he shall not be liable for it unless he is a party to
that defect, fraud, or forgery.
7. Privileges: A holder-in-due-course enjoys certain privileges under the Negotiable
instruments Act (as discussed earlier), which are not available to a holder.

Comparison Chart

BASIS FOR
HOLDER IN DUE
COMPARISO HOLDER
COURSE (HDC)
N

A holder is a person A holder in due course

who legally obtains the (HDC) is a person who
negotiable instrument, acquires the negotiable
Meaning with his name entitled instrument bonafide for
on it, to receive the some consideration,
payment from the whose payment is still
parties liable. due.
Consideration Not necessary Necessary
A holder cannot sue all A holder in due course
Right to sue
prior parties. can sue all prior parties.
The instrument may or
The instrument must be
Good faith may not be obtained in
obtained in good faith.
good faith.
Privileges Comparatively less More
A person can become
A person can become
holder in due course,
holder, before or after
Maturity only before the maturity
the maturity of the
of negotiable
negotiable instrument.
instrument.

Negotiable Instruments (NI) Act

1881: Endorsement
Endorsement
Section 15 defines endorsement as follows: “When the maker or holder of a negotiable
instrument signs the same, otherwise than as such maker, for the purpose of
negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so
signs for the same purpose a stamped paper intended to be completed as negotiable
instrument, he is said to indorse the same, and is called the endorser.”

Thus, an endorsement consists of the signature of the holder usually made on the back
of the negotiable instrument with the object of transferring the instrument. If no space is
left on the back of the instrument for the purpose of endorsement, further endorsements
 are signed on a slip of paper attached to the instrument. Such a slip is called ‘along’ and
becomes part of the instrument. The person making the endorsement is called an
‘endorser’ and the person to whom the instrument is endorsed is called an ‘endorse.’

Kinds of Endorsements: Endorsements may be of the following kinds:

1. Blank or general endorsement: If the endorser signs his name only and does
not specify the name of the indorse, the endorsement is said to be in blank. The effect of
a blank endorsement is to convert the order instrument into bearer instrument which may
be transferred merely by delivery.
2. Endorsement in full or special endorsement: If the endorser, in addition to his
signature, also adds a direction to pay the amount mentioned in the instrument to, or to
the order of, a specified person, the endorsement is said to be in full.
3. Partial endorsement: Section 56 provides that a negotiable instrument cannot
be indorsed for a part of the amount appearing to be due on the instrument. In other
words, a partial endorsement which transfers the right to receive only a part payment of
the amount due on the instrument is invalid.
4. Restrictive endorsement: An endorsement which, by express words, prohibits
the indorse from further negotiating the instrument or restricts the indorse to deal with
the instrument as directed by the endorser is called ‘restrictive’ endorsement. The
indorse under a restrictive endorsement gets all the rights of an endorser except the
right of further negotiation.
5. Conditional endorsement: If the endorser of a negotiable instrument, by
express words in the endorsement, makes his liability, dependent on the happening of a
specified event, although such event may never happen, such endorsement is called a
‘conditional’ endorsement.

In the case of a conditional endorsement the liability of the endorser would arise only
upon the happening of the event specified. But the endorse can sue other prior parties,
e.g., the maker, acceptor etc., if the instrument is not duly met at maturity, even though
the specified event did not happen.