NOORUL ISLAM CENTER FOR HIGER EDUCATION FACULTY OF

MANAGEMENT STUDIES
Question bank
Business law
Reference:
1. Business laws (R1)
Nirmal singh (M.A, MBA, D.B.M, PHD, L.L.B)
2. Legal Environment of business (R2)
DR.G. Vadivalagan and C.N.Rajarajan

Unit 1
1) Define law?(R2 :1)
The term law refers to set of rules and regulation backed up by enough
authority, enacted and implemented by government in order to ensure fairness and
justice of the particular field.
2) Mention few branches of the law(R1 :6)
 Civil law
 Criminal law
 Administrative law
 Constitutional law
3) Define mercantile law.(R1:6)
It can be defined as that branch of law that deals with rights and obligations
arising out of the transaction between mercantile person .Mercantile person is person
who carries on commercial dealing and may be a single individual or an association of
persons such as firm or a company
4) List out the sources of Indian mercantile law.(R1:6)
The main sources of mercantile law are
 English mercantile law
 Act enacted by legislature
 Judicial decisions
 Customs and trade usage
5) What are the two classification of the law?(R1:10)
There are two classification of law that are
 Public law and Private law

6) What is a contract?(R1:43)
A contract is the agreement between two person which is intended to
enforceable at law and is constituted by the acceptance by one party of an offer made
to him by other party to do or abstain from doing some act .
7) Mention any four essential elements of valid contract. (R1:45)
 There must be offer and acceptance
 The consent of parties must be free and genuine
 The parties must intend to create legal relationship
 There must be a lawful consideration
8) What is offer and acceptance?(R2:27)
Offer is the first and foremost requirement to make an agreement .it is starting
point of the agreement. Offer is a proposal by one party to another to enter into a
legally binding agreement with him. By means of an offer a person signifies his
willingness to do some act in order to get consent from the other party.
9) Write a short note on void contact.(R1:50)
A contact which ceases to be enforceable by law becomes void when it ceases
to be enforceable. A contact may be enforceable at the time when it was entered into
but later on it may become void due to certain reasons.eg a contact may become void
by subsequent impossibility or when a voidable contract is made void by the
aggrieved party when his consent is not fee.
10) What is Express contract?(R1:52)
An express contact results from an express promise. Promise is said to be
express when it is made in words spoken or written. This means that the offer and
acceptance constituting a contract are made in words spoken or written.
11) What is implied contract?(R1:53)
The promise is said to be implied when proposal and acceptance is made
otherwise than in words .Implied contract is not formed by words but has to be
inferred from the act or conduct of parties or course of dealing between them. Implied
contract arises when one person without being requested to do so, renders services
under circumstances indicating that he expects to be paid for them and the other
person knowing the circumstances accepts the benefits of the services.
12) What is Quasi contract?(R2:192)
The law creates and enforces legal rights and obligations under the certain
condition where no express or implied contract exists. These obligation are known as
quasi contracts

13) What is valid contract?(R1 :49)

A contract which satisfies all the legal requirement of the act is known as valid
contract. The valid contract is an agreement enforceable by law .It satisfies all
essential requirements. If one of the elements are missing it is said to be void contract.
14) Write a note on free consent?(R1 :48)
The parties must have entered into the contract out of their own free will.
Consent implies agreeing upon the same thing in same sense and free consent implies
consent which is not vitiated by coercion, under influence, fraud, etc.
15) What is agreement?(R2:43)
Every promise and every set of promises forming the consideration for each
other is an agreement.
16 marks
1) Write in detail on essential elements of valid contract.(R1 :45)
A contract has been defined in Section 2(h) as “an agreement enforceable by
law. “To be enforceable by law, an agreements must possess the essential elements of
a valid contract or contained in Section 10, 29 and 56. According to section 10, all
agreements are contract if they are made by the free consent of the parties.
Competent to contract, for a lawful consideration, with a lawful object are not
expressly declared by the art to be void and where necessary, satisfying the
requirements of any law as to writing or attestation or registration.
1) Offer and acceptance:

There must be a ‘lawful offer’ and a ‘lawful acceptance’ of the offer, thus
resulting in an agreement. The adjective ‘lawful’ implies that the offer and acceptance must
satisfy the requirements of the contract in relation thereto.

2) Intention to create legal relationship:

Parties enter into a contract must intend to constitute legal relationship. If there is no
such intention, there can be no contract between them. An agreement to dine at a friend’s
house is not an agreement intended to create legal relation and is not a contract. But an
agreement to buy and sell goods are intended to create some legal relationship and therefore
contracts.
For Example: M promises his wife N to gift her a saree if she will sing a song. N sang the
song but M did not bring the saree for her. N cannot bring an action in a court to enforce the
agreement as it lacked the intention to create legal relation.

3) Free consent

There must be free consent to the parties to the contract. According to section 14,
consent is said to be free when it is not caused by:

 Coercion.
 Undue influences.
 Fraud.
 Misrepresentation.
 Mistake.
If the consent of the parties is not free then no valid contract comes into existence.
For Example: X threatens to kill Y if he does not sell his house to X. Y agrees to sell
his horse to X. In this case, y s consent has been obtained by coercion and therefore, it
cannot be regarded as free.
4) Capacity of parties:
The parties to an agreement must be competent to contract, otherwise it
cannot be enforced by a court of law. In order to be competent to contract the parties
must be of the age of majority and of sound mind and must not be disqualified from
contracting by any law to which they are subject (Section 11).
For example: Ramesh, a minor borrowed 4,000 from Suresh and executed mortgage
of his property in favour of the lender. This was not valid and the money advanced to
minor could not be recovered.
5) Lawful consideration:
The most important element is the presence of consideration which can be said
to be the price for the promise. The consideration must be lawful. An agreement made
without consideration and the lawfulness of considerations
6) Lawful objects
 For the formation of a valid contract, it is also necessary that the parties to an
agreement must agree for a lawful object. Accounting to Section (23) the object for
which the agreement has been entered into must not be fraudulent or illegal or
immoral or opposed to public or must not imply injury to the person or property of
another. If the object is unlawful for one or the other of the reason mentioned above
the agreement is void.

7) Writing and registration

According to the Indian contract Act in Section (25) a contract may be oral or in
writing. But in certain special cases it lays down that the agreement to be valid must be in
writing and registered.

8) Certainty

Section 29 of the contract Act provides that “Agreements, the meaning of which is not
certain or capable of being made certain are void. “In order to give rise to valid ascertain the
meaning of the agreement, for otherwise, it cannot be enforced.
For Example: A agree to sell ‘B’ a hundred tons of oil”. There is nothing
whatever to show what kind of oil was intended. The agreement is void for uncertainty.

2) Write in detail on classification of contract.(R1:49)

On the basis of the mode of formation

1) Express contract
2) Implied contract
3) Quasi-contract

 Express Contracts
A contract would be an express contract if the terms are expressed by words or
in writing. Section 9 of the Act provides that if a proposal or acceptance of any
promise is made in words the promise is said to be express.
 Implied Contract
 An implied contract is a contract which is made otherwise than by the words
spoken or written. It came into existence on account of an act or conduct of the
parties.
 Quasi contract
 Even in the absence of a contract, certain social relationships give rise to
certain specific obligations to be performed by certain persons. These are known as
quasi contracts as they create same obligations as in the case of regular contract.Quasi
contracts are based on principles of equity, justice and good conscience.

On the basis of performance

1) Executed contract
2) Executory contract
3) Partly executed and partly executory
4) Unilateral contract
5) Bilateral contract

 Executed contract:
The consideration in a given contract could be an act or forbearance. When the
act is done or executed or the forbearance is brought on record, then the contract is an
executed contract.
 Executory contract: 
In an executory contract the consideration is reciprocal promise or obligation.
Such consideration is to be performed in future only and therefore these contracts are
described as executory contracts.
 Partly executed and partly executory
In a partly executed and partly executory contract, one party has already
performed his promise and the other party has yet to execute his promise.
 Unilateral contract
 Unilateral contract is a one sided contract in which only one party has to
perform his duty or obligation.
 Bilateral contract
 A Bilateral contract is one where the obligation or promise is outstanding on
the part of both the parties

On the basis of Validity or Enforceability

 Valid contract
If the contract entered into by the parties and satisfies all the elements
of a valid contract as per the act, it is said to be a valid contract.
  Void contract
 A contract which ceases to be enforceable by law is known as a void
contract. A void contract is not enforceable by the court.Generally,a valid
contract ceases to be enforceable on the change in circumstances or on the
change of provisions of an act.
 Voidable contract
When the contract is entered into without the free consent of party, it
is considered as a voidable contract. The definition of the act states that a
voidable contract is enforceable by law at the option at the option of one or
more parties but not at option of the other parties.
 Illegal Agreement
 An illegal agreement is one which is forbidden by law.It cannot be
enforced by any court. Not only that any associated or collateral transaction to
an illegal agreement is also void. No action is allowed on an illegal agreement.
No action can be taken for the recovery of the money paid under illegal
agreement or for the breach of the illegal agreement.
 Unenforceable contract
 A contract which satisfies all the requirements of the contract but has
technical defects is called an unenforceable contract. A contract is said to have
a technical defect when it does not fulfil the legal formalities required by some
other act. When such legal formalities are compiled with later on,the act
becomes enforceable
3) Write in detail on types of offer. (R2:26)
Generally offer is a promise to do an act .but sometimes it may be in the form
of not doing an act .for example x promised not to take any legal action against Y if
Y pays compensation to X accordingly .here not doing an act is the offer.
The person making the offer is known as the offerer or proposer and person to
whom it made is called offeree.
Types of offer are briefly explained below
1. Express Offer

The offer made by using words spoken or written is known as an express offer.

2. Implied Offer
 The offer which could be understood by a conduct of parties or circumstances of case
is called the implied offer.

3. Specific Offer

The offer made to a specific person or a particular person or two or more than two
specific persons. The specific offer is made to an ascertained person.

4. General Offer

It is not necessary that the offer should be made to a specific person. The offer can be
made to the world at large. If the offer is made to the world at large, it is known as the
general or public offer.

5. Cross Offer

When two parties exchange identical offers in ignorance at the time of each other’s
offer, the offers are called cross offers. There is not binding contract in such a case, as one’s
offer cannot be construed as acceptance by the other.

6. Continuous Offer

It is the offer which is open for a continuous period of time, it is also known as the
open offer or the standing offer.

7. Counter Offer

When the offeree makes some changes in the original offer, made by the offerer it is
called the counter offer

4) Write in detail on types of consideration and rules regarding valid

consideration. (R1:86)

Type of Consideration

1. Past Consideration

It is also known as executed consideration. One party to contract has received the
benefit before formation of contract.

2. Present Consideration
 It is received at the time of formation of the contract. It is in process of execution.

3. Future Consideration

It will be received by a party after the formation of the contract. It is also called as
executory consideration.

Legal Requirements Regarding Consideration

1. Consideration means doing or not doing something

The consideration is some act or abstinence. Some act means doing something while
abstinence means not to do something. Thus, a consideration can be positive or negative. To
do something is known as positive consideration while not to do something is known as
negative consideration.

2. Consideration must move at the desire or Promisor

The consideration must move at the desire of the promisor.However,it is not

necessary that it must for the benefit of the promisor. It can be for the benefit of a third
person also.

3. Consideration can flow either from the promise or any other person:

The consideration for a contract can move either from the promise or from any other
person. This point is made clear even by the definition of the word “consideration”, according
to which at the desire of the promisor, the promise or any other person, doing something is
consideration.

4. Consideration may be inadequate

Consideration need not necessarily be of the same value as of the promise for which it
is exchanged. But it must be something which can be inadequate as well. Inadequate
consideration would not invalidate an agreement but such inadequate consideration could be
taken into account by the court in deciding whether the consent of the promisor was freely
given.

5. Consideration may be Past, Present or Future

The consideration may be past, present or future. A past consideration is valid in India
while it is not regarded as valid in many other countries.
  Past consideration:

When a consideration by a party for a present promise was given in the past i.e. before
the date of the promise, it is said to be a past consideration.

 Present Consideration:

A consideration to do or abstain from doing something given simultaneously with the

promise is a present consideration.

 Future Consideration:

When the consideration from one party to the other is to pass subsequent to the act of
doing or abstaining from doing something, it is called a future consideration.

6. Act Promisor bound to do is not consideration

If the promisor is legally bound or required to perform something as a part of his duty,
and he agrees to do so, it is not a valid consideration. The consideration must be something
different from promisor’s existing obligation.

7. Consideration must be lawful

The consideration must be lawful. Lawful means as per the provisions of an act. An
unlawful act or benefit received in an unlawful manner is not regarded as the consideration.

8. Consideration should be possible to perform

The consideration must be real and not illusory. It means the consideration should not
be impossible to perform. An act does not recognize impossible performance. It may be
physically impossible or can be legal impossible

5) Write in detail on legality of object and its consideration.(R2:92)

Legality of object

According to section 10 of The Indian Contract Act, all agreements are contracts if
they are made by the free consent of parties competent to contract, for a lawful consideration
and with a lawful object and are not hereby expressly declared to void. It should be for lawful
consideration and with a lawful object.
The consideration or object of an agreement is lawful, unless:

1. It is forbidden by law

When something is forbidden by law, an agreement to do that is unlawful. An

agreement to do what has been prohibited by the Indian Penal Code or by some other law
cannot be enforced.

2. Defeat the provisions of law

If the object or consideration of an agreement is of such a nature that, if it is

permitted, it would defeat the provisions of any law, such an agreement is void. Certain acts
may not be expressly forbidden by law, but if they result in circumventing any law, they
cannot be encouraged

3. Is fraudulent

If the consideration or object of an agreement is to commit a fraud, the agreement is

void. An agreement to avoid competition with one another cannot be considered to be either
fraudulent or opposed to public policy.

4. Agreement injurious to the person or property of another

If the consideration or the object of an agreement is to cause an injury to theperson or

property of another, the agreement is unlawful, and therefore void. Injury here means harm
which is unlawful, for example, an agreement to commit fraud or a tort

5. Immoral or opposed to public policy

If the consideration or object of an agreement is regarded by a court to be immoral or

opposed to public policy, the agreement is unlawful and void. Public policy means the policy
of the law at a stated time. An act which is injurious to the interest of the society is against
public policy. If an agreement is prejudicial to social or economic interest of the community,
it will be against public policy to enforce such an agreement. On the one hand a person’s
right of contractual freedom should be maintained, on the other hand if the contract is against
public policy the law must not allow that to be enforced.

6) Write in detail on Remedies of Breach of Contract (R2 231)

A breach of contract occurs when a party thereto renounces his liability under it, or by
his own act makes it impossible that he should perform his obligations under it or totally or
partially fails to perform such obligations. The failure to perform or renunciation may take
place when the time for performance has arrived or even before that. Thus, breach is of two
kinds, viz.:

Anticipatory Breach

It occurs when prior to the due date of performance, the promiser absolutely refuses
or disables himself from the performance of his obligations. In other words, it is a declaration
by one party of his intention not to perform his obligations under the contract. Thus, the
anticipatory breach is the premature destruction of the contract, i.e., the repudiation of the
contract before due date of performance.

Present Breach

When the promiser indicates his refusal to perform his obligation at the time of
performance it amounts to a present breach.

REMEDIES FOR BREACH OF CONTRACT

The person injured by a breach of contract can claim damages from the other party for
compensating the loss suffered. When a there is breach of contract, the injured party has one
or more of the following remedies:

Rescission of contract

Rescission of the contract is a remedy that allows the non-breaching party to cancel
his or her responsibilities under the contract. This remedy might be available when the
contract was based on fraud or a mistake by one or both of the parties. It is also available if
both parties prefer to cancel the contract and return any money that had been advanced as part
of the contract.

Suit for damages

Damages ‘means compensation in terms of money for the loss suffered by the injured
party. Burden lies on the injured party to prove his loss.

Contract act deals with compensation for breach of contract, is based on the judgement
in above case. The rules are as follows

 Injured party can claim damages which arise out of breach and in the natural course of
business
  Special damages can be climed only when effect of breach can be informed to other
party
 Compensation for remote and indirect loss cannot be claimed

Suit for specific performance of the contract

In certain cases of breach of a contract, damages may not be an adequate remedy.

Then the court may direct the party in breach to carry out his promise according to the terms
of the contract. This is an order of the court requiring performance of a positive contractual
obligation. But in general, courts do not wish to compel a party to do that which he has
already refused to do. Part II of the Specific Relief Act, 1963 lays down detailed rules on the
specific performance of contracts.

Specific performance is not available in the following circumstances:

 Damages provide an adequate remedy.

 Where the order could cause undue hardship.
 Where the contract is of such a nature that constant supervision by the court would be
required.
 Where the party seeking the order has acted unfairly.

Suit for injunction

An injunction is an order of the court requiring a person to perform a negative

obligation. But for performance of the positive terms of the contract, the aggrieved party may
seek other remedies.

Unit 2

1) What is partnership?(R1:437)
According to the Indian partnership act 1932, Partnership is the relationship
between two persons who agreed to share the profit of the business carried on by all
or any one of them acting for all. They person who enter into such relationship are
individually called partners.

2) What are the essential elements of partnership?(R1:438)

 Association of two or more person
 An agreement
  Business
 Sharing of profit
 Carried on by all or any of them
3) List out the few main duties of partners(R1:459)
 To work for common advantage
 To render true accounts
 Duty to give full information
 To indemnify for fraud
 Duty to attend diligently
 Not to claim remuneration
4) Write a note on Retirement of partner.(R1:465)
Partner is said to be retire when the surviving continue to carry in
the business of the firm, and member retiring ceases to be a partner
A partner may retire:
 With consent of all other partners
 In accordance with expressed agreement of other partners
5) Write a note on Insolvency of partners.(R1:467)
If a partner is declared insolvent, he is no more a partner in the firm
from the date, he is declared insolvent in court whether the firm is thereby
dissolved or not depend on the terms of agreement between the partners.
Effect of the insolvency of partners in the firm are
 He ceases to be partner from the date of the order adjudicating
himself insolvent
 The firm is dissolved at same date other partners may decide that
firm shall continue
 The firm is not liable for any act of the insolvent partner after the
date of the order
6) Write a note on transfer of partner’s interest. (R1:467)
A partner can transfer his interest in a partnership to stranger. The transfer may
be absolute or partial .the transferee in such cases has very limited rights over
the firm.

 The transferee does not become partner of the firm .he cannot interfere in
conduct of the business or require accounts or inspect the books of the
firm
 The transferee is entitled to receive the share of profits of the transferring
partner .The transferee has to accept the account of profits agreed to by
partners
7) Write a note on actual of partners. (R1:450)
A person who become a partner by an agreement and is engaged in
the actual conduct of the business of the firm is called actual or active
partner. An active partner has authority to bind the firm and the other
partners for the act done by him in the ordinary course of business and
active partner and other partners are liable for all parties for all act done
by him. In the case of retirement he must give the public notice
8) Who is nominal partner? (R1:450)
A nominal partner one who has no real interest in the business. He
lends his name as one of the partners in the firm. He does not contribute
any capital. He does not take part in conduct of partnership business. He
is known to public as a partner. He is not entitled to share the profit of the
firm. But he is liable to third parties for all the acts of them.
9) Who is sub partner?(R1:451)
A sub partner is one who shares the profits of another partner.
When a partner agreed to share the profit in a firm with third person, that
third person is called sub partner. A sub partner is not an original partner
in the firm. He has no rights against the firm.
10) Write a note on sharing of profits. (R1:439)
 A partnership must aim to make profit then only profit may be divided among the
partners. The term profit means net profit, surplus money left after the expenses.
There must be agreement among the partners to share the profit of a business. They
share the profit by they like equally or any ratio they like

11) What is partnership property? (R1:447)

The term partnership property may be defined as joint property of all the partners as
opposed to their personal property.
12) Write a note on partnership for fixed term. (R1:450)
It is a type of partnership in which its duration is fixed. For a fixed period. This type
of partnership comes to the end, when the fixed term expires. If the partner carry on the
business after the expiry of the term, it becomes partnership at will. The partner assume to
continue as same rights and duties as they were having before the expiry of the fixed
term.
13) Write a note on partnership at will. (R1:450)
There are two following condition are to be fulfilled in order that a partnership is at will
 Where there is no contract between the partners for the duration of the partnership
 Where there is no provision in the contract for the determination of the partnership
14) What is particular partnership? (R1:450)
A person may become a partner with another person in particular adventures or
undertaking. Such partnership is known as particular partnership
15) List out the rights of the partners. (R1:457)
 Right to take part in the business
 Right to be consulted
 Right to have access to book of accounts
 Right to share the profit
 Interest of capital
 Right to indemnify
16 marks

1) Write in detail on essential elements of partnership. (R1:438)

The following are essential elements which are required under sec 4 of the Indian partnership
act, for constituting a valid partnership

1. Partnership is a association of two or more persons

2. That  it  is  the result of  an  agreement.

3. That  it  is  organised to  carryon a business.

4. That  the persons concerned agree to share the  profits of the business.

5. The  business  is to be carried on  by all or anyone of them  acting  for all.

1. Association of at least Two Persons

 In order to constitute a partnership legally there
must be anassociation of at least two persons. Regarding the maximum number of Partners
in a firm Sec. II of theCompanies Act provides that the number of partners in a firm carryin
g on  banking business should not exceed 10  and  in  any  other business 20.the relation of
partnership arises from the contract and not from the status.

2. Agreement

According  to  Section  5  a  partnership  is  created  by  contract  and  not  by
status. It ishowever, not necessary that there should be a very formal or written agreement.
The  agreement  to createa  partnership  may  as  well  arise  from  the  conduct  of  the  parties
concerned. Where, the parties agree toenter into partnership at some future date, the relation
of  partnership does  not  arise until  that  date.

3. Business

 A partnership can be formed only for the purpose of carrying on business. Busines
s includesevery trade, occupation and profession. The word business generally conveys the id
ea of running businessinvolving numerous transactions. The business to be carried on
by  the firm  must be  legal.

4. Sharing  of  Profits

   The  word Partnership  is derived from the word “to  part” which
means “to  divide”.Thus  division  of  profits  is  an  essential  condition  of  the  existence  of  a
partnership.  The object  ofpartnership  should  be  to  make  profits  and  distribute  among  the p
artners.

5. Mutual Agency

 The  business  of  partnership  may  be  carried  on  by  all  or  anyone  of
them  acting  for  all.Thus,  if a person  carrying  on  the  business  acts  not  only  for himself  but
for others also, so that they standin the position of principles and agents, they are partners.
It is not necessary that all of them shouldactively participate in the affairs of business. The 
necessary element is  that the  business  must be carriedon, on  behalf of all the partners.

2) Write in detail on classes of partners. (R1:450)

Classes of  Partners

A person  who  deals  with  a firm  would  like to know who are the  partners, and  to what

extent they  are liable to himfor  his claim against the firm. The position of different classes
of  partners may be examined as follows:

 Actual Partner

 A person who has by agreement become a partner and who takes actual
part in the conductof partnership business is an actual and working partner. He is the agent
of  other  partners  for  the  purposesof the  business. All  his acts in the ordinary course  of the
business  bind him and the other  partners to third parties.

 Dormant or Sleeping Partner

 A person who is in reality a partner but whose name does
not appear in any way as partner, nor does he take part in the management of the business,
and is not, therefore, known to outsiders as partner in the firm, is called a dormant or sleeping
partner. Sucha partner is liable to third parties who gave credit to the firm even without
knowing of his being partnerbut subsequently discovering the fact. A sleeping partner’s
liability rests on his being in the position of anundisclosed principal.One important distinctio
n exists between a sleeping and active partner with regard to liability towards third parties.
A sleeping partner is responsible for the debts of the firm takenduring the tenure of his
partnership like an active partner. But his liability ceases immediatelyon retirement and he is 
not supposed to give anotice on his retirement like other active partners.

 Nominal partners

A nominal partner is one who has no real interest in the business. He lends his name
as one of the partners in the firm. He does not contribute any capital. He does not take part
in conduct of partnership business. He is known to public as a partner. He is not entitled to
share the profit. But he is liable to third parties

 Partners  in  Profits  only

A partner  may  stipulate  with  his  co-partners  that  he  will  be

entitled to a certainshare of the profits without being liable for losses. But he will be liable
to  outsiders for all  debts  and obligations of the firm.

 Sub-partner

Where a member of a firm agrees to share the profit derived by him from
the firm with  astranger,  there  arises  a  sub-partnership  between  him  and  the  stranger.  Such
stranger  is  said  to  be  a  sub-partner,  although  he  is  in  no  way  a  partner  in  the  original 
firm, has  no rights  against  it,  nor he  is liable for its debts.

3) Write in detail on right of partners. (R1:457)

 Right to take part in business

Subject  to  any  contract  to  the  contrary,  every  partner  has  a  right  to  take  part  in
management  of  the  business.
 Right to be consulted 

Every partner has a right to be consulted and heard in all matters affecting the 
businss
of  the firm.  In  all  mattersof  importance  and  those  affecting  the  policy  and  nature  of  the
business  or  any  change  in  the  constitution  of  thefirm,  all  the  partners  must  agree,  mere
majority  will  not be sufficient.  But  in  ordinary  routine matters  the  majorityrule may apply.

 Right to access to books of accounts

  Every partner, active or dormant, has  a  right of free access to all  records,  books 

and accounts of the business and also to examine and copy them.

 Right to share the profit: Every partner is entitled to equal share in the profits

unless different proportions are stipulated. 
 Interest on capital
Apartner who has contributed more than his share of the capital for the purposes of
the business is entitled tointerest at a rate agreed upon and where no rate is agreed upo
n, at6 per cent per annum. But a partner is notentitled to any interest on the capital sub
scribed by him unless there is an agreement or a trade custom to thateffect exists.
 Right to indemnify
Subject to a contract to the contrary, a partner is entitled to be indemnified by the firm
for all acts done by him inthe course of the partnership business, for all payments mad
e byhim to  discharge the debts and liabilities of the firmand for expenses made by hi
m in an emergency.
 Right to us partnership property
every partner is  joint owner  of the partnership property and is  entitled to have the
property used exclusively  for the purposes  of the partnership.
 No new partner to be introduced
Every  partner  is  entitled  to  prevent  the  introduction  of  a  new  partner  into  the  firm
without his consent.
 Liability before joining
An incoming partner is not liable for any debts and obligations of the firm incurred
before he joined it, excepting by his  own consent.
 Right to retire
  Every partner has  a  right to retire from the firm.
 Right to carry competition business
Every outgoing partner has a right to carry on competing business, but without using
the  firm’s  name  and  withoutsoliciting  the  customers.  He  may,  however,  agree  not  t
o  do  so for a specified period and  within specified  local  limits.
  Right after retirement

Where  a  partner  dies  or  otherwise  ceases  to  be  a  partner  because  of  his  retirement,
expulsion, insolvency,insanity, and the other partners carry on the business with the propert
y
of the firm without any final settlement ofaccounts, the estate of the deceased partner, or the
partner  himself,  as  the  case  may  be,  is  entitled  to  share  in  theprofit  earned  with  the  aid  of
the assets of the outgoing partner, or interest at 6 per cent per annum, if so desired bythe lega
l representatives of  the  deceased partner, or by  the partner  himself.

4) Write in detail on duties of partners. (R1:460)

Duties of  Partners
The relation of partners is based on mutual confidence and the law required that a partner
must act towards the otherpartners with the utmost good faith. In particular, the Partnership
Act  provides for the following  duties:
1. Every partner must carry on the business of the firm to the greatest common advantage.
2. Every  partner must be just  and  faithful to the other partners.
3. A partner is bound to keep and render true, proper and correct account of the partners
hip. He must permitthe other partners to inspect such accounts and take copies of them. All 
money of the firm that may come  tohis hand must be handed  over  to  the firm.
4. Every partner is an agent of the other partners and as such is bound to communicate
full information relatingto the business of the firm to the other partners.
5.  Every  partner  is  bound  to  indemnify  the  firm  for  any  loss  caused  by  his  fraud  in
conduct of business. Also, if apartner commits a fraud on his co-partner, he must indemnify
him for any loss caused  to  him.
6. Every partner who  is guilty of wilful neglect in the conduct of the business and the
firm suffers  loss  inconsequence,  is  bound  to  make  compensation  to  the  firm  and  other
partners.
7. Subject to a contract to the contrary, every partner is bound to share losses equally with
the others.
8.  Every  partner  is  bound  to  attend  diligently  to  the  business  of  the  firm  and  in  the
absence of an agreement tothe contrary, he is not entitled for any remuneration; whether in
the form of salary, commission, or otherwise, onaccount of his own trouble in conducting th
e business  of the  firm.
9. In the absence of an agreement to the contrary, every partner is bound to hold and use
the partnership property for the firm.
10.
A partner cannot make private gain by reason of his membership with the firm. Thus,
where a partner inthe course of the business has received an information and uses it for his
personal gain as against theinterest of the firm, he must pay over any benefits he may have 
obtained by the use of this information. Hecannot bargain for a private gain from the customer
s of  the  firm.
11.  No partner can carry on any business which is likely to compete with the business
of the partnershipexcept with the consent of the other partners. If he does so, he shall ha
ve to account for the profits ofsuch business to the firm, and also to compensate the firm for
any loss sustained by his carrying on such competing business.
12. Every partner is bound to act within the scope of the actual authority conferred upo
n him. If he exceeds hisauthority, he shall have to compensate the other partners for any
ensuing loss, unless they ratify his act.
13. No partner can assign or transfer his partnership interest to any other person so as 
to
make him a partner in thebusiness. But a partner may assign his share in the profits and asset
s of the firm.
The assignee or transferee will have noright to ask for the accounts or to interfere
in the management of the business. He can  only  share the actual profits.On dissolution  he
can  ask  for  the share of  the assets  and also the accounts since the  date of dissolution.

5) Explain in detail on dissolution of firms. (R2:154)

Dissolution of a firm
Dissolution of a firm means the end of a firm by the break up of
the relation ofpartnership between all the partners but where the relation between only some
partner is broker it is calleddissolution of partnership. For example, where A, B and C were
partners in a firm and A died or retired orwas adjudged insolvent, the partnership firm woul
d
come to an end. But if the partners had agreed thatdeath, retirement or insolvency of a partne
r would  not  dissolve  the  firm,  then  on  the  happening  of  any of  these  contingencies  t
he “partnership”  would  certainly  come to  an  end,  but  the  firm  might continueunder the sa
me
name.  It  would be  a  “reconstituted  firm”;  for where A had gone out  of  the  firm  on accoun
t
of  any  reason;  the  relationship  between  A,  B  and  C is  broken  up  and  a  new  relationship
between B and Cis created. Therefore, “dissolution of partnership” involves a change in the
relation  of  the partners,  but  itdoes  not mean the end of  the partnership firm.A firm  may  be 
dissolved  on  any  of  the  following  grounds:

1. By Agreement: A firm may be dissolved with the consent of all the partners of the
firm, partnership iscreated  by contract.  It can be terminated by contract (S. 40).

2. By Notice: Where the partnership is at will, the firm may be dissolved by any partner
giving notice  inwriting  to  all  the  other  partners  of  his  intention  to  dissolve  the  firm.  The di
ssolution takes place from thedate mentioned in the notice, or, if no date is mentioned then
from  the  date of communication of the noticeto the other  partners (S. 43).

3. On  the happening  of  certain  contingencies: (S.42):  Subject  to  contract  between

the partners  tocontinue  the business in spite of the contingency, firm is dissolved

 if formed for a fixed  term, by the expiry of that  term;

 (b)    If formed to carry out one or more adventures or  undertaking, by the completi
on thereof;
 (c) by the death of  partner;  and
 (d)   By the insolvency of a partner.

4. Compulsory Dissolution: According to Section 41 the dissolution of a firm is automatic u
nder the following  circumstances:

(a)  If all the partners of a firm or if all the partners except one become insolvent, there
must necessarilybe  dissolution  of  the  firm.  When  a  partner  is  declared  insolvent,  then  he
ceases  to  be  a partner  from  thedate  of  such  declaration,  since,  there  must  be  at  least  two
partners in a firm, if all partners or all thepartners except one become insolvent then the fir
m is  dissolved.

(b) By business becoming illegal: A firm is  in  every case dissolved if the business of

the partnership isprohibited by law, i.e., the object for which the partnership was formed is
unlawful,  or  becomes  illegal  as  aresult  of  some  subsequent  events. This  is  by  operation  of
law. But if the  firm is carrying  on more than onebusiness, if one business  becomes illegal
the  firm  is  not dissolved.

5. Dissolution through the Court (S.44): At the suit of a partner, the Court may dissolve
a firm on anyone of  the following grounds:
  If a partner becomes of unsound mind. The suit for dissolution may be filed by the
next in kin  of the  insane partner or by  any  other partner.
 If  a  partner becomes  permanently incapable,  of performing his duties  as a partner,
e.g., he becomesblind, or  paralytic, etc., the suit  will be filed by a partner  other
than the  partner who has  become incapable.
 If a partner is guilty of misconduct which is likely to prejudice the business of the
firm, the court may dissolvethe firm at the instance of the other partners. The Court
will  order dissolution  if  the  act  complained  of  is  likely  toaffect  the  credit  and
customers of the partnership business. Gambling by the  partner, misapplication  of
clients’ money by  a solicitor are the examples  of misconduct.
 If  a  partner  wilfully  and  persistently  commits  breach  of  the  partnership  agreement
regardingmanagement,  and  the  other  partners  find  it  impossible  to  carry  on  the
partnership business, the Courtmay order dissolution of the firm at the instance of a
ny of  the  other  partners.  For  example,  constant refusal  to  perform  duties,  or co
ntinuous,  quarrels,  or  erroneous  accounts  by  a  partner  are  good grounds  for dis
solution.
 If a partner has transferred the whole of his interest in the firm to an outsider or has
allowed his interest to besold in execution of a decree, the other partners may sue
for  dissolution.
 If the business of the firm cannot be carried on except at a loss, the court may order 
dissolution.
 Where the court considers it just and equitable to dissolve the firm. It may do so at
the instance  ofany  partner.  Dissolution  has  been  granted  under  this  clause  in  the
following cases:  deadlock in  themanagement;  complete  destruction  of confidence bet
ween the partners that they are not even on speakingterms any more; the substance of 
the business gone,  etc.

6) Explain in detail on Reconstitution of Firms.

Reconstitution  of  the Firm

When there is a change in the relations of partners and the firm continues as a new firm,
then it is called dissolution ofthe partnership or reconstitution of the firm. Reconstitution of
the  firm  may take  place  in  various  ways,  namely;

(1) By  admission  of  a  partner,

(2) By retirement of a partner  
(3) By  expulsion of a partner,
(4) By  insolvency of a partner,
(5) By death  of a partner  and
(6) By transfer of a partner’s share.

1.   Admission  of a partner 

A new partner can be introduced in a firm with consent of all the existing partners
of  the firm.  This  is  because  therelations  of  partners  are  based  on  mutual  trust  and
confidence, as  such, only that  person  can be  admitted  as  a newpartner  who  enjoys  the
confidence of all the partners. A new partner can also be introduced in the firm if there
is acontract between the partners in this regard. 

2.   Retiring partner

The retirement of a partner from a firm takes place when he leaves the firm. When a partn
er retire or withdraws from the firm and the remaining partners continue with the
firm, reconstitution of  the firm takes  place. Apartner may retire from the firm 

 Where  all the  partners give their consent  to retirement.

 Where  it is a partnership  agreement that a partner might retire without seeking
the dissolution of  the  firm.
 Where partnership is at will, by giving notice to all other partners of his intention
to retire.

3.   Expulsion of a partner 

Ordinarily a partner cannot be expelled from the firm by any majority of the partners. But
the  authority  of  expulsioncan  be  given  to  the  majority  only  by  an  express  provision  in  the
partnership  agreement.  But  this  power  of  expulsioncan  be  exercised  if  three  conditions  are
satisfied.  These conditions  are:

 The right  of expulsion  should  be  given to the partners by an express contract,

 The power  of explusion  should be  exercised  by a majority of partners,
  The power should be exercised in good faith. The test of good faith is that, first, the
expulsion must be in theinterest of the firm, two, that the partner to be expelled is
served a notice  and  three, that he is given an apportunityto explain his position.

4. Insolvency  of a  Partner 

Where a partner in a firm is declared insolment, he remains no more a partner on the date
on which the order ofdeclaring him insolvent is made, whether the firm is thereby dissolved
or  not.  The other effects  resulting from  theinsolvency of a partner are:

 The  firm  is  dissolved  on  the  date  of  order  of  insolvency  but  the  partners  may
specifically provide that on  suchan event  the firm shall  not be dissolved.
 The estate  of the insolvent partner shall not be liable for the acts of the firm done
after the date ofthe order. A public notice of the order of adjudicating insolvent is
not  required.
 The firm  is  not  liable  for  the  acts of  the  insolvent  partner  after  the date  of order.

5.   Death of a partner 

A firm is dissolved, subject to contract between the partners, by the death of a partner.
However, when under a contractbetween the partners the firm is not dissolved, the estate
of the deceased partner is not liable for any act of the firmdone after his death. Further,
no  public notice  is  required  of  the  death  of a partner.

6.   Transfer of a partner’s Interest 

A  partner  may  transfer  his  interest  in  firm  by  sale,  mortgage  or  charge.  But  the
transfree is not entitled tointerfree in the conduct of the business of the firm, to require
accounts of the firm and to inspect the books of thefirm. When the partner transfers the
share, the  transferee only becomes entitled to receive the share of profit of thepartner
who has transfered his share. . 

Unit 3

1) What is a Company?(R2:204)
 A company is a legal entity formed by a group of individuals to engage in and operate
a business enterprise. A company may be organized in various ways for tax and financial
liability purposes depending on the corporate law of its jurisdiction

2) List out the Characteristics of a Company (R2:204)

 Separate legal existence

 Perpetual succession
 Limited liability
 Transferability of shares
 Common seal
 Separation of ownership and control
 Voluntary association

3) What are the documents required for registration? (R2:204)

 Memorandum of Association

 Articles of Association

4) What are the contents to be present in prospectus?(R2:216)

 The prospectus contains the main objectives of the company, the name and addresses
of the signatories of the memorandum of association and the number of shares held by
them.
 The name, addresses and occupation of directors and managing directors..
 The number, description and the document of shares or debentures which within the
two preceding years have been agreed to be issued other than cash.
 The name and addresses of the vendors of any property acquired by the company and
the amount paid or to be paid.

5) Who is a promoter?

A promoter is a person who undertakes to form a company with reference to a given

object and brings it into actual existence.

6) What is preliminary contract?

 Preliminary contract refers to those agreements or contracts entered into between
different parties on behalf and for the benefit of the company prior to its incorporation.

7) Write a note on Certificate of Commencement of Business.

A public company, having a share capital and issuing a prospectus inviting the public
to subscribe for shares, will have to file a few documents with the registrar who shall
scrutinize them and if satisfied will issue a certificate to commence business.

8) What do you mean by Memorandum of Association?(R2:213)

A Memorandum of Association is a legal document prepared in the formation and

registration process of a limited liability company to define its relationship with shareholders.
The MOA is accessible to the public and describes the company’s name, physical address of
registered office, names of shareholders and the distribution of shares.

9) Write a note on Prospectus.(R2:216)

A document inviting offers from the public for the subscription of shares in on
debentures of a company is known as a prospectus.

10) What do u mean by Minimum Subscription?

Minimum subscription is the amount which, in the opinion of the board of directors, must be
raised by the issue of share capital.

11) List out the rights of the members in the company.

 Statutory rights
 Documentary rights
 Legal rights

12) Who is a shareholder?

A shareholder is an individual or institution that legally owns one or

more shares of stock in a public or private corporation Shareholders may be referred to as
members of a corporation. Legally, a person is not a shareholder in a corporation until their
name and other details are entered in the corporation‘s register of shareholders or members

13) What are the two powers of the liquidator?

 Powers exercisable with the sanction of the Court

  Powers exercisable without the sanction of the Court.

14) Who is a liquidator?

A liquidator is a person who is appointed by the court to conduct the proceedings in

winding up the company and perform such duties in reference thereto as the court may
impose.

15) Write a note on voluntary winding up.

Winding up by the creditors or members without any intervention of the Court is

called 'voluntary winding up'. In voluntary winding up, the company and its creditors are left
free to settle their affairs without going to the Court, although they may apply to the Court for
directions or orders if and when necessary

16 mark

1) Write in detail on features of the Company.(R2:205)

Artificial legal person.

A company is an artificial person. Negatively speaking, it is not a natural person. It
exists in the eyes of the law and cannot act on its own. It has to act through a board of
directors elected by shareholders. It was rightly pointed out in Bates V Standard Land Co.
that: “The board of directors are the brains and the only brains of the company, which is the
body and the company can and does act only through them”. But for many purposes, a
company is a legal person like a natural person. It has the right to acquire and dispose of the
property, to enter into contract with third parties in its own name, and can sue and be sued in
its own name

Separate Legal Entity:

A company has a legal distinct entity and is independent of its members. The
creditors of the company can recover their money only from the company and the property of
the company. They cannot sue individual members. Similarly, the company is not in any way
liable for the individual debts of its members. The property of the company is to be used for
the benefit of the company and not the personal benefit of the shareholders. On the same
grounds, a member cannot claim any ownership rights in the assets of the company either
individually or jointly during the existence of the company or in its winding up.

Perpetual Existence.

A company is a stable form of business organization. Its life does not depend upon the
death, insolvency or retirement of any or all shareholder (s) or director (s). Law creates it and
law alone can dissolve it. Members may come and go but the company can go on for ever.
“During the war all the member of one private company, while in general meeting, were
killed by a bomb. But the company survived; not even a hydrogen bomb could have
destroyed i”. The company may be compared with a flowing river where the water keeps on
changing continuously, still the identity of the river remains the same. Thus, a company has a
perpetual existence, irrespective of changes in its membership.

Common Seal.

As was pointed out earlier, a company being an artificial person has no body similar
to natural person and as such it cannot sign documents for itself. It acts through natural
person who are called its directors. But having a legal personality, it can be bound by only
those documents which bear its signature. Therefore, the law has provided for the use of
common seal, with the name of the company engraved on it, as a substitute for its signature.
Any document bearing the common seal of the company will be legally binding on the
company. A company may have its own regulations in its Articles of Association for the
manner of affixing the common seal to a document.

Limited Liability

A company may be company limited by shares or a company limited by guarantee. In

company limited by shares, the liability of members is limited to the unpaid value of the
shares. For example, if the face value of a share in a company is Rs. 10 and a member has
already paid Rs. 7 per share, he can be called upon to pay not more than Rs. 3 per share
during the lifetime of the company. In a company limited by guarantee the liability of
members is limited to such amount as the member may undertake to contribute to the assets
of the company in the event of its being wound up.

Transferable Shares.

In a public company, the shares are freely transferable. The right to transfer shares is
a statutory right and it cannot be taken away by a provision in the articles. However, the
articles shall prescribe the manner in which such transfer of shares will be made and it may
also contain bona fide and reasonable restrictions on the right of members to transfer their
shares. But absolute restrictions on the rights of members to transfer their shares shall be ultra
vires. However, in the case of a private company, the articles shall restrict the right of
member to transfer their shares in companies with its statutory definition. In order to make
the right to transfer shares more effective, the shareholder can apply to the Central
Government in case of refusal by the company to register a transfer of shares.

Separate Property:

As a company is a legal person distinct from its members, it is capable of owning,

enjoying and disposing of property in its own name. Although its capital and assets are
contributed by its shareholders, they are not the private and joint owners of its property. The
company is the real person in which all its property is vested and by which it is controlled,
managed and disposed of.

2) Write in detail on types of the company.(R2:206)

TYPES OF COMPANY

Joint Stock Company can be of various types. The following are the important types of
company:

Classification of Companies by Mode of Incorporation Depending on the mode of

incorporation, there are three classes of joint stock Companies.

 Chartered companies.

These are incorporated under a special charter by a monarch. The East India
Company and The Bank of England are examples of chartered incorporated in England. The
powers and nature of business of a chartered company are defined by the charter which
incorporates it. A chartered company has wide powers. It can deal with its property and bind
itself to any contracts that any ordinary person can.

 Statutory Companies.

These companies are incorporated by a Special Act passed by the Central or State
legislature. Reserve Bank of India, State Bank of India, Industrial Finance Corporation, Unit
Trust of India, State Trading Corporation and Life Insurance Corporation are some of the
examples of statutory companies. Such companies do not have any memorandum or articles
of association. They derive their powers from the Acts constituting them and enjoy certain
powers that companies incorporated under the Companies Act have..

 Registered or incorporated companies.

These are formed under the Companies Act, 1956 or under the Companies Act passed
earlier to this. Such companies come into existence only when they are registered under the
Act and a certificate of incorporation has been issued by the Registrar of Companies. This is
the most popular mode of incorporating a company. Registered companies may further be
divided into three categories of the following.

On the basis of liability

(i) Companies limited by Shares:

These types of companies have a share capital and the liability of each member or the
company is limited by the Memorandum to the extent of face value of share subscribed by
him. In other words, during the existence of the company or in the event of winding up, a
member can be called upon to pay the amount remaining unpaid on the shares subscribed by
him. Such a company is called company limited by shares. A company limited by shares may
be a public company or a private company. These are the most popular types of companies.

(ii) Companies Limited by Guarantee:

These types of companies may or may not have a share capital. Each member
promises to pay a fixed sum of money specified in the Memorandum in the event of
liquidation of the company for payment of the debts and liabilities of the company This
amount promised by him is called ‘Guarantee’. The Articles of Association of the company
state the number of member with which the company is to be registered. Such a company is
called a company limited by guarantee. Such companies depend for their existence on
entrance and subscription fees. They may or may not have a share capital. The liability of the
member is limited to the extent of the guarantee and the face value of the shares subscribed
by them, if the company has a share capital. If it has a share capital, it may be a public
company or a private company.

The amount of guarantee of each member is in the nature of reserve capital. This amount
cannot be called upon except in the event of winding up of a company. Non trading or non-
profit companies formed to promote culture, art, science, religion, commerce, charity, sports
etc. are generally formed as companies limited by guarantee.

(iii) Unlimited Companies

Section 12 gives choice to the promoters to form a company with or without limited liability.
A company not having any limit on the liability of its members is called an ‘unlimited
company’ [Sec 12(c)]. An unlimited company may or may not have a share capital. If it has a
share capital it may be a public company or a private company. If the company has a share
capital, the article shall state the amount of share capital with which the company is to be
registered.

The articles of an unlimited company shall state the number of member with which the
company is to be registered.

II. On the Basis of interest of public

On the basis of number of members, a company may be:

(1) Private Company, and

(2) Public Company.

A. Private Company

According to the Indian Companies Act, 1956, a private company is that company which by
its articles of association: limits the number of its members to fifty, excluding employees who
are members or ex-employees who were and continue to be members; restricts the right of
transfer of shares, if any; Prohibits any invitation to the public to subscribe for any shares or
debentures of the company. Where two or more persons hold share jointly, they are treated as
a single member .According to the Companies Act, the minimum number of members to
form a private company is two. A private company must use the word “Pvt” after its name.
B. Public company

 The articles do not restrict the transfer of shares of the company It imposes no
restriction no restriction on the maximum number of the members on the company. It
invites the general public to purchase the shares and debentures of the companies
Number of directors.
 A public company must have at least 3 directors whereas a private company must
have at least 2 directors Restriction on invitation to subscribe for shares. A public
company invites the general public to subscribe for shares. A public company invites
the general public to subscribe for the shares or the debentures of the company. A
private company by its Articles prohibits invitation to public to subscribe for its
shares
 .Name of the Company: In a private company, the words “Private Limited” shall be
added at the end of its name.

III. On the basis of Control

On the basis of control, a company may be classified into:

1. Holding companies, and

2. Subsidiary Company

1. Holding Company

A company is known as the holding company of another company if it has control

over the other company. According to Sec 4(4) a company is deemed to be the holding
company of another if, but only if that other is its subsidiary. A company may become a
holding company of another company in either of the following three ways:a) by holding
more than fifty per cent of the normal value of issued equity capital of the company; or b) By
holding more than fifty per cent of its voting rights; or c) by securing to itself the right to
appoint, the majority of the directors of the other company , directly or indirectly. The other
company in such a case is known as a “Subsidiary company”. Though the two companies
remain separate legal entities, yet the affairs of both the companies are managed and
controlled by the holding company.

2. Subsidiary Company.
 A company is known as a subsidiary of another company when its control is exercised
by the latter (called holding company) over the former called a subsidiary company. Where a
company (company S) is subsidiary of another company (say Company H), the former
(Company S) becomes the subsidiary of the controlling company (company H).

On the basis of Ownership of companies

Government Companies.

A Company of which not less than 51% of the paid up capital is held by the Central
Government of by State Government or Government singly or jointly is known as a
Government Company. It includes a company subsidiary to a government company. The
share capital of a government company may be wholly or partly owned by the government,
but it would not make it the agent of the government.

3) Write in detail on memorandum of association.(R2:213)

MEMORANDUM OF ASSOCIATION

The formation of a public company involves preparation and filing of several essential
documents. Two of basic documents are:

 Memorandum of Association
 Articles of Association

The preparation of Memorandum of Association is the first step in the formation of a

company. It is the main document of the company which defines its objects and lays down
the fundamental conditions upon which alone the company is allowed to be formed. It is the
charter of the company. It governs the relationship of the company with the outside world and
defines the scope of its activities. Its purpose is to enable shareholders, creditors and those
who deal with the company to know what exactly its permitted range of activities is.

Name clause

Promoters of the company have to make an application to the registrar of Companies

for the availability of name. The company can adopt any name if: There is no other company
registered under the same or under an identical name; The name should not be considered
undesirable and prohibited by the Central Government A name which misrepresents the
public is prohibited by the Government under the Emblems & Names (Prevention of
Improper use) Act, 1950 Once the name has been approved and the company has been
registered, then the name of the company with registered office shall be affixed on outside of
the business premises; if the liability of the members is limited the words “Limited” or
“Private Limited” as the case may be, shall be added to the name

 Registered Office Clause

Memorandum of Association must state the name of the State in which the
registered office of the company is to be situated. It will fix up the domicile of the company.
Further, every company must have a registered office either from the day it begins to carry on
business or within 30 days of its incorporation, whichever is earlier, to which all
communications and notices may be addressed. Registered Office of a company is the place
of its residence for the purpose of delivering or addressing any communication, service of
any notice or process of court of law and for determining question of jurisdiction of courts in
any action against the company.

Object Clause

This is the most important clause in the memorandum because it not only
shows the object or objects for which the company is formed but also determines the extent
of the powers which the company can exercise in order to achieve the object or objects.
Stating the objects of the company in the Memorandum of Association is not a mere legal
technicality but it is a necessity of great practical importance. It is essential that the public
who purchase its shares should know clearly what the objects for which they are paying are.
In the case of companies which were in existence immediately before the commencement of
the Companies (Amendment) Act. 1965, the object clause has simply to state the objects of
the company. But in the case of a company to be registered after be amendment, the objects
clause must state separately.

i) Main Objects: This sub-clause has to state the main objects to be pursued by the
company on its incorporation and objects incidental or ancillary to the attainment of
main objects.
ii) Other objects: This sub-clause shall state other objects which are not included in the
above clause. Further, in case of a non-trading company, whose objects are not
 confined to one state, the objects clause must mention specifically the States to whose
territories the objects extend
 Capital Clause

In case of a company having a share capital unless the company is an

unlimited company, Memorandum shall also state the amount of share capital with which the
company is to be registered and division thereof into shares of a fixed amount [Sec. 13 The
capital with which the company is registered is called the authorized or nominal share capital.
The nominal capital is divided into classes of shares and their values are mentioned in the
clause. The amount of nominal or authorized capital of the company would be normally, that
which shall be required for the attainment of the main objects of the company against his
name the number of shares he takes.

 Liability Clause

In the case of company limited by shares or by guarantee, Memorandum of

Association must have a clause to the effect that the liability of the members is limited. It
implies that a shareholder cannot be called upon to pay any time amount more than the
unpaid portion on the shares held by him. Association or Subscription Clause

In this clause, the subscribers declare that they desire to be formed into a company
and agree to take shares stated against their names. No subscriber will take less than one
share. The memorandum has to be subscribed to by at least seven persons in the case of a
public company and by at least two persons in the case of a private company. The signature
of each subscriber must be attested by at least one witness who cannot be any of the
subscribers.

4) Write in detail on requirements regarding issue of prospects.

A prospectus may be defined as an invitation to the public to subscribe to a
company’s shares or debentures. By virtue of the Amendment Act of 1974, any
document inviting deposits from the public shall also come within the definition of
prospectus. The word “Prospectus” means a document which invites deposits from the
public or invites offers from the public to buy shares or debentures of the company

The relevant requirements regarding issue of prospectus are given below.

1. Issue after Incorporation

Section 55 of the Act permits the issue of prospectus in relation to an intended

company. A prospectus may be issued by or on behalf of the company. by a person interested
or engaged in the formation company or Through an offer for sale by a person to whom the
company has allotted shares.

2. Dating of Prospectus

A prospectus issued by a company shall be dated and that date shall be taken as the
date of publication of the prospectus (Section 55). Date of issue of the prospectus may be
different from the date of publication.

3. Registration of Prospectus

A copy of every prospectus must be delivered to the Registrar for registration before it
is issued to the public. Registration must be made on or before the date of its publication. The
copy sent for registration must be signed by every person who is named in the prospectus as a
director or proposed director of the company or by his agent authorized in writing. Where the
prospectus is issued in more than one language, a copy of it’s as issued in each language
should be delivered to the registrar. This copy must be accompanied with the following
documents: If the report of an expert is to be published, his written consent to such
publication; a copy of every contract relating to the appointment and remuneration of
managerial personnel; a copy of every material contract unless it is entered in the ordinary
course of business or two years before the date of the issue of prospectus;a written statement
relating to adjustments; if any, made by the auditors or accountants in their reports relating to
profits and losses, assets and liabilities or the rates of dividends, etc.; and

4. Expert to be unconnected with the Formation of the Company

A prospectus must not include a statement purporting to be made by an expert such as

an engineer, value, accountant etc. unless the expert is a person who has never been engaged
or interested in the formation or promotion as in the management of the company (Section
57). A statement of an expert cannot be include in the prospectus without his written consent
and this fact should be mentioned in the prospectus. Further, this consent should not be
withdrawn before delivery of the prospectus for registration Section (58).

5. Terms of the contract not to be varied

The terms of any contract stated in the prospectus or statement in lieu of prospectus cannot be
varied after registration of the prospectus except with the approval of the members in the
general meeting (Section 61).

6. Application Forms to be accompanied with the Copy of Prospectus

Every form of application for subscribing the shares or debentures of a company shall
not be issued unless it is accompanied by a copy of prospectus except when it is issued in
connection with a bona fide invitation to a person to enter into an underwriting agreement
with respect to shares or debentures or in relation to shares or debentures which were not
offered to the public provides that the prospectus need not contain all the details required by
the Act where the offer is made to exiting members or debenture holders of the company or if
such shares or debentures are in all respect uniform with shares or debentures already issued
and quoted on a recognize stock exchange.

7. Personation for Acquisition etc. of Shares

The provision, consequences of applying for shares in fictitious names to be

prominently displayed must be reproduced in every prospectus and every application form
issued by the company to any person. A person who makes in a fictitious name to a company
for acquiring shares or subscribing any shares or subscribing any shares shall be liable to
imprisonment which may extend to five years similarly, a person who induces a company to
allot any shares or to register any transfer of shares in a fictitious name is also liable to the
same punishment. [Section 68(a)].

8. Contents as per Schedule II

Every prospectus must disclose the matters as required in Schedule II of the Act. It is
to be noted that if any condition binding on the applicant for shares or debentures in a
company to waive compliance with any requirements of the Act as to disclosure in the
prospectus or purporting to affect him with notice of any contract, document or matter not
specifically referred to in the prospectus shall be void

5) Write in detail on winding up of a company.

MODES OF WINDING UP

A company can be wound up in three ways:

 Compulsory winding up by the Court

  Voluntary winding up
 Voluntary winding up subject to the supervision of the Court
1. WINDING UP BY THE COURT

A company may be wound up by an order of the Court. This is called compulsory

winding up or winding up by the Court. Section 433 lays down the following grounds where
a company may be wound up by the Court.

A petition for winding up may be presented to the Court on any of the grounds stated below:

1. Special resolution

A company may be wound up by the Court if it has, by a special resolution, resolved

that it be wound up by the Court. But it is to be noted that the Court is not bound to order for
winding up merely because the company by a special resolution has so resolved. Even in such
a case it is the discretion of the Court to order for winding up or not.

2. Default in filing statutory report or holding statutory meeting

If a company has made a default in delivering the statutory report to the Registrar or
in holding the statutory meeting, a petition for winding up of the company may be presented
to the Court. A petition on this ground may be presented to the Court by a member or
Registrar (with the previous sanction of the Central Government) or a creditor. The power of
the Court is discretionary and generally it does not order for winding up in first instance.

3. Failure to commence business within one year or suspension of business for a whole
year

Where a company does not commence its business within one year from its
incorporation or suspends its business for a whole year, a winding up petition may be
presented to the Court. Even if the business is suspended for a whole year, this by itself does
not entitle the petitioner to get the company wound up as a matter of right but the question
whether the company should be wound up or not in such a circumstances entirely in the
discretion of the Court depending upon the facts and circumstances of each case..

4. Reduction of membership below the minimum

When the number of members is reduced, in the case of a public company, below 7
and in the case of a private company, below 2, a petition for winding up of the company may
be presented to the Court.
5. Company's inability to pay its debts

A winding up petition may be presented if the company is unable to pay its debt.
'Debt' means definite sum of money payable immediately or at future date. A company will
be deemed to be unable to pay its loan.

 It is proved to the satisfaction of the Court that the company is unable to pay its debts,
taking into account its contingent and prospective liabilities, i.e. whether its assets are
sufficient to meet its liabilities.

6. Just and Equitable

The Court may also order to wind up of a company if it is of opinion that it has just
and equitable that the company should be wound up. What is 'just and equitable' depends on
the facts of each case. The words 'just and equitable' are of wide connotation and it is entirely
discretionary on the part of the Court to order winding up or not on this ground

2. VOLUNTARY WINDING UP

Winding up by the creditors or members without any intervention of the Court is called
'voluntary winding up'. In voluntary winding up, the company and its creditors are left free to
settle their affairs without going to the Court, although they may apply to the Court for
directions or orders if and when necessary.

A company may be wound up voluntarily under the circumstances:

when the period fixed for the duration of the company by the articles has expired or the
event has occurred on the occurrence of which the articles provide that the company is to
be dissolved and the company in a general meeting has passed a special resolution to
wind up voluntarily; or

 The company has passed a special resolution to wind up voluntarily. Thus a company
may be wound up voluntarily at any time and for any reason if a special resolution to
this effect is passed in its general meeting.
 When a company has passed a resolution for voluntary winding up, it must within 14
days of the passing of the resolution gives notice of the resolution by advertisement in
the official Gazette and also in some newspaper circulating in the district where the
registered office of the company is situated.

Commencement of Voluntary Winding up

 A voluntary winding up is deemed to commence at the time when the resolution for
winding up is passed The date of the commencement of the winding up is important for
several matters such as liability of past members and fraudulent preferences, etc..

Consequences of Voluntary Winding up

The consequences of voluntary winding up are:

 From the commencement of voluntary winding up, the company ceases to

carry on its business, except so far as may be required for the beneficial
winding up.
 The possession of the assets of the company vests in the liquidator for
realisation and distribution among the creditors.
 On the appointment of a liquidator, all the powers of the board of directors
cease and the liquidator
3. WINDING UP SUBJECT TO SUPERVISION OF THE COURT

Voluntary winding up may be under the supervision of the Court. At any time
after a company has passed a resolution for voluntary winding up, the Court may make an
order that the voluntary winding up shall continue, but subject to such supervision of the
Court. If a company is being wound up voluntarily or subject to supervision of the Court, a
petition for its winding up by the Court may be presented by:

 any person authorised to do so which deals with provisions as to applications for

winding up or
 the official liquidator

Where a supervision is made the Court may appoint an additional liquidator or liquidators, or
remove any liquidator at any time and fill any vacancy. The Court may also appoint the
official liquidator as an additional liquidator or to fill any vacancy.

Consequences of Winding up

The consequences of winding up may be discussed under the following heads

1. Consequences as to Shareholders
 A shareholder is liable to pay the full amount upto the face value of the shares held by
him. Not only the present, but also the past members are liable on the winding up of the
company. The liability of a present member is the amount remaining unpaid on the shares
held by him, while a past member can be called upon to pay if the present contributory is
unable to pay.

2. Consequences as to Creditors

A company, whether solvent or insolvent, can be wound up under the Act. In case of a
solvent company, all claims of its creditors when proved are fully met. But in case of an
insolvent company, the rules under the law of insolvency apply. A secured creditor need not
prove his claim against the company.

3. Consequences as to servants and officers

A winding up order by a Court operates as a notice of discharge to the employees and

officers of the company except when the business of the company is continued. The same
principle will apply as regards discharge of employees in a voluntary winding up. Where
there is a contract of service for a particular period, an order for winding up will amount to
wrongful discharge and damages will be allowed as for breach of contract of service.

4. Consequences of proceedings against the company

When a winding up order is made, or an official liquidator has been appointed as

provisional liquidator no suit or legal proceedings can be commenced and no pending suit or
legal proceeding continued against the company except with the leave of the Court and on
such terms as it may impose.

5. Consequences as to costs

Where the assets of the company are insufficient to satisfy the liabilities, the Court
may make an order for payment out of the assets of the costs, charges and expenses incurred
in the winding up. The Court may determine the order of priority in which such payments are
to be made.

6. Consequences as to documents

When a company is being wound up whether by or under the supervision of the Court
or voluntarily, the fact must be made known to all those having any dealing with the
company; every document in the nature of an invoice, order for goods or business letter
issued in the name of the company, after the commencement of winding up must contain a
statement that the company is being wound up

6) Write in detail on corporate governance

Corporate Governance

The conduct of business in accordance with shareholders’ desires, which generally is

to make as much money as possible, while conforming to the basic rules of the society
embodied in law and local customs

 Corporate Governance is concerned with holding the balance between economic and
social goals and between individual and communal goals.
 The corporate governance framework is there to encourage the efficient use of
resources and equally to require accountability for the stewardship of those resources.
 The concept of governance has been known in both political and academic circles for
a long time, referring generally to the task of running a government, or any other
appropriate entity for that matter.
 Corporate governance is therefore the process whereby people in power direct,
monitor and lead corporations, and thereby either create, modify or destroy the
structures and systems under which they operate.
 The primary purpose of corporate leadership is to create wealth legally and ethically.
 This translates to bringing a high level of satisfaction to five constituencies --
customers, employees, investors, vendors and the society-at-large..”

The pillars of this Code of Best Practice of Corporate Governance are

(a) Transparency

The Code requires that the CEO and management meet different information and
transparency needs of the owners, the board of directors, the independent auditors, the
supervisory board, the stakeholders, and the public at large.

(b) Accountability

The following agents of corporate governance

  Board of directors,
 CEO and management,
 Independent auditors
 Fiscal council should account for their results and activities to those bodies that
elected them.
(c) Fairness

Relations between all agents of corporate governance and the different types of
owners must be based on fair treatment of all the parties involved.

(d) Ethics

Good corporate governance is to comply with the law. In addition every company
should have a statement of values and a code of ethics. The key issue of ethics is the
avoidance of conflict of interests.

Unit 4

1) What is negotiable instrument?(R1 469)

A negotiable instrument is actually a written document. This document specifies

payment to a specific person or the bearer of the instrument at a specific date. So we can
define a bill of exchange as “a document signifying an unconditional promise signed by the
person giving promise, requiring the person to whom it is addressed to pay on demand, or at a
fixed date or time, a certain sum to or to the order of a specified person, or to bearer.”

2) Define promissory note.(R2:185)

Promissory note is an instrument in writing containing an unconditional undertaking

signed by the maker to pay a certain sum of money to or to the order of a certain person or to
the bearer of the instrument

3) What is bill of exchange?(R2:184)

 A written, unconditional order by one party (the drawer) to another (the drawee) to
pay a certain sum, either immediately (a sight bill) or on a fixed date (a term bill), for
payment of goods and/or services received. The drawee accepts the bill by signing it, thus
converting it into a post-dated check and a binding contract

4) List out the characteristic features of bill of exchange.(R2:187)

 It must be in writing
 It must contain order to pay
 The parties must be certain
 It must be signed by drawer
 The sum payable must be certain
5) Write a note on cheque.(R2:189)

Cheque is defined as a bill of exchange drawn on a specified banker and not

expressed to be payable otherwise than on demand. Thus cheque is a bill of exchange with
two added features

 Its is always drawn on specified banker

 It is always payable on demand
6) Write a note on paying banker.

The paying banker is a term used to denote the position and duties of the drawee
banks in paying the cheques of their customers. Thus paying banker is banker upon whom a
cheque is drawn

7) What is endorsement?(R2:193)

An endorsement is the mode of negotiating a negotiable instrument. A negotiable instrument

payable otherwise than to bearer can be negotiated only by endorsement and delivery

8) List out the different kinds of endorsement.

 Conditional endorsement
 Endorsement in blank
 Endorsement in full
 Restrictive endorsement
 Partial endorsement
9) What are the different kinds of bill?(R1:515)
  Inland bill
 Foreign bill
 Trade and accommodation bill
 Time bill
 Demand bill
 Clean and documentary
10) What is inland bill? (R1:515)

An inland bill or instrument is defined as promissory note bill of exchange or cheque

drawn or made in India and payable in or drawn upon any person resident in India

11) What is foreign bills? (R1:515)

According to section 12,a foreign bill is negotiable instrument which is not an inland
instrument ,as defined above thus a foreign bill of exchange is

 Drawn in india upon a person resident outside india and mad payable outside india
 Drawn outside and payable in india
12) What is Trade and accommodation bills? (R1:515)

A trade bill is the bill of exchange issued in respect of genuine trade transaction .such
bills are drawn by seller on buyer in respect of payment of price of goods sold and purchased.

13) What is Time bills? (R1:515)

Time bills are also called as usance bills are bills payable at a fixed period after date
or sight of the bills. Thus a bill of exchange drawn payable at 3 months after the date it is
drawn is a time or usance bill. A time bill also be made payable at fixed period after the event
which is certain to happen

16 marks

1) Write in detail on hundis and its classification. (R1:551)

An age-old tradition of business transactions, peculiar to India, Hundis are
negotiable instruments written in various vernacular local languages in the country.
The term is derived from the Sanskrit word hundi which means ‘to collect’. These are
 generally in the form of bills of exchange but may sometimes look like promissory
notes in shape and contents.

Types of Hundis

The following are some of the popular forms of hundis.

1. Darshani hundi
2. Shahjog hundi
3. Dhanijog hundi
4. Jawabee hundi
5. Firmanjog hundi
6. Miadi hundi
7. Namjog hundi
8. Jokhmi hundi
9. Zikri hundi

 Darshani hundi
A hundi payable at sight is called darshani hundi. It is negotiable and is like a
demand bill. It may be sold at par or at premium or at discount. A darshani hundi should
be presented for payment within a reasonable time of its receipt by the holder. If the
drawer suffers a loss due to delay in presentment, holder shall be responsible for it.

 Miadi hundi
Also known as muddati hundi, miadi hundi is one which is payable after a specified
period of time like a ‘time bill’. Banks usually provide loans against the security of such
hundis.

 Shahjog hundi
This is a hundi made payable only to a Shah (a respectable person of financial worth
and substance in the market). It may be miadi or darshani and can be transferred freely
from one person to another by mere delivery but it is not payable to bearer. In some
respects it is similar to a crossed cheque.
 Namjog hundi
 It is a hundi payable to the party named in the hundi or his order. Such a hundi is
similar to a bill of exchange payable to order.

 Dhanijog hundi:
‘Dhani’ in vernacular language means owner. Thus, a dhanijog hundi is one which is
made payable to the owner, or a holder or bearer-owner. It is just like a bearer cheque and
the holder of it becomes holder in due course if he takes it bona fide and for value.
 Jokhmi hundi
The term ‘Jokhmi’ has been derived from the Hindi word ‘jokhim’ meaning ‘risk’.
Such a hundi is usually drawn against goods shipped on a vessel and implies a certain risk
involved in the shipment of goods. Jokhmi hundi, in fact, is a combination of bill of
exchange and insurance policy and payable only when the goods arrive in safe and sound
condition. If the goods are lost in transit, the consignor cannot claim payment of the hundi
from the consignee, i.e., the drape.
 Jawabee hundi
A hundi, which is in the form of letter or recommendation to a banker for payment of
a certain sum of money to a specified person, is termed as jawabee hundi.
 Zikri hundi
This is a hundi accepted for honour in writing on a Zikri chit (letter of protection)
without being protested. It is drawn in the name of a specified person residing in the town
or city where the hundi is payable. In case, acceptance is refused by the drawee or when a
refusal is likely to occur, the hundi is furnished to the holder by some prior party to it.
 Firmanjog hundi
The term Firman refers to order in vernacular language and therefore, a firmanjog
hundi is made payable to the order of payee. It is just opposite of dhanijog hundi which is
payable to the bearer only.

2) Write in detail on discharge of negotiable instrument(R1:545)

Discharge of a Negotiable Instruments

When the liability of the party, primarily and ultimately liable on the instrument,
comes to an end, the instrument is said to be discharged. The discharge of the instrument
results in extinguishment of all rights of action under it and the instrument ceases to be
negotiable. After discharge of a negotiable instrument, even a holder-in-due-course acquires
no right under it and he cannot bring a suit on the face of it.

A negotiable instrument may be discharged in any one of the following ways.

 By payment in due course

 By the principal debtor becoming the holder
 By renunciation of the rights by the holder
 By cancellation of the instrument
 By an act that would discharge an ordinary contract

1. By payment in due course

Payment-in-due-course, is the payment made in good faith and in accordance with the
apparent tenor of the instrument to the rightful holder thereof. Accordingly, it is the payment
made in money only on maturity of the instrument and of the entire amount due on it and the
person to whom it is made should be in possession of the instrument. It may be noted that a
payment of a post-dated cheque before maturity is not according to the apparent tenor of the
instrument and hence, does not discharge the instrument unless the instrument is cancelled or
the fact of payment is duly recorded on the instrument to prevent its further negotiation..

2. By the principal debtor becoming the holder

When the acceptor of a bill of exchange becomes its holder on or after maturity
thereof, all rights of actions thereon are extinguished. As a result, the instrument is
discharged. An acceptor may become the holder of a bill by the process of negotiation back.
But in order to discharge the bill it is essential that this happens after maturity because if he
becomes holder of the bill before maturity, he may again endorse the same.

3. By renunciation of the rights by the holder

If the holder of a negotiable instrument expressly gives up or renounces his rights
against all the parties, the instrument is discharged. The renunciation can be made by
surrendering or delivering the instrument to the party who is primarily liable thereon or
declaring in writing the fact of renunciation. Such renunciation discharges the instrument as
well as all the parties thereto.
4. By cancellation of the instrument
If the holder intentionally cancels the name of the drawer or acceptor of a promissory
note or bill of exchange, the instrument is automatically discharged. It is important to note
that the cancellation should be made with an intention to release the party primarily liable on
it, which in turn would discharge the other parties thereto. Cancellation of the instrument can
be executed either by physical destruction or by crossing out signatures of drawer, acceptor,
etc., on the instrument.

5. By an act that would discharge an ordinary contract

A negotiable instrument may also be discharged by an act that would discharge a
simple contract for payment of money. This is technically called discharge of negotiable
instrument by operation of law. Such a discharge may occur due to expiry of period
prescribed for recovery of sum of money due on the instrument, or by substitution of another
negotiable instrument for the original instrument or by an agreement between the parties in
the form of novation. It may also take place by way of merger of one or more debt into
another or by the debtor being adjudicated insolvent.

3) Write in detail on dishonour of negotiable instrument(R1:539)

Dishonour of negotiable instrument means loss of honour or respect for the

instrument in question on the part of the maker, drawee, or acceptor, as the case may be,
which eventually results in non-realization of payment due on the instrument. Thus the
negotiable instrument may be dishonoured in either of following two ways
 Due to non-acceptance
 Due to non-payment
Dishonour by non-acceptance:
Any type of negotiable instruments i.e., bill of exchange, promissory note, or cheque
may be dishonoured by non-payment by the drawee/acceptor thereof. But a bill may also be
dishonoured by non-acceptance because bill of exchange is the only negotiable instrument
which requires its presentment for acceptance and non-acceptance thereof, can amount to
dishonour.
A bill is said to be dishonoured by non-acceptance in the following circumstances.
  When the drawee or one of the several drawees, not being partners, commit default in
acceptance upon being duly required to accept the bill. In this expressly provides that
the holder must, if so required by the drawee of a bill of exchange presented to for
acceptance, allow the drawee forty-eight hours (exclusive of public holidays) to
consider whether he will accept it.
 Where presentment is required and the bill remains unrepresented.
 Where the drawee is incompetent to enter into a valid contract.
 Where the bill is given a qualified acceptance.
 If the drawee is a fictitious person.
 If the drawee cannot be found even after reasonable search.
Dishonour of negotiable instrument by Non-payment
A promissory note, bill of exchange, or cheque is said to be dishonoured by non-
payment when the maker of the note, acceptor of the bill, or drawee of the cheque commit
default in payment upon being duly required to pay the same. Also the holder of a bill or pro-
note may treat it as dishonoured, without placing for payment when presentment for payment
is excused expressly by the maker of the pro-note, or acceptor of the bill and the note or bill
when overdue remains unpaid

4) Write in detail on different kinds of bill(R1:515)

Bills are of different kinds some are given below

 Inland bills
 Foreign bills
 Trade and accommodation bills
 Time bills
 Demand bills
 Clean bills
 Documentary bills
1. Inland bills

An inland bill or instrument is defined as a promissory note bill of exchange or

cheque drawn or made in India and payable in or drawn upon any person resident in India .on
analysis of the above definition follows are inland bills
  Must be drawn and made payable in india
 Must be drawn in india upon a person resident in india although it may be payable
outside india
2. Foreign bills

According to section 12,a foreign bill is negotiable instrument which is not an inland
instrument ,as defined above thus a foreign bill of exchange is

 Drawn in india upon a person resident outside india and mad payable outside india
 Drawn outside and payable in india
3. Trade and accommodation bills

A trade bill is the bill of exchange issued in respect of genuine trade transaction .such
bills are drawn by seller on buyer in respect of payment of price of goods sold and purchased.

4. Time bills

Time bills are also called as usance bills are bills payable at a fixed period after date
or sight of the bills. Thus a bill of exchange drawn payable at 3 months after the date it is
drawn is a time or usance bill. A time bill also be made payable at fixed period after the event
which is certain to happen

5. Demand bills

A bill of exchange or a promissory note is payable on demand when

 It is made payable on demand or at sight or on presentation

 No time for payment is mentioned
6. Clean and documentary bill

It is a common practice at home and foreign trade to deliver to the banker along with
the bills of exchange the documents of title to the goods

5) Explain in detail on types of negotiable instrument (R1:471)

Most Common types of negotiable instruments are;

 Promissory notes.
 Bill of exchange.
 Check.
 Government promissory notes.
 Delivery orders.
 Customs Receipts.

1) Promissory notes
 The promissory note is a signed document of written promise to pay a stated sum to a
specified person or the bearer at a specified date or on demand.
 The promissory note is an instrument in writing containing an unconditional rule
signed by one party to pay a certain sum of money only to, or to the order of a certain
person or to the bearer of the instrument.
 Thus a promissory note contains a promise by the debtor to the creditor to pay a
certain sum of money after a certain date. The debtor is the maker of the instrument

2) Bill of exchange
 The bill of exchange contains an order from the creditor to the debtor to pay a certain
person after a certain period.
 The person who draws it is called drawer (creditor) and the person on whom it is
drawn is called drawee (debtor) or acceptor.
 The person to whom the amount is payable is called payee

3) Cheque
 A Cheque is a bill of exchange drawer a specified banker not expressed to be payable
otherwise than on demand.
 It is an instrument in writing, containing unconditional order, signed by the maker
(depositor), directing a certain banker to pay a certain sum of money to the bearer of
that instrument.
 Some other instruments have acquired the character of negotiability by customs or
usage of trade.
Negotiable instruments by custom or usages are mainly, the government promissory notes,
delivery orders, and railway receipts have been held to be negotiable by usage or custom of
the trade.
6) What is negotiable instrument and list out its features?(R1:471)

Negotiable Instruments

A negotiable instrument is actually a written document. This document specifies

payment to a specific person or the bearer of the instrument at a specific date. So we can define a
bill of exchange as “a document signifying an unconditional promise signed by the person
giving promise, requiring the person to whom it is addressed to pay on demand, or at a fixed
date or time, a certain sum to or to the order of a specified person, or to bearer.”

Features of Negotiable Instruments

 Easily Transferable:

A negotiable instrument is easily and freely transferable. There are no formalities or

much paperwork involved in such a transfer. The ownership of an instrument can transfer
simply by delivery or by a valid endorsement.

 Must be written:

All negotiable instruments must be in writing. This includes handwritten notes,

printed, engraved, typed etc.

 Time of Payment must be certain

If the order is to pay when convenient then such an order is not a negotiable
instrument. Here the time period has to be certain even if it is not a specific date. For
example, it is acceptable if the time of payment is linked with the death of a specific
individual. As death is a certain event.

 Payee also must be certain

The person to whom the payment is to be made must be a specific person or persons.
Also, there can be more than one payee for a negotiable instrument. And “person”
includes artificial persons as well, like body corporates, trade unions, chairman, secretary
etc.
  A negotiable instrument can be transferred infinitum eg. It can be transferred any
number of times its maturity

Unit 5

1) What are the classification of goods? (R2:167)

 Existing goods
 Future goods
 Contingent goods
2) Define contract of sale. (R1:338)

Sale of goods act defines contract of sale as a contract whereby the seller transfers or
agrees to transfer the property in goods to buyer for a price.

3) What are the essential of contract of sale of goods? (R1:338)

 Bilateral contract
 Transfer of property
 Goods
 Price or money consideration
 All other essential elements of valid contract
4) What is condition in sale of goods contract?R1:357)

A condition is stipulated essential to the main purpose of the contract breach of which
gives rise to right to treat the contract as repudiated.

5) What is warranty in sale of goods contract?(R1:357)

Warranty is stipulation collateral to the main purpose of the contarct,the breach of
which gives raise to calm for the damages but not toright to reject the goods and treat the
contract as repudiated
6) List out the consequences of breach of Warranty
 The breach of warranty gives right to claim for damages but not to reject
 The buyer may sue the seller for damages
 No remedy is available if the fulfilment for warranty becomes impossible by law
7) What are the three stages of the performance of the contract of sale?
 The transfer of property in goods
  Transfer of possession of goods
 Passing of the risk
8) What are the significance of transfer of ownership?(R1:379)
 Risk prima facie passes with ownership
 Proprietary rights over the goods
 Sue for price
 Insolvency of seller or the buyer
9) What is delivery in performance of contract sale?(R1:397)
Delivery means voluntary transfer of possession from one person to other .delivery is
bilateral act.it requires two parties to act.it is the duty of seller to deliver the goods. And
of buyer to accept it and pay for them.

10) What is actual delivery? R1:397)

In actual delivery the goods are physically handed over the seller or his agent to the
buyer. This type of delivery is called actual delivery.

11) List out the few the rights of the seller.(R1 407)
 Right to claim compensation
 Right to sue for the price
 Right to sue for price against contract
 Right to sue for the damages
12) List out few duties of buyer.(R1:407)
 Duty to pay price and accept the goods
 Duty to apply for delivery
 Duty to demand delivery at reasonable hour
 Duty to accept the instalment
 Duty to pay price
 Duty to pay increased tax

16 mark

1) Write in detail on Classification of goods. (R1:335)

 Goods form the subject matter of the contract of sale. Goods means every kind of
movable property other than actionable claims and money and includes stocks, shares,
growing crops are under contract of sale

1. Existing Goods

Existing goods are goods that physically exist and belong to the seller at the time of contract
of sale. Existing can be further divided into two categories:

 Specific Goods

These are goods that are specifically agreed upon between the seller and buyer at the
time of making the contract of the sale. For example, the seller may agree to sell the buyer a
specific item bearing a specific number. These are sometimes known as "ascertained
goods." This distinction becomes important because of the rules regarding the transfer of
property between parties.

 Unascertained goods

 These are goods that are agreed upon at the point of making the contract of sale but
are not specifically identified in the contract. For example, a seller may agree to sell a buyer
one out of a number of items of the same type (e.g., bags of sugar) without defining which
specific item the buyer will receive. As soon as the specific item is defined, for example
when being prepared for delivery, this becomes specific, or ascertained goods.

2. Future Goods

Future goods are goods that are not yet in existence or that do not yet belong to the
seller when the contract of sale is made. This could be goods that are yet to be manufactured
or that the seller has not yet acquired. For example, a farmer may agree to sell a buyer all of
the milk produced by his/her cows in the coming year. This is called an "agreement to sell."
Because the milk does not yet exist at the point of making the contract, it is an example of
future goods.

3. Contingent Goods

Although contingent goods are a type of future goods, they differ in that they are
dependent on a specific contingency. For example, a seller may agree to sell a buyer some
specific goods that are due to arrive on a particular ship. If, when the ship arrives, it does not
contain those goods, the buyer will still have fulfilled his agreement, because the sale was
contingent on the ship containing those specific goods

2) Write in detail on essential of contract of sale of goods. (R1:338)

1) Bilateral contract

2) Transfer of property

3) Price or money consideration

4) Transfer of general property

 Bilateral contract
Two parties: there must be 2 distinct parties i.e. a buyer and a seller, to affect a
contract of sale and they must be competent to contract. ‘Buyer’ means a person who buys or
agrees to buy goods [Sec. 2(1)]. ‘Seller’ means a person who sells or agrees to sell goods

 Transfer of property

Goods: there must be some goods the property in which is or is to be transferred from
the seller to the buyer. The goods which form the subject-matter of the contract of sale must
be movable. Transfer of immovable property is not regulated by the Sale of Goods Act

 Price or money consideration

Price: Price is an essential ingredient for all transactions of sale and in the absence of
the price or the consideration, the transfer is not regarded as a sale. The transfer by way of
sale must be in exchange for a price. It has been held that price normally means money. The
price can be paid fully in cash or it can be partly paid and partly promised to be paid in
future. The price can be fixed by the agreement between the parties before the conveyance of
the property
  Transfer of general property

There must be a transfer of general property as distinguishes from special property in

goods from the seller to the buyer. For e.g. if A owns certain goods he has general property in
the goods. If he pledges them with B, B has special property in the goods.

 Essential elements of a valid contract: All essential elements of a valid contract

must be present in the contract of sale.

3) Write in detail on express condition and implied warranties(R1:364)

Express and Implied Conditions / Warranties: 

Conditions and warranties may be express or implied.

Express conditions and warranties are which, are expressly provided in the contract.
Implied conditions and warranties are those which are implied by law or custom; these shall
prevail in a contract of sale unless the parties agree to the contrary.

i) Condition as to title
In every contract of sale, unless the circumstances of the contract are such as
to show a different intention, there is an implied condition on the part of the seller,
that:

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

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

ii) Condition as to Description

In a contract of sale by description, there is an implied condition that the goods shall
correspond with the description. The term ' sale by description' includes the
following situation;

 Where the buyer has not seen the goods and buys them relying on the description
given by the seller.

 Where the buyer has seen the goods but he relies not on what he has seen but what
was stated to him and the deviation of the goods from the description is not apparent.
 Packing of goods may sometimes be a part of the description. Where the goods do not
conform to be method of packing described (by the buyer or the seller) in the contract,
the buyer can reject the goods.

ii) Condition as to Quality or Fitness

Where the buyer, expressly or by implication, makes known the seller the
particular purpose for which goods are required, so as to show that the buyer relies
on the seller's skill or judgment and the goods are of a description which it is in
the course of the seller's business to supply (whether or not as the manufacturer of
producer), there is an implied condition that the goods shall be reasonably fit for
such purpose. In other words, this condition of fitness shall apply, if:

 The buyer makes known to the seller the particular purpose for which the goods are
required,

 The buyer relies on the seller's skill or judgment,

 The goods are of a description which he sellers ordinarily supplies in the course of his
business, and

 The goods supplied are not reasonably fit for the buyer's purpose.

iii) Condition as to Merchantability

Where the goods are bought by description from a seller, who deals in goods
of that description (whether or not as the manufacturer or producer) there is an
implied condition that the goods shall be of merchantable quality.
iv) Condition as to Wholesomeness
In case of sale of eatable provisions and foodstuff, there is another implied
condition that the goods shall be wholesome. Thus, the provisions or foodstuff
must not only correspond to their description, but must also be merchantable and
wholesome. By 'wholesomeness' it means that goods must be for human
consumption.
v) Condition Implied by Custom or Trade Usage
An implied warranty or condition as to quality or fitness for a particular
purpose may be annexed by the usage of trade. In certain sale contracts, the
purpose for which the goods are purchased may be implied from the conduct of
the parties or from the nature or description of the goods. In such cases, the parties
enter into the contract with reference to those known usage.
 Conditions in a Sale by Sample

A contract of sale is a contract for sale by sample where there is a term in the
contract, express or implied to that effect. Usually, a sale by sample is implied
when a sample is shown and the parties intend that the goods should be of he kind
and quality as the sample is.

viii) Conditions in a sale by Sample as well as by Description

A vast majority of cases where samples are shown, are sales by sample as well as by
description. In a contract for sale by sample as well as by description, the goods supplied
must correspond both with the sample as well as with the description.
 
 Implied Warranties
A condition becomes a warranty when
a. The buyer waives the conditions or opts to treat the breach of the
condition as a breach of warranty; or 
b. The buyer accepts the goods or a part thereof, or is not in a position to
reject the goods.

i. Implied Warranty of Quiet Possession

In every contract of sale, unless there is a contrary intention, there is implied

warranties that the buyer's shall have and enjoy quiet possession of the goods. If the
buyer's right to possession and enjoyment of the goods is in any way disturbed as
consequences of the seller's defective title, the buyer may sue the seller for damages
for breach of this warranty.

ii. Implied Warranty of Freedom from Encumbrances

The buyer is entitled to a further warranty that the goods shall be free from
any charge or encumbrance in favour of any third party not declared or known to
buyer before or at the time when the contract is made. If the buyer is required to
discharge the amount of the encumbrance it shall be a breach of this warranty and the
buyer shall be entitled to damages for the same.

4) Explain in detail about significance of Transfer of Ownership.(R1 :379)

Significance of transfer of ownership
 In a contract of sale, the precise moment at which property or ownership in goods
passes from the seller to the buyer is of great importance because, it has multiple legal
ramifications. This is so because it is the ownership or title in goods that dictates the legal
course in several extraordinary circumstances. The significance of transfer of ownership in
goods can broadly be studied under the following four heads.

 Risk ‘Prima-facie’ passes with property

 Action against third party
 Suit for price
 Insolvency of the buyer or seller.

Risk prima facia passes with ownership

The general rule of law is that the ‘risk‘prima-facie follows ownership. If goods are
lost or damaged by some accident or otherwise, then, subject to certain exceptions,
whosoever is the owner of the goods at the time of loss or damage, shall bear the loss. In
other words, it is the owner of the goods at the time of loss who suffers the risk of loss and
not the person who is merely in possession of the goods

Action against third party in transfer of ownership

If after the contract of sale, there is a risk of the goods being damaged by the action of
third parties, it is generally the owner who can take action and not the person who is merely
in possession of the goods.

Suit for price in transfer of ownership

Price being an integral part of a contract of sale, the seller can sue the buyer for the
price when the property in goods or the ownership of goods is transferred to the latter. Here it
is important to note that the seller is not bound to accept the price in any form or mode except
in legal tender money unless there is an agreement, express or implied, to the contrary.
Hence, he cannot be compelled to accept by cheque.
Insolvency of the Buyer or Seller in transfer of ownership
If the buyer or seller becomes insolvent, it is necessary to ascertain whether the goods
can be taken over by the ‘official receiver ‘or ‘official assignee‘. This depends upon whether
the property in the goods was with the party adjudged insolvent. If the buyer is adjudged
insolvent, the buyer’s official receiver or official assignee shall be entitled to take the
possession of the goods even though the goods have not been delivered by the seller. On the
other hand, if the seller becomes insolvent before effecting delivery of the goods but the
property in goods has already passed to the buyer who has paid the price, the seller’s official
receiver shall have no claim against the goods.

5) Write in detail on rules regarding the delivery of goods(R:398)

 Delivery should have the effect of putting the goods in possession of buyer or his
agent

The delivery of goods can be made either by putting the goods in the possession
of the buyer or any person authorized by him to hold them on his behalf or by doing anything
else that the parties agree to.

 Effect of part-delivery

If a part-delivery of the goods is made in progress of the delivery of the whole,

then it has the same effect for the purpose of passing the property in such goods as the delivery
of the whole. However, a part-delivery with an intention of severing it from the whole does not
operate as a delivery of the remainder.

 Buyer to apply for delivery

A seller is not bound to deliver the goods until the buyer applies for delivery
unless the parties have agreed to other terms in the contract.

 Place of delivery
 When a sale contract is made, the parties might agree to certain terms for delivery, express
or implied. Depending on the agreement, the buyer might take possession of the goods from
the seller or the seller might send them to the buyer.
 If no such terms are specified in the contract, then as per law on sales
 The goods sold are delivered at the place at which they are at the time of the sale
 The goods to be sold are delivered at the place at which they are at the time of the
agreement to sell. However, if the goods are not in existence at such time, then they are
delivered to the place where they are manufactured or produced.
 Time of Delivery
 Consider a contract of sale where the seller agrees to send the goods to the buyer, but not
time of delivery is specified. In such cases, the seller is expected to deliver the goods within a
reasonable time.

 Goods in possession of a third party

If at the time of sale, the goods are in possession of a third party. Then there is no
delivery unless the third party acknowledges to the buyer that the goods are being held on his
behalf. It is important to note that nothing in this section shall affect the operation of the issue or
transfer of any document of title to the goods.

 Time for tender of delivery

It is important that the demand or tender of delivery is made at a reasonable hour. If not,
then it is rendered ineffectual. The reasonable hour will depend on the case.

 Expenses for delivery

The seller will bear all expenses pertaining to putting the goods in a deliverable state
unless the parties agree to some other terms in the contract.

 Delivery of wrong quantity

Sub-section 1 – If the seller delivers a lesser quantity of goods as compared to the contracted
quantity, then the buyer may reject the delivery. If he accepts it, then he shall pay for them at
the contracted rate.

Sub-section 2 – If the seller delivers a larger quantity of goods as compared to the contracted
quantity, then the buyer may accept the quantity included in the contract and reject the rest.
The buyer can also reject the entire delivery. If he wants to accept the increased quantity, then
he needs to pay at the contract rate.

Sub-section 3 – If the seller delivers a mix of goods where some part of the goods are
mentioned in the contract and some are not, then the buyer may accept the goods which are in
accordance with the contract and reject the rest. He may also reject the entire delivery.

Sub-section 4 – The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.

 Instalment deliveries
 The buyer does not have to accept delivery in instalments unless he has agreed to do so
in the contract. If such an agreement exists, then the parties are required to determine the rights
and liabilities and payments themselves.

 Delivery to carrier

The delivery of goods to the carrier for transmission to the buyer is prima facie deemed
to be ‘delivery to the buyer’ unless contrary terms exist in the contract.

 Deterioration during transit

If the goods are to be delivered at a distant place, then the liability of deterioration
incidental to the course of the transit lies with the buyer even though the seller agrees to deliver
at his own risk.